Editor's Note: This article comes fromOrange Book (ID: chengpishu), Author: orangefans, published with permission.
Editor's Note: This article comes from
Orange Book (ID: chengpishu)
, Author: orangefans, published with permission.
About two or three months ago, I interviewed a friend of Compound who was in charge of the market online. Compound is the most basic and lowest-level lending agreement in finance. When we talked about DeFi, this friend mentioned that their team will chat with many institutional investors every month. These institutions have a lot of money. They also want to put interest in the Compound protocol, but they have two biggest concerns.
The first concern is legal compliance. If the institution wants to move the money, it is a big problem for the company’s legal affairs to write compliance documents; the second concern is the lack of stable and safe insurance business in the DeFi industry, so they Dare not enter. When I asked whether the so-called insurance business refers to centralized or decentralized insurance, he replied that he didn’t know. It may not matter whether it is decentralized or not, but if there is an insurance business, there will be more DeFi players who can enter the market. many.
Of course, it seems a bit unrealistic to expect traditional insurance companies to provide business for such a non-mainstream field as DeFi or digital currency. Then, the so-called "decentralized insurance" that is more in line with fundamentalism seems to be another big market that DeFi hopes to subvert.
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Like DeFi, decentralized insurance has many "ideal benefits". One of its main concepts is to empower the traditional insurance business with the help of smart contracts that cannot be tampered with and enforced automatically. For example, in the traditional insurance industry, claims are often difficult and take a long time. If it is written in the form of a smart contract, once the conditions mutually agreed by both parties are met, the compensation can be paid immediately even if there is no claim.
Another "imagined benefit" is to improve the efficiency and transparency of the insurance business process through the blockchain, and at the same time allow the insurance company to take on more responsibilities, because once the terms are written into the code, there is no need to trust the employees of the company. This may save part of the management cost for the insurance company, and at the same time reduce the premium cost of the customer's insurance.
On top of that, the permissionless nature of blockchain could bring new users to insurance. Many times, insurance companies need to obtain a lot of personal information about customers before they can offer insurance policies. Health insurance, for example, needs to have customer information in order to price policies. But there are many more general types of insurance, such as property insurance, renters insurance, flood insurance, etc., that would attract more people to use without the current red tape.
Decentralized insurance agreements, like decentralized financial agreements, all want to lower the threshold of the traditional industry they correspond to, transform it into an open ecology without permission, and finally democratize the power of finance and insurance, and empower everyone hands of more individuals. Decentralized finance may increase leverage for more individuals, while decentralized insurance hopes to become a firewall for the entire society and provide security for the society.
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2 actual situation
The idea looks great, but what about the actual thing?
Etherisc
Nexus Mutual
CDx
oTokens
VouchForMe
Therefore, the insurance agreement mainly provides guarantee services for various DeFi products and lending scenarios. In the off-chain world, the accident insurance and life insurance provided by the traditional insurance industry are relatively less involved. Therefore, decentralized insurance also has the concept of "DeFi patron saint".
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3.1 Etherisc
The idea of Etherisc is very similar to Aragon in the DAO field - to build a general decentralized insurance application platform first, so that developers can use this platform to quickly develop new insurance products.
The Etherisc core team has developed some insurance common infrastructure, product templates, and insurance license-as-a-service (insurance license-as-a-service), allowing anyone to create their own insurance products.
At present, the Etherisc community has designed a set of basic insurance products, ranging from flight delay insurance, hurricane insurance to encrypted wallet and loan mortgage insurance, but most of them seem to be just demo tests.
3.2 Nexus Mutual
3 different modes
The idea of Etherisc is very similar to Aragon in the DAO field - to build a general decentralized insurance application platform first, so that developers can use this platform to quickly develop new insurance products.
The Etherisc core team has developed some insurance common infrastructure, product templates, and insurance license-as-a-service (insurance license-as-a-service), allowing anyone to create their own insurance products.
3.3 CDx
At present, the Etherisc community has designed a set of basic insurance products, ranging from flight delay insurance, hurricane insurance to encrypted wallet and loan mortgage insurance, but most of them seem to be just demo tests.
Nexus Mutual adopts a risk-sharing model. It has a risk-sharing pool, which is governed by members of the community who hold NXM tokens, and the community votes to determine which claim is valid.
Nexus Mutual initially launched with smart contract insurance, allowing anyone to purchase any insurance policy on a publicly available Ethereum smart contract. This means that DeFi users can now purchase insurance to protect their funds lent on Compound or Dharma, and the digital currency stored in Uniswap. After that, Nexus Mutual also hopes to provide more blockchain and traditional insurance products in addition to smart contract insurance.
The model of risk sharing pool actually appeared before the blockchain, which is the "mutual protection" launched by Alipay before. For the traditional insurance industry, the model of mutual insurance is more like a social experiment, and because the partner was fined by the China Banking and Insurance Regulatory Commission for alleged violations, Ant Financial also changed the name of "mutual insurance" to "mutual treasure" and positioned it as launched an Internet-based mutual aid program—a model that seems to have been disproved in traditional industries.
3.4 oTokens
CDx is a trading platform for tokenized insurance. It is a credit default swap agreement. A credit default swap (CDS) is a financial product designed to insulate users from the risk of default by another party. The buyer pays the fee continuously during the insurance period, and can receive compensation if he encounters a breach of contract.
Credit default swap is the most common credit derivative product in foreign bond markets. It refers to a contract in which buyers and sellers exchange risks on specified credit events within a certain period of time. The buyer of credit risk protection pays the seller of credit risk protection for the credit event of a reference entity periodically during the term of the contract or prior to the occurrence of the credit event, in exchange for payment after the credit event occurs.
On CDx, this risk conversion contract is called Swap. You can create a Swap by minting a unique token corresponding to the Swap type. When the seller creates a Swap, he sets the total amount of assets he needs to insure and the amount of compensation he wants to get, and then the buyer can decide whether to buy the Swap after seeing it. This Swap is matched by some relayer service providers, and finally on the chain make a deal. At the same time, Swap can be traded in the secondary market like ordinary tokens. If there is a breach of contract, the person holding Swap can exchange the corresponding compensation through Swap.
Exchange insurance may be among all types of insurance, and the current demand for currency circle users is the greatest. CDx hopes to allow users to keep their assets on the exchange safe through the credit default swap agreement.
Convexity Protocol is a new option agreement based on ERC20 homogeneous tokens recently launched in DeFi. It is currently only a proposal and has no actual product. In this proposal, oTokens (option token) can be used as an insurance tool, and its operating mechanism is closer to financial derivatives and option transactions.
3.5 VouchForMe
The oTokens team believes that dYdX, as the earliest derivatives trading protocol in DeFi, has some natural flaws in the initially proposed model, such as only supporting the 0x protocol, and option writers can only charge with performance assets, etc. Therefore, the oTokens team hopes to propose a more complete protocol to replace dYdX, which is the Convexity Protocol.
Basically, Convexity Protocol wants to replicate this function in traditional finance to the DeFi field, and provide options sellers with more flexible options and less restrictions. People can mint an ETH oToken by mortgaging Ethereum ETH. This oToken represents a put option on Ethereum. Others can buy this option to obtain insurance against the collapse of ETH. Users who mint oToken are equivalent to mortgaging ETH to sell options to obtain additional income, and holding ETH can also make money.
In addition to the original insurance agreement, as well as the model of financial products such as derivatives transactions and option agreements, the prediction market can actually be used as an insurance mechanism. For example, on Augur, you can build a prediction market to hedge the risks you may suffer, but this model requires you to have enough people willing to participate in the prediction market betting.
The idea of VouchForMe can be seen from the product name, they hope to use social networks to reduce the cost of insurance. Your family and friends know you better than others, and they can better understand your risks. VouchForMe hopes to collect guarantors who are willing to endorse you from social networks and social relationships, and let insurance companies believe that you are eligible through guarantors. Requirements, thereby reducing the cost of insurance. When guaranteeing, you need to sign a financial commitment linked to the insurance claim. The more people who guarantee you, the lower the premium. If there is a claim, the guarantor will bear it in a certain proportion.
3.6 Other modes
In addition to the original insurance agreement, as well as the model of financial products such as derivatives transactions and option agreements, the prediction market can actually be used as an insurance mechanism. For example, on Augur, you can build a prediction market to hedge the risks you may suffer, but this model requires you to have enough people willing to participate in the prediction market betting.
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4 Insurance vs Financial Derivatives vs Prediction Markets
In his view, the biggest difference between insurance agreements and financial derivatives and prediction markets is that insurance has a risk sharing pool. Because of this pool for risk sharing, risk compensation can be paid at a lower cost. In financial derivatives and prediction markets, 100% of mortgage funds are required for compensation. Especially when there is a risk with a very low probability of occurrence, such as a 1% probability per year, then obviously the insurance model is much cheaper than financial derivatives and prediction markets. Another benefit of the risk sharing pool is that the liquidity of the product will be better and the accumulation speed will be faster at the beginning of the product.
5 summary
But in terms of flexibility, when financial derivatives and forecasting markets want to develop a new product, because they are all standardized, they only need to meet technical standards, so development is easier, lower cost, and faster. Insurance agreements are relatively inflexible. When opening a new risk sharing pool, a lot of research and pricing are required to ensure that it can be operated.
