On October 26, 2020, at the 7th Old Friends Reunion IOSG DeFi Summit, we invited Upshot CEO Nick Emmons, Nexus Mutual Founder Hugh Karp, PoolTogether CEO Leighton Cusack and Hakka Finance Founder Ping Chen, discussed and shared the theme “Reimagining Insurance through Decentralization”, and talked about how to explore and develop more interesting products in the DeFi insurance era.
Moderator — Nick Emmons (Upshot):
Hey everyone, my name is Nick Emmons. I’m the CEO of Upshot. We’re building a decentralized question-and-answer protocol on Ethereum, that has a bunch of applications in decentralized insurance, particularly around decentralized claims processing. I come from the traditional insurance space. I was leading blockchain development at John Hancock and Manulife prior to this doing a bunch of work around decentralized insurance. So, this should be a pretty good panel. We’re going to be going through what insurance looks like in a decentralized landscape the different considerations, the different possibilities etc. So, I’ll hand it off to the panelists and let them introduce themselves.
Hugh Karp (Nexus Mutual):
Hi I’m Hugh Karp. I’m the founder of Nexus Mutual. We’re building a decentralized alternative to insurance and our big goal is to become a crypto version of Lloyds of London.
Leighton Cusack (PoolTogether):
My name’s Leighton and I’m one of the core team members at PoolTogether. And we’re building a decentralized protocol for price savings on Ethereum.
Ping Chen (Hakka):
Hi, this is Ping Chen from Hakka Finance and we are quite new. We have built an insurance project called 3F Mutual.
Moderator — Nick Emmons (Upshot):
I’d be curious to dive into the specifics with you Leighton. How is PoolTogether using or planning to use insurance in its protocol?
Leighton Cusack (PoolTogether):
Well, it’s a good question. As we’re thinking about it, one of the first big forks on the road is do we think of insurance as a universal protocol attribute that the protocol is providing in some mechanism or do we think of it as something the user brings to the protocol. And, thus far, it’s been the latter. It’s been something the user brings to the protocol. So, people are insured through Nexus Mutual for deposits into PoolTogether, but not all deposits into PoolTogether are insured. So that’s like the current paradigm.
I don’t know how it will play out, but I do think we want to ideally move towards a more universal insurance where the protocol itself through. Whether it’s a protocol reserve or whether it’s governance token mining type of thing, is actually insuring the whole protocol for all the people who use it, so that users don’t have to be super savvy about going and getting their own insurance. I think that is the ideal. I think we’re getting close to being able to do that, but, right now, we have we haven’t done that yet. And it does go towards this question of what the responsibilities of the protocol versus the users of the protocol are.
Right now, we’re still mostly in a paradigm. I would say where the expectation is the insurance falls on the user, but I’m not sure if that will work for like the mainstream. I’m not sure if a bunch of people put a bunch of money into Compound and then something happens that they’ll be okay with the idea that they were supposed to go to Nexus and buy insurance. I think that works for the savvy people. Anyways, I guess that’s a kind of a long-winded answer, but we think of it right now from a user-centric paradigm of like they bring the insurance, but we would like to move towards a protocol-centric paradigm of the protocol provides the insurance in some programmatic way that’s integrated into the protocol itself.
Hugh Karp (Nexus Mutual):
I was just going to say, more generally, I really like the model where the protocol provides some base level of coverage itself somehow like it pulls together for its own users and then perhaps something like Nexus or whatever. Then comes in for more extreme events, if it can’t handle it or whatever, I think that model kind of works quite well, because it also aligns interest between a bunch of people. I also agree with you that it’s kind of funny we’re kind of pushing this whole. Everyone takes our own responsibility for everything, which would mean all the individuals should purchase the cover themselves, but it doesn’t quite work for the regular people because they’re just used to having natively built-in FDIC insurance or whatever it is, right? So, it’s a different paradigm that we’re moving to.
Moderator — Nick Emmons (Upshot):
Yeah, it’s kind of an interesting way of bootstrapping these early general insurance pools as well by offsetting some of the cost to the specific protocols and allowing them to pool the amount of capital they see fit for their own protocol specific risks. I’d be curious to hear what you guys think about exciting insurance products that have enabled our markets that have opened up outside of the DeFi space outside of the crypto space all together. Decentralized finance does a bunch in disinter-mediating the firm from the the policyholders and that comes with a bunch of efficiencies. Are there any other types of markets you guys are excited about?
Hugh Karp (Nexus Mutual):
Yeah, I’ve got a whole list. I can go through if you want, but generally they are people that can’t access or struggle to get access to insurance in whatever way or shape or form whether that’s emerging economy stuff or for things like one example that I’ve been talking about. In the real world is the marijuana growers in Canada. It’s kind of legal, but no insurance company wants to back them, because there’s potential reputation risk there that they don’t want to take on. And so, community-based solutions are a really good solution for that type of thing. DeFi insurance is really going to be community-based. There’s a whole bunch of those types of things in the real world that I’ve… (been paying attention). Perhaps not for right now, but as we grow and all the rest of it. I think that’s where we can really help out. It’s giving access to people that struggle to get it right now.
Moderator — Nick Emmons (Upshot):
With that specifically and anyone else can answer this as well. I have a specific question. Do you see as these insurance pools grow the same consolidated reputational risk taking an effect there as well? Like I’m in a Nexus pool as a Mutual, and we kind of agree that marijuana insurance is not good for our reputation as a Mutual. Do you see that kind of taking form in these decentralized communities as they do in kind of centralized firms.
Hugh Karp (Nexus Mutual):
Potentially, but the whole point is trying to give access to as many people as possible. So, hopefully that’s less of an issue. I mean maybe it happens in 10 years’ time, I don’t know…
Moderator — Nick Emmons (Upshot):
Ping, are there any insurance products outside of DeFi you guys have thought about or are excited about?
Ping Chen (Hakka):
We’re currently only building for DeFi native product, so, I’m not sure if there’s any workable approach to make a reliable data feed from off-chain. But I think in the long run, it will be the institution to get into the market because like being an insurer required some kind of expertise. You need to know how to on the right (time), and how to deal with the dispute of claim, and that’s not what laymen can deal with.
Moderator — Nick Emmons (Upshot):
Do you see that more traditional institutional insurance companies getting involved in this space building up claims departments specifically for smart contract hacks and risks related to DeFi. Have you guys talked to any of them and tried to get them in?
Hugh Karp (Nexus Mutual):
I’ve talked to a lot, e.g., Lloyds, Aviva, and a whole bunch of other places. The current viewers, right now, they are looking at it. They’re interested and they’re on the edges, but it’s still kind of too small and niche for them to start deploying real capital into it. I think actually they’re more going to be interested in entering via a partnership with an existing player. Whether that’s Nexus or someone else? Just because they can take the second layer of risk rather than the first layer. So they’re a bit further removed and that makes a bit more sense to them to learn because they just don’t have the expertise right now and it takes a lot of effort to get niche expertise up when the market may not be big enough for them. So, I’m sure they’ll come in five years, maybe a bit sooner. But they probably want to dip their toes in the water, fire (on) someone else first I believe.
Moderator — Nick Emmons (Upshot):
Is getting them in a priority to any of you at all? Just like bringing some of that immense amount of capital that they have locked up in the old world into this new space, because that brings a bunch of benefits obviously.
Hugh Karp (Nexus Mutual):
Yeah, I mean from my perspective, it comes with a big benefit and potentially big disadvantages as well. But it’s challenging. I think the one thing that is beneficial is the capital that’s outside the ecosystem is covering the ecosystem. So, it’s actually probably more resilient from really catastrophic events that eat everything. So, there could be something that hits Nexus as well as Compound or something. And then we’ve got a real problem: no one gets covered right. So, it’s good to have the entirely independent capital. The challenge is that they don’t want to put stacks of money on-chain to be able to provide you insurance in there. They want to sit it off in a bank account somewhere deployed against multiple different business lines. So, you actually have to convince them to put money on-chain and that’s going to take a long time. So, there are technical challenges and things that they’ll have to get across.
Moderator — Nick Emmons (Upshot):
Yeah, do you guys ever worry about the turtles all the way down paradigm that’s introduced by insuring our smart contracts with other smart contracts? How do you prevent against that? Is it just extra care going into the audits and what not?
Hugh Karp (Nexus Mutual):
Yeah, my response on this one is that you’re still in a much better position if you’ll get some cover because both the insurance protocol and the thing you’re insuring have to fail at the same time for you to be really at a loss, because if just the insurance protocol fails, you lose your premium, which isn’t great but it’s a relatively small amount. And then if the protocol fails by itself, you get your cut (and) you get your claim, but it’s only if they both fail at the same time so that’s a relatively low risk and you’re still improving your risk margins by an order of 50 to 100 times. So, you know that’s a pretty good thing, but obviously it would be better from that perspective if there was a regular insurance player that provide a coverage, but they don’t exist right now. So, this is the option we have.
Ping Chen (Hakka):
I think the issue can be solved by a competition, like there’s multiple insurance providers that they need to accumulate their reputation. So, they will tend to act more honestly.
Moderator — Nick Emmons (Upshot):
Yeah, that makes sense. I think the video froze at the beginning. So, I’m going to ask the first question again why do you think DeFi users need to buy insurance?
Leighton Cusack (PoolTogether):
I think DeFi insurance is or insurance is just a super important piece of crossing the chasm of reaching the people that ultimately. We all want to reach right, like no one got into Ethereum to build a new financial system for the super techy wealthy people. We got into a theory to build a new financial system for the people who are currently excluded. In order to do that, we need to solve a lot of problems, but one of them is certainly the risk, because if you only have a thousand dollars, you can’t put it into a super risky protocol because you’ll lose it all, you lose all your life savings. So, I think insurance is like a fundamental thing that we have to have in order to really reach the true intent of what DeFi and Ethereum is, which is a more equitable financial system.
Hugh Karp (Nexus Mutual):
Yeah, there’s another thing that I’d like to say. It’s a tick-the-box stuff for a bunch of bigger institutions getting involved. I think that’s necessary and the other aspect is it’s funny this even applies to deep crypto people when something goes wrong, and everyone wants someone to blame regardless of how everyone is pushing on this idea of self-responsibility type thing. It doesn’t matter what you’re doing. A crypto people will get up in arms if they think they’ve been wronged as well. So, basically everyone wants that buffer, that safety net, and if they see something that’s gone wrong and it’s outside of their control, they didn’t really have responsibility for it or whatever. Then they’ll want that safety net that’s kind of human nature really.
Ping Chen (Hakka):
I believe not all users need to buy insurance. For example, most people do not purchase insurance for their fund deposit in a traditional bank. So, it’s the service providers duty to buy insurance for their user unless individuals are seeking to invest in an asset and want to hedge against risk.
Hugh Karp (Nexus Mutual):
Sorry, but doesn’t it like a whole bunch of people have insurance on their bank accounts effectively via the government. They’ve been effectively forced to pay it by paying lower and getting lower interest rates on their savings, because the bank buys the cover the FDIC insurance in the US or the equivalent systems elsewhere. So, it’s not as if they buy it themselves, but it’s actually there in the underlying financial system.
Moderator — Nick Emmons (Upshot):
Do you guys see more projects coming up, launching without audits or (with) poor security practices, because they know they can just rely on insurance almost using it as a means to push those large upfront costs of audits onto their users via these small premiums that are amortized across the user base. And you see that, as an existential risk for systems in case of what these guys think…
Leighton Cusack (PoolTogether):
I mean my take is that the projects that are launching in that way are not insuring either. They’re just very irresponsible in every aspect, but I don’t know. Are you guys seeing that happen? That’s definitely an interesting risk asymmetry. I don’t know if that’s the right word, but if you have insurance, maybe you don’t need to work so hard in securing it.
Hugh Karp (Nexus Mutual):
There’s a whole bunch of protocols launching without audits now, and they’ve had to get them later which is not… I don’t know. I can seek some kind of benefits if you cap things and all the rest of it, but still, I don’t think they’re trying to arbitrage the insurance to me, as the main thing I think one of the things that I have seen a bit more of is they launched something get a lot of funds in there and then they effectively blackmail the security audit firms into doing something free. You don’t want the space to explode or whatever. So, all of a sudden, we’ve moved up the priority list when it takes three to six months to get an order these days or whatever. So, I think it’s perhaps a bit different, but the practice is happening a bit more.
Ping Chen (Hakka):
Interesting! I think buying the audit service is quite identical as buying insurance. But since the most recent projects are quite innovative, I believe at least maybe 99% of them will die very soon. So, I think it’s acceptable that they don’t get insurance, or they don’t get audit because they will disappear eventually.
Moderator — Nick Emmons (Upshot):
How do you guys think about expanding into other product types, like from a speed perspective from a coordinating-your-user-base perspective. How do you think about the timeline of expanding into the other product types we’ve talked about?
Ping Chen (Hakka):
You mean, in terms of insurance or general DeFi?
Moderator — Nick Emmons (Upshot):
Yeah, insurance. Like other types of insurance outside of what you guys are currently offering. How do you coordinate moves like that? And at what speed do you have plans to move into other types of insurance?
Ping Chen (Hakka):
General speaking I think option can be seen as a kind of insurance. It’s like the fundamental version of insurance. So, in this scenario, options are the type of insurance that hedges we can say maybe all kind of risk. I think insurance is not only about risk and covers, but it’s also a way to realize the risk you’re taking by being aware of its cause. So, the cause of either option or insurance is determined by the market mechanism, but it’s also a good way to signal the risk of the let’s say specific product.
Hugh Karp (Nexus Mutual):
Guess from our side, we’ve been building a generalized protocol that you can hopefully add on any kind of risk really quite simply. We’re not rolling out massive funds right now because (we) just focus on one thing to start with and make sure the mechanics are all working smoothly, but we proposed some specific tailored cover to make it out recently. And we’re going to be looking at other things potentially things like slashing risk and staking networks or specific Oracle cover and those types of things or more comprehensive cover within the DeFi space as well. So, quite a lot of plans. But we’ve got maybe six months something like that. Maybe a bit less. We’ll see how we go.
Moderator — Nick Emmons (Upshot):
Cool! We have only a couple of minutes left if there’s anything you guys want to talk about around insurance. Feel free to take the floor. Just anything we didn’t cover that you feel should be mentioned about decentralized insurance. Anything?
Hugh Karp (Nexus Mutual):
I could go for ages on a whole bunch of stuff. I think it’s obviously fledgling right now relative to the lending protocols and stuff to me. It’s also a bit more complicated to get right. There’s a few more elements to it that have to work in balance. I think we’re definitely on the right track, but there’s going to be some significant innovations in the space coming. And that’s going to be really interesting to see how it evolves from here.
Ping Chen (Hakka):
In my perspective, I think the professional agencies are quite important in the long way round of DeFi insurance, because they will allow retail investor to purchase share from the insurance company and that the operation be held by those experts.
Leighton Cusack (PoolTogether):
I don’t think I have much to add other than it definitely seems like it’s an exciting space. And I think there’s still obviously a lot of opportunities to figure out how to make this work well for users. And I’m really excited because I do think solving this problem is going to unlock a lot of growth for all of DeFi.
Moderator — Nick Emmons (Upshot):
Well, I think that’s the perfect place to wrap things up. This has been great. Thanks for doing the panel guys. I think we’ve covered a lot. I think insurance is really exciting. What we see decentralized insurance do and grow to over the next five years is going to be a really exciting thing. So yeah, thanks, thank you!
🦄 About IOSG
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