Next Up For DLT Disruption? The $1.2 TRILLION Insurance Industry
The finance sector relies on numerous middlemen. And they’re making out like bandits.
In traditional payment systems, you invariably go through a middleman, such as Mastercard Inc (NYSE:MA) or Visa Inc (NYSE:V) … Western Union (NYSE:WU) … or a bank that issues a check, bank draft or wire transfer.
The transaction fees can be expensive, often a few percentage points of the total. And it usually takes several days to settle.
Similar middlemen are found in traditional asset trading and banking, as well. Not only do they complicate these processes, but they charge for their services. In the end, you bear the cost.
But Distributed Ledger Technology (DLT) — or the blockchain — has disrupted and reshaped the finance sector by removing these middlemen.
With Decentralized Finance (DeFi), buyers and sellers transact directly. No broker or custodian stands in-between. And because there’s no “service fees” for these middlemen, you hold on to more of your money.
This is all possible because the blockchain automatically handles all the due diligence required. You no longer need a trusted (and costly) intermediary to protect you against the party on the other end of the deal, who may try to cheat you.
That's why these are called “trustless systems.” The blockchain handles everything without the need for that costly extra layer.
This includes enforcement, too. Try to cheat, and you get drummed out on your ear. No do-overs, no appeals.
How Nexus Eliminates The Middleman
Like other financial intermediaries, insurance companies basically bring together individuals or companies needing coverage with investors or companies wanting to earn the fees.
It can be a very inefficient market, with widely varying costs and coverage options.
Now, a DeFi project is pioneering insurance on the blockchain in a way that promises to slash overhead expenses — usually 35% of what your premium —by at least half. That's huge!
It would save insurance companies — and by extension, customers — a nice chunk of change by removing administrative inefficiencies and eliminating the need for an army of analysts to review paperwork.
The project’s name is Nexus Mutual.
Unlike traditional insurance, Nexus has a whole library of complex but transparent algorithms that constantly adjust financial incentives for these two groups to come together according to market demand.
The result is two-fold: Lower-cost, fairer coverage for the insured and, at the same time, higher returns for investors.
Right now, the Nexus business model can only insure assets that already exist on the blockchain. That’s because the insurance it offers is against undiscovered bugs in smart contracts.
While rare, these bugs can open smart contracts up to hackers and glitches. These can ruin your crypto portfolio.
But several high-powered projects — involving the likes of Hedera Hashgraph and Microsoft — are also working on ways to bring ownership of real assets, such as automobiles or homes, onto the blockchain.
It's only a matter of time before they succeed. At that point, the door will be wide open to cannibalizing old-line insurance business.
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