The past two weeks have been “one of the darkest in cryptocurrency history.” The sudden collapse of Sam Bankman-Fried’s FTX crypto empire has impacted the entire crypto market and caused crypto investors to lose billions of dollars of their savings. The implosion also impacted the stock market and public pensions as the Ontario Teachers pension fund plans to fully write off its $95 million investment in FTX.
FTX’s demise is a lesson for everyone. The collapse of FTX has also renewed calls for transparency and trust across the crypto industry. But the question many are asking is: what’s next for crypto and can crypto exchanges win back customers’ trust?
Before we answer this question, it is important to distinguish between centralized crypto exchanges like FTX and cryptocurrency itself. Unlike Binance and other decentralized exchanges, FTX is a centralized cryptocurrency exchange that offers derivatives and spot trading services and is not subject to any audit. FTX also didn’t have a “Proof of Reserves” like others. Here is what Ethereum’s Vitalik Buterin said about the event: The FTX collapse confirms the view that “centralized everything is suspicious by default”.
In other words, the problem is not with crypto and the underlying blockchain technology. Buterin commented on the FTX collapse, adding that blockchain base layers and decentralized finance protocols were working “flawlessly.”
“Of course, what happened at FTX was a huge tragedy,” Buterin told Bloomberg. “Nonetheless, many in the Ethereum community also see the situation as confirmation of something they believed in all along: centralized things are suspicious by default,” he said. Among those beliefs was a belief in “open and transparent code about individuals,” he added.
Where is cryptocurrency going from here?
In the wake of the FTX scandal, other crypto exchanges have taken to social media to reassure nervous customers by sharing information about digital asset holdings with the so-called “proof-of-reserve.” In the crypto world, proof of reserves is a transparent audit practice for crypto exchanges that provides an unbiased report on the assets they have in reserve. With proof of reserve, crypto exchanges are becoming more transparent about the assets on the exchanges and the type of liquidity buffers they have.
Some crypto exchanges have already embraced the idea of proving the reserver. Last Friday, Crypto.com CEO Kris Marszalek tried to reassure customers that their deposits are safe. He said Crypto.com would share “a fully audited proof of reserve.”
Meanwhile, a DeFi startup InsurAce is proposing a deposit insurance scheme called Crypto Deposit Insurance Scheme (CDIS) for the entire crypto industry. Similar to FDIC (Federal Deposit Insurance Corporation), CDIS will help further restore trust and confidence and protect the most vulnerable users. FDIC is the US insurance organization in the traditional financial industry to protect depositors in the event of an institution’s failure, and each depositor is insured for up to $25,000.
As Crypto Deposit Insurance Scheme (CDIS) will work
1. This CDIS is initiated by InsurAce as an independent entity with participation from major exchanges and industry custodian providers as founding partners of the DI program. They will inject initial funds into the DI fund pool.
2. The CDIS is set up as a mutual insurance structure. KYC-ed clients of these incorporation partner exchanges purchase coverage from the exchange platforms or directly from the CDIS application and the premium goes into the DI fund pool. The coverage aims to protect only the small/medium users and ensure they are capped at around $10,000 per user.
3. In the event of an institution’s failure, the CDIS performs claims and payouts to affected users to secure their savings from the DI fund pool on an actual loss basis up to the insurance limit.
4. The InsurAce team acts as the insurance manager of this insurance scheme and handles all operations while being overseen by the mutual society members and regulators. This is implemented via a governance framework.
Core Features of the Crypto Deposit Insurance Scheme (CDIS)
This CDIS solution will combine the best practices from FDIC, SDIC etc. and also the Web3 technologies to meet the needs of the crypto industry and maximize transparency and efficiency. In the meantime, we will also be looking for a regulated way to bring it safely to global crypto users.
InsurAce will use Web3 technology (DLT, tokenization, etc.) to bring full transparency to the operation of the mutual.
2. User Protection
InsurAce will focus on protecting small and medium-sized depositors. Every KYC-ed user is automatically insured up to a certain limit.
3. Established best practices for (re)insurance
InsurAce will follow existing best practices in the (re)insurance industry to manage risks, e.g. B. Mutual insurance, corporate risk management, data management and claims infrastructure.
The InsurAce team is already looking for a regulatory framework for crypto insurance and can bring CDIS into a regulated environment.
InsurAce Protocol has been an early pioneer in Web3 risk protection since 2020 with a dedicated and professional team working at the intersection of Web3 and risk management. The team has built a deep understanding of Web3 native risk to date and is committed to long-term build-up in the Web3 risk management vertical.
The InsurAce dApp is the only protocol active on Ethereum, BNB Chain, Polygon and Avalanche, protecting $350 million worth of digital assets for 130+ DeFi protocols on 20 public blockchains.
In May 2022, InsurAce paid $11.7 million in claims to UST De-Peg policyholders caused by the collapse of Terra — the largest claims payment in crypto insurance history. To date, InsurAce has covered over $350 million in assets across 140 different protocols across 20 public chains. InsurAce famously paid out nearly $12 million to victims of UST pessimism in May 2022.
Led by Oliver Xie, InsurAce is a multi-chain decentralized coverage protocol that offers Web3 users protection for their digital assets. Oliver started working on the InsurAce project in September 2020, having previously worked as CTO in one of the three largest licensed derivatives exchanges and clearing houses based in Singapore.
Oliver entered the crypto space back in 2017, where he led a team researching crypto derivatives and blockchain technology, and has moved towards blockchain-based open finance in recent years. He identified an opportunity for a unique approach to providing insurance for DeFi smart contracts and users, and InsurAce was created.
InsurAce is backed by DeFiance Capital, Parafi Capital, Hashkey Group, Huobi DeFiLabs, Hashed, IOSG, LuneX, Blockarc, and Signum Capital. InsurAce offers portfolio-based insurance products with optimized pricing models to significantly reduce costs (up to 80% lower than other insurance protocols). InsurAce offers smart contract risk cover, IDO cover, custodian cover and stablecoin de-peg risk cover.