Tag Archives: ingenesist project

Can Blockchains Be Insured?

Are blockchains insurable? This question was posed as a topic for presentation by the Center of Insurance Policy and Research, a research arm of the National Association of Insurance Commissioners (CIPR/NAIC).

The trigger appears to be that some insurance companies are being asked to insure the business operations of blockchain enterprises. This same question would apply to legacy businesses that may choose to use or participate in a blockchain, which is basically a shared database managed by software. If one listens to blockchain activists, this issue could apply to everyone in the near future.

The Ingenesist Project volunteered the following opinion to the question: “Are blockchains insurable?”

The article is long and comprehensive, but the implications are staggering. The article begins by describing the landscape of finance and entrepreneurship in terms of insurability. It follows with, in essence, a mathematical proof that blockchains are indeed insurable but that business processes using blockchains may not be.

Luckily, the technology offers sufficient mathematical underpinning to adequately calculate risk and thereby pool risk exposures of its components. However, trouble arises when digital assets can neither be treated as money nor as property. As such, an extralegal condition may exist that would be categorically non-insurable in mainstream finance.

See also: Why Insurers Caught the Blockchain Bug  

“Extralegal” refers to a condition where something is neither legal nor illegal. Economist Hernando De Soto writes about how the extralegal sector in many parts of the world grossly inhibits economic growth because people are unable to secure “title” to property and businesses they create. They are unable to bridge the capitalization gap — that is, the ability to borrow against tangible assets or future returns.

Blockchain technology appears to be languishing in the extralegal domain as courts and governments have few uniform ideas about how and where this tech fits in society — that is, until something goes wrong, such as a major hack where important people lose a lot of money. Only then will some patchwork of blanket legislation likely emerge that favors those of one sector over another. The running joke in crypto-space is that any effort to control blockchain technology would negate any benefits of having it one in the first place.

A Third Option

The CIPR/NAIC article raises the possibility that the pairing of blockchain technology with professional engineers (as the decentralized adjudicators of smart contracts) would achieve a state of insurability and thus bridge the capitalization gap required for mainstream financing of blockchain enterprise. This arrangement applies primarily to basic infrastructure and derivatives of basic infrastructure, which may not actually be a bad thing at all.

See also: What Is and What Isn’t a Blockchain?  

The Critical Path

The Earth is currently an epic case study in deferred maintenance. There are very real and serious global problems that affect every living creature that we need to attend to immediately. Critical path methodology is a technique familiar to all builders as a set of instructions specifying where one action must precede the next for subsequent actions to occur. Millions of business plans that provide basic human needs and protect our natural resources and that are currently unprofitable will suddenly become hugely profitable.

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These outcomes could be accomplished with the recommendations provided within the CIPR/NAIC article. Please read this article and forward it to others who are interested in this technology. There is very real value to be released and money to be made in the next economic paradigm that is currently at our fingertips. All we need to do is align insurance with engineering on a shared database.

The Future of Money: Not What You Think

Never underestimate the ability of the human species to adapt to changes in its environment. All humans are engineers. If there is too much friction in a system, they will fix it, or they will replace it. When banks add overdraft penalties, incur service fees, constrain capital, restrict mobility or compromise the public trust in any way, all those engineers will make a “correction.” Money, after all, is a social agreement.

Today, young people are encountering a financial game that they cannot win playing by the rules that are presented to them. The result should surprise no one – they will either not play the game, or they will change the rules. In fact, innovation in banking is happening at an astonishing rate; unfortunately, bankers are not necessarily doing it.

Because banking touches every part of our lives, so, too, will any innovation that occurs in the domain of banking.

Look at Bitcoin. It is more than just a cute new social app like Facebook or Twitter – it is a new idea called decentralization. If it is possible to decentralize banking, it would also be possible to decentralize everything; insurance, engineering, education, production (i.e., corporations), education, legislation and even governance. Nothing is immune from the next wave of Internet innovation that is bearing down — and right now, not tomorrow.

Because this is an insurance audience, allow me to mention that, the easiest (technically) and likely the first big innovation that will arise from the decentralization movement will be decentralization of insurance. With the advent of smart contract platforms such as Ethereum and Ripple Labs, people can form their own risk-sharing pools to cover a whole suite of perils now in the domain of insurance. (For the lawyers and politicians out there, it is also nearly trivial to set up voting, escrow, contract enforcement, etc., via the sort of block chain protocol that is the basis for Bitcoin.)

Last year, I published an article called “What if everyone was a BitCoin”? The core idea was that there are several problems with Bitcoin:

  • Concentration of wealth is worse than the dollar.
  • The proof of work that creates coin is trivial except for the fact that it is difficult.
  • The valuation was speculative.

Today, there are hundreds of companies forming, and being funded in the millions of dollars, that are investing in innovations that would create thousands, if not millions, of alt-coins with characteristics of Bitcoin, except iterated without the impracticalities of Bitcoin.

For example, MaidSafe was able to introduce a currency called Safecoin that provides a way to take unused computational capacity that members are willing to contribute and build a decentralized server network. This network encrypts data flowing through it, creating a secure and anonymous Internet. What happens to big data when people stop sharing the streams of information available on today’s Internet?

Further, innovations such as Curiosumé (by this author) could have wide-ranging implications on everything from education to corporate HR and factors of production — Curiosumé is an open-source development project designed to replace the resume as a means for describing one’s interests, skills and abilities; the tag line is, “Because the resume must die.”

Swarm.co allows individuals to invest time and money in decentralized innovations without banks, insurance, corporations, etc. A new generation of venture capitalists such as DApps Fund is already funding new startups in crypto-currencies and demonstrating high convertibility and liquidity.

Every month, thousands of people are coming together at Meet-up  (itself an earlier social innovation) to learn, teach and collaborate on open-source platforms such as Ethereum, Bitcoin, Ripple and many others. Every day, with each article warning of the dangers of Bitcoin, there is another article of an ex-CEO banker coming out strongly in favor of the financial innovation in the crypto space. What is certain is that every impression placed on the public regarding these new technologies is bad for the status quo for banking and insurance.

Resistance predictably comes from the public voice of banks and governments, which have the most invested in the way things are. This is not to say that they are bad and wrong, just that they have the greatest infrastructure in place to support the existing system. Changing their minds is like pushing electric cars against the tide of Big Oil; lines have been drawn in concrete.

What we are seeing is not a “revolution” with a central army in a field of battle; there is simply a natural progression happening fueled by rational efficiency and nothing else. But change is inevitable.

As with previous financial innovations, my guess is that some trader may discover that the true risk associated with a particular crypto-asset is less than what the risk-adjusted market valuation indicates it is. Then, a financial instrument will be developed to exploit the risk-arbitrage. Some readers may recall the saga of Michael Milken, who correctly observed that companies with low credit scores were in some cases less likely to fail than their risk valuations indicated. This led to the creation of junk bonds and, ultimately, the idea that risk valuations can be skirted. To Milken’s credit, the assumption held until greed set in (which is not the fault of the asset).

I believe something similar may or must happen in finance to spawn internal innovation. For example: the insurance industry does not necessarily care about risk per se; the industry cares mostly that the risk is priced correctly. Soon, the insurance industry may realize that the risk of assets backed in crypto-currencies is lessened because of increased liquidity, fewer restrictions and regulations and rapid convertibility and because they are underwritten by better fundamental assets than the dollar. The industry will develop financial instruments that exploit this risk arbitrage and profit considerably.

But if the insurance company does not innovate in this future form of value, then people will build their own instruments. These new ideas and the technologies will enables millions of entrepreneurs and billions of engineers to print their own money one social agreement at a time. My advice to the insurance industry is to get in, help out and adapt before your customers leave you behind.

(Editors note: You are invited to join the author at The Future of Money and Technology Summit in San Francisco, Dec. 2, 2014, for his panel: Everything that Can Be Decentralized Will Be Decentralized.

The description is:

Much of our society today is based on centralized organizations that allocate our land, labor and money to create the things that we need. Today, we have an opportunity to specify and design any number of decentralized applications that also can produce all the things that society needs — except with stunning efficiency. This is a conversation about what is not only possible but is becoming increasingly probable. This group of speakers represent innovations that decentralize: data, venture capital, productivity, currency, contracts and knowledge — and that’s just the beginning.

The speakers are:

Paige Peterson – Maidsafe

Sam Onat Yilmaz – DApps Fund

Joel Dietz – Swarm.co

Christian Peel – Ethereum

Moderator: Dan Robles, The Ingenesist Project)