The insurance business has been thriving well since its inception in the 18th century. Insurance activities such as risk assessment, premiums calculation and receipt, and claims payout have undergone subtle but consistent changes through the years. But generally, insurance did not go through such an intensive change enough to revolutionize the entire business.
But all of this changed when cryptocurrencies rose in popularity. It impacted the insurance business in unique ways due to the rise of decentralized insurance.
What is decentralized insurance and how does it work? Why is it becoming a popular choice over traditional insurance policies? We’ll find out all the answers in this short article.
Decentralized Insurance Defined
Decentralized insurance, like much of the products and services in the Decentralized Finance (DeFi) ecosystem, is insurance that is not regulated by any controlling agency. It is completely devoid of middlemen. Transactions between the insurance policy taker and provider all take place through digital peer-to-peer platforms, eliminating the need for any financial institution or advisor.
Blockchain technology and smart contracts enabled decentralized insurance to work. All these things automate contracts and provide irreversible transactions – something that isn’t always possible in a typical insurance policy.
Decentralized insurance programs are also referred to as “crowdsurance”. This is because no financial institution collects, stores, and distributes money for the policy takers. This framework is a breakthrough in the history of insurance, considering that the model allows everyone in the community to partake in covering the properties of anybody else.
How Does Decentralized Insurance Work?
Smart contracts are codes carrying agreement terms between a buyer and a seller. In a decentralized insurance program, these contracts are all embedded with clear policies covering insurance matters. These smart contracts are then safely stored in a blockchain and utilized whenever an insurance-related transaction is initiated.
Decentralized insurance platforms are not insurance companies per se. Instead, they are protocols that allow the creation of distributed insurance products.
Popular Decentralized Insurance Platforms
Here are the most popular decentralized insurance platforms rising in the market today:
- Etherisc – A platform for creating risk transfer solutions
- Opyn – An insurance layer used for decentralized finance
- Nexus Mutual – A DAO or a digital cooperative that utilizes the Ethereum blockchain
- VouchForMe – A platform that provides low premiums through a system of trust-building between family and friends
Why the Rise of Decentralized Insurance?
Perhaps the most important aspect that made decentralized insurance popular is its non-reliance to expensive agents. Since the platforms use smart contracts, there is no need for intermediaries to explain the agreement terms, collect payments on the insurance providers’ behalf, and receive remuneration for their work. All these things are bypassed by a decentralized insurance framework.
Since decentralized insurance doesn’t have middlemen, transaction fees in these platforms are much lower compared to traditional insurance companies’ policies. That’s another main reason why people patronize decentralized insurance.
There are also lots of problems associated with the traditional insurance industry, and this includes:
- Human errors
- Fraudulent transactions
Most of these issues are addressed in some way by decentralized insurance. For instance, cyberattacks are minimized due to a decentralized platform that doesn’t have a single information bank where hackers penetrate in. Meanwhile, inefficiency, human errors, and fraud can all be addressed by the innate use of smart contracts, blockchain technology, and oracle mechanisms.
Decentralized insurance is making waves in the DeFi ecosystem. It’s a unique system that changed the way people pay insurance premiums and claim their payouts. There are already a handful of decentralized platforms that allow these transactions to happen safely and securely within the crypto ecosystem. Want to learn more? Download a free Crytpo Guide for Beginners here.
Originally posted in ACCOINTING.com. For more information visit www.accointing.com.