The metaverse is by far one of the most bespoken innovations of the last decade. It’s praised by some as the new frontier of social and business interactions and criticized by others as the most likely successor to the 1995 dotcom bubble. Despite either side, it’s objectively recognized that the metaverse ecosystem is growing, both in terms of economic and social traction.

Because of this, a number of our corporate partners were interested in this space and simply wanted to know more. Plug and Play Insurtech team members in Munich, Germany conducted deep research in the area of NFTs to further our integration into the space. This exploration was then supplemented by expert insights from the Global Head of Open Innovation at AXA Next, Frank Desvignes.

“Metaverses enabled by Web3 new capabilities are in the construction phase. With the rapid development of transactions between users, when some risks are minimized, new types of risks emerge. There are new opportunities for the insurance industry to understand and anticipate those changes. Protecting users against those new risks will help the web3 entertainment industry to get massive adoption.” Frank Desvignes, Global Head of Open Innovation, AXA Next.

Why the metaverse is relevant for insurance companies

With the term “metaverse,” we refer to online spaces that allow individuals to interact in a more immersive way than a traditional web experience. This can either happen through the use of virtual reality or simply through more traditional technologies applied to VR spaces where individuals have their own avatars and virtual identities. From a technological point of view, the metaverse wouldn’t have the same potential without the following enablers:

• Blockchain: the infrastructure enabling the mirroring of real-world transactions in a decentralized and trustless fashion
• Non-Fungible Tokens (NFTs): the digital assets enabling the existence of real ownership structures in a digital setting
• And, Web 3.0: a “constructive” variant of the world wide web leveraging technology to achieve real-world human interaction

The role of blockchain in the pursuit of new insurance solutions within the scope of NFTs and the metaverse

Blockchain and cyber risk

Blockchain is what enables the maintenance of a decentralized and secure network of transactions. It’s a distributed database or ledger shared among multiple nodes of a computer network storing information electronically in digital format.

Blockchain is certainly not a unique remedy to today’s vast array of information security challenges, but it has the capability to provide strong solutions for securing networked ledgers. Among its most recognized strengths is the capability to develop standard security protocols as alternatives to end-to-end encryption. It’s also able to decentralize DNS entries, minimizing opportunities for DDoS attacks. Finally, it can protect user data from unauthorized external access.

Despite these, it must be recognized that the introduction of any new technology often comes with new and unexpected risks. In this case, they can be categorized as:

• Standard risks: primarily related to the integration of blockchain technologies within one’s corporation, exposing it to specific strategic, reputational, regulatory, and operational risks;
• Value transfer risks: deriving from the introduction of peer-to-peer transactions, hence, exposing the interested parties to a new form of risk, which was previously mitigated by centralized entities;
• Smart contract risks: specific to the business, financial, and legal arrangements of the contract itself.

In a world where assets are digital, and the transfer of value occurs on a peer-to-peer basis, such risks are those opening up the most relevant opportunities for insurers.

The five emerging risks shaping the market opportunities of tomorrow

Hacks:

The total amount of money lost to hacks and breaches of Web3 platforms has crossed $2bn in the first half of 2022, already exceeding the total amount of breaches seen globally in 2021. More than ever, digital asset owners have the need to protect themselves against cyber theft. This generates an opportunity for insurance companies to offer cyber liability insurance to help reduce the financial risks associated with owning such assets.

Despite the demand for single individual policies being still limited, we see more and more businesses, specifically custodial wallet solutions, play-to-earn gaming platforms, and exchanges, requesting new partnerships to establish this typology of insurance programs.

One example of startups operating in this space is Breach, which focuses on cyber theft insurance and risk management solutions for the digital asset industry.

Authenticity:

Fraudulent activities are often directed at replicating digital assets by altering their intrinsic properties. As a consequence, this would create a visually identical copy of the digital asset. But it’ll limit its capabilities in terms of intrinsic utility and value. Insurers can intervene by sharing the risk of the sale with the marketplace licensing the asset itself, hence, ensuring coverage against the liability deriving from the commercial transaction.

Exploits:

Potential exploits within the metaverse sphere could potentially lead to financial or image-related damages. The need for insurance against financial or image-related damage holds especially true within the digital sphere, as many potential exploits may affect the virtual space in the future. Insurers wanting to enter the space must be able to cover the risks of both public and private entities wishing to operate their business in a virtual environment. Examples include loss of funds as well as illicit interference with the online entity image.

Liability within DAOs:

DAO stands for “Decentralised Autonomous Organization” and refers to an organization where decisions and transactions are facilitated by a smart contract in a permissionless and trustless manner. In this regard, members of the organization do not need to trust the actions and decisions of a top management team, as such are automated through a community-governed smart contract. Members of the DAO will have a voting right proportional to their stakes in the company (represented by the number of tokens held within their wallets). Therefore, they’ll be able to make decisions on the way in which the organization itself operates.

As it stands, DAOs are often organized in a hierarchical structure based on the number of votes held by each member. This, in turn, creates a liability structure holding the “controlling entities” accountable for their decisions according to the specific regulations of the country in which it is operating.

One example of startups operating in this space is Twire.io, a Web3 builder community from Munich, Germany.

Auditing:

As the blockchain ecosystem matures, the security needs of the space are evolving. Some of the largest losses in the space were due to bugs in smart contracts, resulting in over a quarter billion dollars lost only in the period between 2017 and 2020. In this regard, audits are an essential component of blockchain application development and smart contracts in general, though they still don’t completely cancel the probability of loss. Insurers could participate in the space by offering coverage to audit service providers who are willing to offer warranties to their clients. The clients, therefore, would have to provide compensation if case funds were to be lost due to a bug in audited code.

One example of a startup providing auditing services is Quantstamp, a blockchain cybersecurity and insurance company.

Our conclusion

By analyzing the current market conditions, it’s easy to come to the conclusion that the current market opportunities are still growing. The intrinsic volatility of digital assets makes it difficult for traditional insurers to fully understand the risks associated with providing ad-hoc policies, hence making a case for such policies to be created in the first place. Most insurtechs in the space are paying attention to preliminary uncertainties unveil into more concrete opportunities. No appropriate legal framework has been defined yet, therefore, the process for traditional insurers to operate transparently is still quite complicated.

The current market conditions simply show the need for more business-to-business transactions to occur prior to the establishment of relevant B2C cases. Amongst the valid opportunities are the following:

• Partnerships with custodial wallet solutions: indirectly mitigating risk for their users by offering insurance at an aggregate level and protecting the platform against theft due to hacks or other external reasons
• Coverage provision to DAOs: partnering with DAOs and DAO builders will allow insurance companies to access a larger user base operating in the Web3 space
• Liability insurance against smart contracts auditing: covering for smart contracts audit service providers against the risk of financial loss due to unidentified bugs in the code

Finally, new business opportunities are emerging for insurers willing to protect the assets of high-profile customers. The market is showing a rise in significant demand for the protection of NFT art. In this sense, a similar type of protection would fall under the umbrella of fine art insurance and would take similar precautions and processes that would guarantee the customers’ protection. Specific differences, though, would apply given the intangible nature of these assets. While they can have a physical expression of themselves, that physical expression isn’t necessarily what’s ultimately owned.

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