Category: Blockchain

Smart Contracts in the Insurance Industry

Posted on by Jean Chalopin

The ultimate challenge concerning technology adoption is deciding where to begin. For many businesses, it’s critical to start with savings. 

So in the case of insurance companies, savings equates to fraud prevention. Why? The insurance business deals with false claims and similar charades totaling billions of dollars yearly. The Coalition Against Insurance Fraud estimates that insurance fraud costs the United States $80 billion a year.

Notwithstanding, insurance providers remain slow to adapt to emerging technologies such as smart contracts and blockchain. These two technologies carry the potential to eliminate insurance fraud by creating a transparent method of tracking transactions throughout the insurance value chain.

Why Blockchain?

It’s more important to understand how blockchain works, as opposed to the technology behind it. Blockchain is similar to Google Docs. It’s a ledger enabling multiple people to view and edit simultaneously. Satoshi Nakamoto founded it in 2008 to manage bitcoin transactions in a transparent and incorruptible manner. Over time, enthusiasts and followers applied the bitcoin platform to other applications in the financial services and insurance industries.


Source: https://www.bitpanda.com/academy/en/lessons/how-does-a-blockchain-work/

According to key blockchain industry statistics, it’s rapidly being integrated into the global financial sector, particularly banking. Banks in Japan, the United States, Belarus, Switzerland, and a few other countries are already accepting cryptocurrency transactions as part of their ecosystems, and more will follow suit soon.

In the insurance industry, three general applications are expected to take root:

  1. Smart contracts for insurance policy execution will increase underwriting and claims processing efficiencies. Smart contracts are self-executing contracts in which the terms of the agreement are directly written into lines of code. The code and agreements contained within will eventually exist across a distributed, decentralized blockchain network.
  2. Firms using a ledger-based mechanism will better manage risk and eliminate sources of fraud in insurance claims.
  3. The automated flow of information will reduce laggards in the processes between insurers and reinsurers. 

In its recent publication: Global Smart Contracts Market, Market Research Future projects that the global smart contracts market will reach approximately $300 million by the end of 2023, or by a 32% CAGR from 2017 to 2023.

Smart Contracts for Insurance

Smart contracts on the blockchain solve many of the insurance industry’s current problems. Overburdened with numerous uncertainties and longstanding issues, it desperately needs to regain the public’s trust.  

According to YouGov polls, people in the United States hold mixed feelings about insurance companies. 47% of Americans believe in or trust them, while 43% do not.


Source: https://www.propertycasualty360.com/2020/01/24/how-blockchain-and-smart-contracts-will-disrupt-insurance/

Even though customers believe that an insurer’s ultimate goal is to pay as little as possible, insurance companies are not without their own aches and pains. Very often, policyholders cheat and file false claims to receive payouts. As a result, the lack of trust is mutual. 

Smart contracts carry the potential to restore confidence and render intermediaries obsolete. Smart insurance code contains software algorithms able to remove administrative barriers, predetermine all insurance payout scenarios, and automatically execute contract terms, leaving no room for manipulation on either side.

The Benefits of Smart Contracts

There are several benefits to deploying smart contracts with insurance. 

Transparency Reduces Fraud

The decentralized and open nature of blockchains provides immediate transparency. Everybody sees the transactions logged into blockchain databases because they have no owners. If changes are made, all parties are notified—meaning, no inconsistencies can be hidden. 

Automating Tasks

All smart contract-related processes remain automatic and secure within the blockchain. The main advantage of smart contract insurance: It eliminates mediators and human intervention. This reduces the possibility of manipulation by third-party participants. Furthermore, when used for smart contract insurance, blockchain enables businesses to review their procedures and processes easily.

Claim Verification

In insurance, blockchain smart contracts completely replace claims processes. There are no additional documents required: only predefined rules are required to settle claims. Ultimately, we have faster processes and lower costs for insurers. 

Policy Documents

Insurance companies store policy documents on multiple ledgers, making them virtually impossible to lose. Smart contracts similarly prevent data loss and damage due to their technical characteristics.

Assessing Risk

Using blockchains, insurance companies may now include cutting-edge risk assessment models into their smart contracts. 

IDs are quickly confirmed and reinforced with fresh data, obviating the need for time-consuming ID verification processes. A smart contract scans all of an individual’s information and automatically assesses risk, saving time and effort over any pre-existing, manual process. 

Stages of a Smart Contract’s Lifecycle

There are four stages to a smart contract’s lifecycle, as illustrated by the graphic below.


Source: https://www.researchgate.net/figure/Smart-Contracts-LifeCycle-1-Creation-of-smart-contracts-Several-involved-parties-first_fig1_340376424

Creation

The parties have reached an agreement on the terms and objectives of the contract. Following that, the agreement is transformed into code through the development processes indicated above.

Deployment

When a smart contract is added to the blockchain, it becomes public and can be accessed via the public ledger. At this point, both contractors must meet all the contract’s requirements, and pay a fee or send an asset in order for this “block” to be added. Further, transfers made to the smart contract’s wallet address are halted until all preconditions are met.

Execution

After a smart contract is executed, new transactions follow, which in turn are put on the same public ledger. The consensus mechanism inherent to blockchain verifies the legitimacy of these transactions.  

Finalization

After all, assets are unfrozen and all transactions confirmed, a smart contract is deemed complete. 

Barriers Facing Smart Insurance Contracts

Despite tremendous excitement, the public still widely misunderstands the concept that is blockchain. The same holds true for deciphering how to make smart contracts the watertight universal solution for companies. Here are some of the concerns preventing smart contracts from becoming more widely used.

  • The scope of the contract is limited. Things that are simple to do on paper can be challenging to translate into code. Especially, since most businesses begin developing smart contracts with basic models, based on the classical formula, if X occurs, then Y follows.
  • The technology is complex. Building a sophisticated smart contract in insurance necessitates a certain level of programming expertise. To begin with, only Ethereum experts can create a well-functioning contract. Naturally, it’s a difficult task because the technology is complex, new, and requires a thorough understanding of software development.
  • Poor coding leads to contractual errors. Smart contracts are difficult to understand. Because they are carried out sequentially, the contract will not be carried out even if one critical component is missing. Despite the fact that eliminating human input is one of the primary benefits of smart contracts in insurance, smart contracts still require human involvement during the development stage.
  • Legal regulations remain limited. Despite the keen interest of public institutions, smart contracts appear largely unregulated. 

Summary

Even though smart contracts are not yet mature, they have already had an impact on custom insurance applications. Using smart contracts, insurers cut administrative and claims costs, boost transparency, and avoid fraud by automating their policies and services. 

Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees.

Asset Tokenization

Posted on by Jean Chalopin

The adoption of blockchain technologies and distributed ledgers is still in its infancy for capital markets, and it’s continuing to find new use cases. One of these broad cases is the tokenization of assets whereby the token is a digital representation of either an asset that only exists on a blockchain, a noncertified security, or an asset that exists off the blockchain.  

The tokenization of assets from the “real world” continues to grow in popularity, and investments in this space are cropping up across finance.

Tokenization, Short and Sweet

Tokenization is not a new concept for the blockchain space, but the finance industry’s attention is on the tokenization of real-world assets. At its core, tokenization is the conversion of a full right, or at least a portion of ownership, to a digital form (a token) that is stored on a blockchain. Regulated financial instruments, like equities and bonds, futures contracts, precious metals, real estate, and even intellectual property rights for patents, writing, and music could be tokenized.  

Graphic courtesy of smart chainers

The benefits of tokenization are apparent for assets that do not currently trade electronically. Items that need increased transparency and basic liquidity stand to benefit greatly, such as artworks and other collectibles.  

Tokenization, Fractional Ownership, and Securitization

Through timestamps and encryption, asset tokenization brings improved information security. The terms tokenization, fractional ownership, and securitization are interrelated and easy to confuse but have some considerable differences. 

Tokenization is the transformation of real-world assets into digital tokens, increasing their liquidity. However, securitization is the conversion of assets with low liquidity into instruments with higher liquidity.  “Security tokens” enable liquid trading with financial exchanges, as well as in over-the-counter (OTC) markets. Blockchain tokenization differs from fractional ownership as the latter refers to shared digital ownership of an asset.   

Token Types

Tangible tokens represent assets with specific monetary values and ultimately are in the physical form. 

Fungible tokens represent those digital assets which are all equal in value—similar to fiat currency. One bitcoin in your wallet is equal to one bitcoin in someone else’s wallet. 

Non-fungible tokens represent digital or real-world assets having unique traits and are not interchangeable, like art. 

Tokenization’s Benefits

When physical assets are tokenized, market participants gain several new benefits.   

Increased Geographic Reach

By their nature, public blockchains have no barriers. In legacy (developed) markets, extensive Know Your Customer (KYC), and Anti-Money Laundering (AML) regulations must be followed. These requirements have slowed the wider adoption of public blockchains.  

Nevertheless, there are now public blockchains performing KYC and AML tasks, building overall trust, and increasing the reach of tokenized assets. This important segment of “Permissioned Blockchains” is evolving, allowing the interest of the all-important institutional investor to grow.  

A Growing Investor Base

While institutional investors comprise much of finance, retail investors are also important. 

For most real-world assets, there is limited fractionalizations. For example, trading fractions of shares has now grown into a massive market with online brokers. 

Selling 1/20th of an apartment or 1/100th of a painting is possible with tokenization. This means a much broader investment base can access and participate in restricted investments such as fine art, which have traditionally only been available to the very wealthy. 

24/7 Trading

The tokenization of assets also means 24/7 market liquidity. 

These assets sit on the blockchain in smart contract form, available for instantaneous trading so long as the smart contract’s parameters are filled—and these parameters can change throughout the token’s lifecycle. This digitization streamlines trading by removing classical intermediaries. 

Counterparty risk is also reduced with blockchain transactions, as is the possibility of trade breaks.  

Reduced Administrative Costs

Blockchains are immutable, distributed digital ledgers. Asset recordkeeping is always ongoing, and those records are easily accessible. 

Administrative tasks like profit sharing, buybacks, voting rights, dividends, and stock splits are much more efficient with tokenization and distributed ledger technology. As the world’s markets slowly accept the distributed ledger as golden, the need for reconciliation could potentially be eliminated, with users just accepting the ledger as is.

Upgraded Infrastructure

Many asset classes are slow and labor-intensive, like real estate or private equity. They require the exchange of traditional paper-based documentation. 

With the digitization of such assets on distributed ledgers, the efficiency of these markets can be greatly improved. The possibilities for other segments currently having limited infrastructure become apparent as well.  

Improved Regulation

Regulators are slowly moving into preestablished markets and laying the foundation of a regulatory framework for digital asset exchanges. The real-time immutable data contained in a digital ledger enhances the protection of investors. 

Asset Collateralization

With the fractionalization of novel asset classes, tokenization expands the range of collateral to beyond traditional assets. 

This significantly increases market activity by providing a new universe of acceptable noncash holdings to be staked as collateral. Through blockchain technology, collateral management can be effectual, transparent, and available to new asset classes.  

The Future of Tokenization

Large financial institutions already understand the opportunities that the tokenization of financial assets brings. 

The transition of legacy assets like corporate securities into digital markets is tempting. We are already seeing American and European exchanges take steps in the development of tokenized offerings. In addition, the enhanced liquidity purports new fiduciary duties for financial services providers. 

We are still in the embryonic stage of security tokens, yet these have the potential to change the entire financial services industry–making markets more dynamic, bringing in new investors, and fractionalizing investments. The sky is the limit.  

Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees.

Crypto Staking

Posted on by Jean Chalopin

Crypto Staking Basics

Staking cryptos involves committing your holdings to a particular blockchain network for it to confirm transactions. Staking is available for currencies using the “Proof-of-Stake” (PoS) consensus method to process transactions. 

Peercoin, introduced in 2012, was the first crypto to use Proof-of-Stake. Proof-of-Stake represents a much more energy and computationally efficient alternative to Bitcoin’s Proof-of-Work (PoW) consensus method requiring miners to compete to solve computational equations for prizes.  

Staking provides buy-and-hold investors with additional passive income, especially for some cryptos offering high-interest staking rates. However, before staking, you should understand its requirements.

How Staking Works

Crypto coins using the PoS consensus mechanism validate new transactions being added to the network’s blockchain.

Staking participants pledge their crypto to the network’s protocol, and from the pool of pledging participants, the protocol chooses validators to confirm the newest transaction blocks. The more coins an investor pledges, the higher their chance of being chosen as a validator.  

For every new block added to the blockchain, new crypto coins are minted and provided as staking rewards to the new block’s validator. Generally, the reward matches the same crypto type the participant staked. 

If you’re interested in staking, you must own a cryptocurrency using PoS, as not all cryptos allow staking. You then choose your stake amount before placing your request through a crypto exchange–simple. 

The staked coins remain in your possession, but since you are using them as part of their underlying blockchain, you must manually un-stake them later. Investors often find minimum staking periods for some cryptos, wherein their coins must remain “staked.”

Since its inception, PoS has quickly gained popularity due to its efficiency with using (less) energy and computing. 

Proof-of-Work requires significant resources, garnering environmental criticism, while Proof-of-Stake doesn’t. Further, PoS can scale to handle more transactions.  

Ethereum is switching to a PoS model and is already allowing people to commit their ETH (Ether) for staking. However, there is a significant base commitment of 32 ETH.  

How to Stake Your Crypto

The staking process may be confusing at first, but it’s not so difficult. 

Here are the basics:

Buy a Crypto Using PoS

Not all cryptos have a PoS consensus mechanism, so you must purchase one that does. 

Here are the four top possibilities:

  • Ethereum is transitioning to a PoS model and is the first cryptocurrency with smart contract capability giving developers the ability to create dApps. 
  • Cardano develops through peer-reviewed research and is eco-friendly.
  • Polkadot allows different blockchains to interconnect through its “Parachains.”
  • Solana offers fast transactions with low fees, designed for scalability. 

Several PoS cryptos offer staking rewards–learn what is involved with each, and then buy on a reputable exchange when you have decided.

Stake on an Exchange or Add to a Wallet

Once purchased, depending on the exchange, you may be able to stake the crypto immediately through the exchange. This is the easiest option but look at the requirements before doing so. Otherwise, you will need to move the currency to a blockchain “crypto” wallet. Crypto wallets can be in software or hardware forms. 

Once the wallet is set up, choose to deposit the currency in your wallet, which will generate a wallet address. Then, from your exchange account, choose to withdraw your crypto and copy the address from the wallet into the “transfer to” area.  

Staking Pools

Most cryptos use staking pools. Pools are where traders combine their funds to receive better chances of earning rewards. Make sure you research any pool first. There are a few things to analyze:

  • Size. Small pools suffer from reduced chances of being chosen to validate blocks. However, they provide more significant rewards when chosen. If a pool is too small, it may outright fail. If a pool is too large, it may fail by paying an overly cheap reward. It’s a goldilocks scenario–try to find a mid-size pool. 
  • Reliability. This is easy to check: a pool’s servers should have little remaining capacity relative to 100% (i.e., 95% used); if their servers are down, your chance of earning turns to zero. 
  • Fees. Pools take a small cut of the rewards for providing the hardware and management of the pool. The cut depends on the crypto, but expect between 2% and 5% of the reward. 

Once you have found a good pool, you can stake your crypto through your wallet to start earning.

Proof-of-Stake Explained

For a comprehensive explanation of PoS, click here. 

Blockchains use a consensus mechanism to validate their blocks, allowing the nodes to be in singular agreement about the chain’s state and its transactions. 

PoS is the second most popular consensus mechanism behind PoW. Investors often prefer it to PoW given the extra crypto rewards.  

Each blockchain has a set reward for a block’s validation, and if an investor’s stake is chosen to validate, they will receive this reward.  

Staking’s Benefits

The primary benefit of staking is earning crypto at a very high yield (or “APY”). 

Some yields reach up to 20% per year. With the right investment, your return compounds quickly. 

Investors balance the fiat cost of the crypto against the possible staking gain. The more extensive the network, the larger the reward becomes. 

Lastly, staking requires nothing in terms of equipment, unlike PoW’s “mining.” 

Staking’s Risks

Staking comes with two key risks, no matter the crypto. 

First, volatility appears often elevated. No matter their levels, crypto enthusiasts understand the potential of price drops outweighing their potential staking rewards. More unstable coins offer higher staking yields on average. 

Second, staking usually requires the locking or “vesting” your assets for a minimum amount of time. In other words, the crypto’s inherent blockchain requires liquidity to be handed over in exchange for a staking reward. It’s vital to know the minimum staking period first. 

Is Proof-of Stake the Best Consensus Mechanism?

Many investors debate which consensus mechanism is best, with security taking center stage. 

Bitcoin supporters admit that PoW uses an immense amount of power, although PoW blockchains remain more difficult to attack. As a result, security-focused projects choose PoW over PoS. 

A third consensus mechanism, though less well known, is Proof-of-Burn (PoB). Here, miners “burn” or destroy their existing coins in exchange for the right to add new blocks to the blockchain and, in so doing, earn new rewards. Instead of using computational power, the required resources remain just the burned coins. 

Finally, there is Proof-of-Authority (PoA). Rather than coins, PoA validators stake reputation. PoA networks are secured by validators that are randomly selected as “trustworthy entities.” This method is a more human approach, with staked reputation, making it more secure and sustainable. It also is highly scalable because it only needs a few validators.  

Who Should Stake Their Crypto?

If you’re holding crypto for an extended time (for more than one month) and presently don’t have a plan to trade them, consider staking. It requires nothing further on your part other than liquidity. 

If you don’t have any crypto to stake and are looking for one to invest in, consider the quality of the coin as a long-term investment first. Those preferring liquidity and relatively less volatility should seek alternative investments. 

Summary

The PoS consensus mechanism has benefitted crypto projects and their investors. The PoS system allows for processing many transactions at minimal costs while also providing the network’s investors with additional passive income. So if your investment criteria matches the requirements of staking, it could be worthwhile for you. 

Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, www.deltecbank.com.

The co-author of this text, Robin Trehan, has a bachelor’s degree in economics, a master’s in international business and finance, and an MBA in electronic business. Mr. Trehan is a Senior VP at Deltec International Group, www.deltecbank.com.

The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees. This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. 

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