The importance of increasing safety in the web3 space cannot be overstated. 

In 2022, hackers stole an estimated $3.8 billion from cryptocurrency businesses – the biggest year ever for crypto hacking, and it is only going to get worse. 

As the crypto market grows, so too will the number of hackers and the sophistication of their attacks. Investors in the space desperately need protection from these risks, and this goes way further than improving the technology. 

The question is not whether or not hacks will happen, but rather when.

Crypto insurance solutions promise to be there, picking you up when you fall.

What is Crypto Insurance?

Crypto insurance is a type of insurance that protects investors against losses caused by theft, fraud, hacks, and other events that can result in the loss of cryptocurrency assets.

Crypto insurance is a policy made to protect investors against losses associated with web3 scams. 

There are a variety of solutions available, most in the form of platform native solutions. Coinbase and Binance, for example, provide some insurance policies to the digital assets they hold for their customers.

An increasing number of insurance providers are created in the space, however, promising more dedicated, personalized and streamlined solutions.

As a space, it is receiving increasing attention, and innovation is occurring. 

From centralized to decentralized solutions, where web3-native principles such as the right to identity are being utilized, there is movement in the space to meet the urgency.

The Problem

This all sounds good, but there is a massive bottleneck. According to this Oliver Wyman report, only 1% of crypto assets are insured.

And this is to be expected. The industry as a whole is very intricate, and a vast lack of familiarity with the inner workings of the sector hold traditional insurance players back from getting involved in the space. Due to its nascency, there is also not much historical data to go off to develop risk models which means that the risk vs reward equation can’t be succinctly developed. As the cornerstone to the strategy of any insurance-based business, this is a major setback.

The lack of regulation of the space, shown by the recent FDE fiasco, makes it impossible to classify crypto assets, and hence horrendously challenging to generate rules around insuring them(underwriting, in insurance industry lingo). 

As crypto is not legal tender, for example, it cannot be insured like stocks, bonds, and other financial instruments.

Finally, the anonymity in the space, frequent lack of KYC performed and lack of coherent identity solutions, certainly does not help.

The Opportunity

This lack, however, breeds opportunity.

Simply being the first to figure out an effective way to insure crypto assets will provide a massive first mover advantage in this blue ocean opportunity. There is huge unmet demand from retail and institutional investors, and whoever figures out how to underwrite prudently for the space and achieve this at scale, will win.

Outside of this, there is a massive potential for web3 tech to revolutionize the space itself. Smart contracts, for example, promise an ability to automate policies for certain types of risk, where third-party data can be used for the real-time evaluation of claims. This could make insurance operations radically more efficient.

Being a lot more customer focused through utilizing web3-native incentives can also rapidly improve the customer experience of many of these firms and lead to macro business-model innovation.

Overall, crypto insurance is a space that many are begging for to grow, and one with many opportunities for both the insured, and the insuring.

A space to watch, and for the chosen, to innovate within.

Also Read:What Bitcoin’s Evolving Supply Distribution Tells Us About Decentralization

[Editor’s Note: This article does not represent financial advice. Please do your own research before investing.]

Featured Image Credit: Chain Debrief

Author: Harry Vellios