Published Oct 14, 2022
By Qredo Team

How Crypto Insurance Works

The availability of insurance is one of the major factors which enables businesses to take risks, innovate, and trade with more counterparties.

Since the early days of the industry covering shipowners against losses incurred from unforeseen circumstances during voyages, insurance has played a key role in facilitating transactions.

In crypto however, insurance coverage has proven hard to come by in many instances.

The lack of familiarity with the intricacies of the sector, as well as a dearth of historical data on which to base risk assumptions, has hampered the development of crypto insurance, stunting the market’s overall growth.

Now though that tide is turning, and more and more options from both Web3 native platforms and the existing commercial market, such as Qredo’s $600 million specie insurance offering, are becoming available.

Given crypto is such a new industry, there remain a host of questions about what crypto insurance is and the role it can play in expanding the market.

So, how does crypto insurance work and why is it so important?

Why crypto insurance matters

All business involves some degree of risk.

That can come from unforeseen circumstances, malicious actors, or any number of other scenarios which cause financial loss.

That’s where insurance comes in. 

In the crypto context, there are many examples of hacks, lost private keys, accidental transfers and other situations which have caused losses that could potentially have been covered by insurance.

Stakeholders ranging from developers seeking to insulate themselves from liability arising from smart contracts they have written, to investors and traders seeking to safeguard their funds all have reason to purchase insurance cover.

But the market remains relatively small compared to the demand.

Uptake of Web3 native insurance remains relatively low, and while some exchanges and custodians have coverage from the traditional insurance sector, the limits and types of policies available are still in its early stages, with the overall market of $1 trillion estimated to currently be only 1% covered.

There is an even larger proposition for institutions seeking to get involved in crypto. Such enterprises often list insurance as a requirement for engaging with other businesses, meaning that wider access to cover could help smooth the path of these companies into Web3.

How does crypto insurance work?

The crypto insurance market is largely split between native platforms designed to manage policies on-chain, and traditional insurance purchased from established firms or markets such as Lloyd’s of London.

Insurance built on blockchains is designed by, and for, digital assets natives. These platforms, such as Nexus Mutual, range from blockchain-based mutuals to cover for trading, and use smart contracts and community-led pricing to provide coverage to individuals and firms.

With the blockchain recording the terms, size and other data of the transaction, policies and claims can be handled instantly, with the community arbitrating on any potential disputes.

However, firms such as listed corporations or regulated asset managers looking to invest in cryptoassets often require commercial insurance for such activities.

That’s where the traditional market steps in. While insurers have long taken an interest in crypto, the surge in the range and value of digital assets in the last few years – and concurrent increased interest from their clients – has prompted significant improvements in cover available.

With some of the biggest insurers in the world getting involved, the scale of the opportunity for both sides is enormous.

These policies can help facilitate the entry of billions of dollars of pent up demand from mainstream institutions, paving the way for wider adoption of crypto.

What crypto insurance is available?

As demand has surged, insurers have begun to offer a variety of policies targeted towards a large set of users.

Commercial insurance companies tend to offer policies for incidents including:

  • Theft/ Crime

  • Specie (cover that that protects highly valuable, portable assets)

  • In-Transit (protection against loss of assets during a transaction)

  • Cold/ Hot Storage (different types of insurance and rates for assets held on or offline

  • Hacks 

Meanwhile in addition to the above, Web3 native firms can often offer more specific policies, such as:

  • Smart contract Cover

  • 51% attacks

  • Lost keys

In many cases, Web3 insurance platforms will also use self-executing smart contracts in their payouts, eliminating the need for the claims adjustment process and even submission of claims, with everything functioning automatically.

Insuring Web3

Insurance is set to be a crucial component in driving forward wider adoption of Web3 in years to come.

Particularly in the institutional world, insurance carries so much weight, not only in protecting against loss, but for instilling the confidence necessary for people to innovate and take risks.

For regulated companies, it is imperative that policies such as Qredo’s specie insurance come through to help pave the way into Web 3 and unleash the massive pent up demand for cryptoassets.

Interested in learning more? Check out our recent panel on crypto insurance below 👇