Public Key Podcast

Decentralized Insurance: Brandon Brown Ep 81 – Chainalysis

November 7, 2023 | by Chainalysis Team

Episode 81 of the Public Key podcast is here and we are happy that you love the refreshed look.  With bridge hacks, phishing scams and malicious code draining wallets, how can the crypto industry protect themselves? Decentralized Insurance has entered the chat and in this episode, we speak with Brandon Brown (CEO & Co-Founder, FairSide) to discuss this emerging insurance alternative to protect consumers.

You can listen or subscribe now on Spotify, Apple, or Audible. Keep reading for a full preview of episode 81.

Public Key Episode 81: Insurance alternatives to protect digital assets in crypto wallets 

Bridge hacks, phishing scams and malicious code draining wallets have forced consumer protection to be a top priority in the crypto and DeFi industry.

In this episode, Ian Andrews (CMO, Chainalysis) gets a deeper understanding of how decentralized insurance works with guest,  Brandon Brown (CEO & Co-Founder, FairSide), who are revolutionizing the insurance alternatives in the crypto space.

Brandon explains that decentralized insurance is still in its early stages and has yet to be fully defined and believes that the current models in the space are trying to reinvent the wheel, even though the traditional insurance model is robust and resilient.

He also discusses the challenges of navigating the regulatory landscape in the insurance industry and explains that FairSide operates as a cost-sharing network rather than a traditional insurance product. 

Quote of the episode

“Defi insurance, as we think of it, should harness the power of blockchain in order to make these things more transparent, make these things easier from an onboarding process, but I don’t think we’ve done that.” – Brandon Brown (CEO & Co-Founder, FairSide)

Minute-by-minute episode breakdown

  • (2:05) – Why Decentralized Insurance is yet to be defined and the importance of insuring valuable crypto assets
  • (6:12) – FairSide Network’s focus on wallet insurance for mass adoption
  • (14:19) – Insurance companies invest premium deposits, but DeFi carriers shouldn’t
  • (18:47) – Traditional insurance expense model vs blockchain efficiency 
  • (23:55) – Different approaches to governance in DeFi and wallet theft protection
  • (28:01) – Navigating the regulatory landscape in traditional and crypto insurance
  • (31:25) – Brandon discusses the roadmap and launch plans of Fairside
  • (33:27) – FairSide can go mainstream and expand beyond crypto

Related resources

Check out more resources provided by Chainalysis that perfectly complement this episode of the Public Key.

 

Speakers on today’s episode

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Transcript

Ian:

Hey, everyone. Welcome to another episode of Public Key. This is your host, Ian Andrews. Today, I’m joined by the CEO and Co-Founder of FairSide Network, Brandon Brown. Brandon, welcome to the show.

Brandon:

Pleasure to be here. Thank you so much.

Ian:

Brandon, I have tons of questions for you. Let’s start with the big one, decentralized insurance. What is it and what drew you to work on this problem?

Brandon:

Well, if you really think about decentralized insurance, I believe that it’s yet to be defined. I think that when you look at current carriers or protocols in the space, I think the space will develop and look far different in five to 10 years. I think you’re going to get more of a replication of the traditional insurance system, where today I think you’re seeing different models mostly trying to reinvent the insurance wheel when, honestly, the insurance financial model was never a broken model. It’s very robust. It is far more resilient than the systems that we’re seeing in defi put out today. I think that over time you’re going to see that that replication come on chain and get the capital efficiencies that traditional insurance systems are seeing today. So I think it’s one of those issues that hasn’t quite been solved yet. Now-

Ian:

Well, I think you make a great point there, that insurance, property, casualty, life insurance, one of the greatest businesses in the world today-

Brandon:

Arguably.

Ian:

… in terms of profits. It’s incredibly robust. You don’t see many headlines about insurance companies failing. You just continually see returns of capital to shareholders. Specifically when you take insurance as a product and bring that into the world of cryptocurrency and specifically decentralized finance, what does that look like? Why as a consumer would I want an insurance product in the world of crypto?

Brandon:

Well, I think with any valuable asset that you hold, typically, people insure everything of value in their life. If you can lose it and you don’t mind, then no problem, but you see people ensuring … I’ve seen it in the traditional sector. People insure the smallest of assets rowboats, and you’re like, “Yeah,” but this is what people care about because people work hard and they want to retain their financial wherewithal. So insurance is that vehicle to allow people to do that.

I would argue that your crypto assets are soon, if not already, the most valuable assets that you hold today. So insuring them makes all the sense in the world, but you need the right vehicle in order to do that. I think that adoption rates, even stakeholder adoption, which is the underpinning of these networks, suffers from the adoption level due to underlying issues within the protocol, but also, the product doesn’t meet the needs of the individual consumers.

So we’re seeing products that require you to purchase cover for every single protocol that you interface with, manage the duration of time, pay a premium for each one of those different positions that you have. It’s become cumbersome and doesn’t solve the real issue. Defi insurance, as we think of it, should harness the power of blockchain in order to make these things more transparent, make these things easier from an onboarding process, but I don’t think we’ve done that. We’ve reinvented the insurance wheel, and that’s been the mistake so far, I believe, in this space.

Ian:

It’s interesting to think about this idea of … I certainly have some crypto assets. They sit in a MetaMask wallet. I’ve never thought about getting an insurance policy. So I would imagine for a lot of listeners, this is a fairly new concept, but you make a great point. If you own an NFT that is maybe worth a hundred thousand dollars or a few million dollars or you’re holding a large amount of Bitcoin or Ethereum, that’s something that the risk of loss is definitely greater than zero. We all read headlines about sim swapping thefts or seed phrase exposure, and all of a sudden everything’s gone. That seems to happen on the daily.

Then also, there’s the other side of it. I assume you’re protecting against things like protocol loss. So when we see one of these bridge hacks or some other manipulation that results in a failure of a protocol, these are all very real events that people are subject to with regularity it seems like in the ecosystem. That’s why I would want an insurance policy.

Brandon:

I think that from a consumer standpoint, we did quite a bit of market research starting in 2018 as to … Well, at that time it was basically how big is this market. We needed to understand how big the market was, are there consumers that have a to buy insurance, what cover types are they after. We did that all the way through … The last one was completed in March of 2023. So we’ve done four different surveys. The big telling factor right now is that today, people want protection for their wallet, and we look at it as the essential line of coverage.

The wallet itself is key infrastructure into crypto and the adoption of web3, that it’s secure and that it also can be protected from insurance products or insurance alternative products, and that’s really what defi insurance today really is. It’s a bunch of alternatives to this traditional system. So from that aspect, we have to have a large enough market to hit some critical mass to support any insurance alternative product or insurance products in the space.

Now, that’s where we start as our baseline is that we need to cover the wallet because we’re looking at poor adoption rates on defi and poor adoption rates on … When I say defi, defi coverage, not defi itself. That’s growing nicely, but the coverage being taken out on those is suffering for a multitude of different reasons. So when we look at things like the bridge hacks and these protocol failures, there’s a market for it and we can solve that and we have built products for it, but it won’t be our product launch. Our product launch will be the essential line is to bring in a mass adoption because when you focus all of your effort on defi insurance, like focusing on the protocol losses for users, you get into an area where you only have three million active users and they’re very risk on users trading yield for risk.

So now there’s a segment of that three million people that will purchase coverage, but will you be able to hit critical mass and will you be able to be a sustainable network with just the risk adverse that are in that group? It’s not known yet. So what we believe though is that if you can onboard through where you have the largest market thickness, which is in the wallet side, and you have the largest demand on the product. When we did surveys, it was overwhelming the number of people who wanted to purchase wallet insurance and cover their wallets.

So from that aspect, if you can onboard many users on the wallet side, it’s easier to offer them an endorsement or some layer on top of their FairSide membership that would then give them defi cover and give them another endorsement for exchange coverage or something like that, a more third party risk. That then becomes a sustainable model when you can start to layer these coverages on top of each other. That’s really where our focus is at is to start with the wallets and then move into the other areas.

Ian:

Now, I’ve got all sorts of questions about the business model of insurance, and I’ll probably ask some dumb questions here because I’m a consumer of insurance, not an expert in the industry like you are. So when I think about an insurance business, it seems like the most critical thing is the calculation of risk, this concept of actuarial tables. In a simple product like life insurance, it’s a prediction of life expectancy of a given individual with a whole bunch of risk factors I think calculated in like were you a smoker, are you overweight, and that allows you to establish likelihood of someone living or dying beyond a period that drives a premium cost.

You have enough of those policies. As long as you’re generally correct in your guess of life expectancy, the business model works. People pay in a premium. They get paid when a policy hits, a policy condition hits, it’s paid out, but the insurance company continues as a profit making business. How in the world do you calculate that risk of loss in something like crypto? I can’t even imagine where I would start to figure out the premium calculations and the risk of loss analysis. Maybe start there with the business. How do you do that?

Brandon:

We looked at it differently than others in the space. There’s models out there that people are using like prediction models and capital allocation. We don’t believe those are accurate to create any underwriting profit. We believe that you have to go with the actuarial modeling side of things, which is science-based. So we looked at things like phishing attack, social engineering, and those things happen today in traditional finance and data stolen all the time, cyber risk exists. So we started modeling the amount of losses that are happening in crypto against these known losses in crypto against some of these more traditional actuarial models and came up with a blended approach that really allowed us to create a starting point.

That’s really what your actuarial model is supposed to do is provide you this really robust but believable and starting point for any InsurTech startup. So with that starting point, we’ve been using actuarial data and using some of the reports that you guys put out. We have created a partnership with Chainalysis on different levels for wallet screening and all these other things to start to cut down on some of the potential losses that would happen in our network initially.

For us, it was to go with the science-based approach where people interface with wallets isn’t with the dark web and all these other things. We can cut a lot of that out through some of the services that you guys offer, but for us, it was to look at more of the traditional modeling and then blend that with known losses in crypto, ,as well as look at some of the reports that you guys are putting out and get some other data points from others as well.

Ian:

So that’s interesting. So you’re actually taking Chainalysis’ address screening, and you’re cutting off maybe what would be considered the riskiest part of the pool in the same way that certain insurance companies, if you’ve had two DUIs and totaled three cars, they’re just not going to write you a car insurance policy. You’re taking a similar approach and saying, “Hey, if a given wallet is known to interact with dark net markets regularly, you know what? That’s just going to be somebody we’re not going to allow to be covered in this case.” So you’re containing the risk profile to what would generally appear to be a less risky crowd in terms of some of the choices, behavioral choices they’re making.

Brandon:

Yes, some of that, and then we also look at a highly diversified model. So in a highly diversified model, we spread risk across much larger networks. So stakeholders have risk reduced positions as a stakeholder, and it creates sustainability within the system and using strong actuarial modeling, what it allows us to do is look at our frequency and severity of loss, and then if we need to adjust, premiums could go down. Your membership fee into the network could go down, but you have to an actuarial based model in order to get to the desired financial outcome you want in the future.

If you use these other types of premium allocation and wisdom of the crowd, there’s no scientific basis to produce an underwriting profit for the network of any kind, and that’s where we’ve really focused our attention is to really charge a higher premium than you intend to pay out in losses on an annual basis. That’s the basis of this model. When you marry these models with blockchain, you’re able to get these transparency, the efficiency, all the things that people are looking for in their insurance systems and cut down an extreme amount of expenses, which then can lead to far greater sustainability of the network.

Ian:

Now, one thing that I think most insurance companies, they have a very large pool of capital, all these premiums that are paid in. I think they create a large amount of profit for the business and their shareholders by investing that capital pool. Now, generally, I think it’s low risk asset like government debt or highly rated corporate bonds as the model, so low risk assets, but that money then goes to fuel a profit engine because they generally don’t have high demand for premium payouts if they’ve done a good job with those actuarial tables. Is FairSide taking an approach where you’re doing something like this as well, where you’re actually investing the premium deposits that go into the protocol or have you taken a different approach?

Brandon:

Well, the companies you described didn’t start that way. They started small and then they built to a position where they have assets in reserve and surplus that they’re able to then take those assets and then create investment income off of them, but they didn’t start that way. In the early systems, and everyone knows that that’s how an insurance system works, but in defi, as you see it today in defi carriers that are coming out and protocols that are offering cover, I think it’s important that they don’t invest those assets because when you see someone like the whole thesis is around the idea of creating an underwriting profit, well, people can do staking on their own early in a system.

The product itself needs to be sustainable and work, and those risk-based assets that are provided to that network need to be there early in the system to float any loss that the system has. If the frequency ends up being slightly higher than anticipated on an annual basis early in a year, then you need those risk-based assets to float the system until your premium allocations, your premium generation is then basically created in a way that the premium allocation, if it’s annualized, the losses end up being less than the amount of premium that you’ve collected, but you have to get to a point where you can do that, and that’s what risk-based assets in the system are meant to do is to continue because if you’ve done your actuarial modeling correctly, you will have an underwriting profit at the end of the year, especially when you’re talking about using blockchain technology, which increases that efficiency so much that you can reduce the amount of expenses that assistant like ours would have.

Ian:

This is a great point. So before we started recording, you were explaining to me the traditional expense model for a normal insurance company, and then you were making the point that with blockchain, your expense model is fractional to that. So maybe explain that in a little more detail for us.

Brandon:

So traditional insurance systems, they’re going to operate on expense loads. They have loss adjusters, they have underwriters, they have executives, they have agents and brokers to pay for distribution. So an expense model on a traditional carriers can run 30 to as high as 40%, 45% on some carriers. Now that means an insurance company that’s focusing on investment income is focusing on a one-to-one model, $1 in, $1 out in losses and expenses, so that means they have to have, this traditional system has to have a 60% loss ratio or lower if they’re operating at a 40% expense ratio in order to create that one-to-one so they can have the investment income.

In our system, focusing on the personal wallet theft side of things where you get more isolated risks and so it becomes very manageable, you’re able to operate at, if you were to get 1% market penetration of the 300 million crypto holders, 1% would generate a billion dollars in revenue. A billion dollars in revenue in a traditional system, they would be having an expense load between $300 and $400 million. So in our system, we could operate similarly on the same levels of revenue, but do that with two to three million dollars of expense load, which is far, far different because we’re focusing on the technology versus heavily driven manpower.

Ian:

Just thinking about that, I can imagine you’re not going to have an agent network. There’s not going to be a local office for FairSide that I come down and sit down with my agent and sign up for my wallet protection policy. So I can imagine all those costs going away, but what about the underwriting analysis? I would assume you still have some marketing costs, right?

Brandon:

Yes.

Ian:

Then you’ve got the people building the technology. Compare some of these other parts of the business.

Brandon:

So you have a fairly large marketing-

Brandon:

Let’s just check it real quick.

Ian:

All right. How’s this sound? Yeah, the echo goes away.

Brandon:

Sorry about that. So traditional insurance systems have a fairly large marketing budget. So that marketing budget in general could be commercials, could be radio ads, but part of that marketing budget is also distribution channels. So we believe that looking at distribution channels is a great go-to-market strategy in order to get to the people. So we intend to keep some of that in our system. One of the major ways in which we do that is we focus on the wallets, having FairSide replication of say the travel insurance experience where inside of a wallet where you hold all of your assets, there could be an easy onboarding opt-in option for getting cover for your wallet. So through that, we look at distribution channels as the wallet and we intend to share top line revenue with wallets, top decks. Similar to how an insurance company would distribute through agents and brokers, we want to distribute our cautionary network in the same way.

Ian:

Now, I have a bunch of questions because I was reading into the white paper this morning and you’re doing some pretty interesting stuff. So there is a token that you’re creating, FSD, and there’s a staking mechanism to support the network and there’s a level of rewards, but I think it also fuels the entire premium payment model and then payouts. Can you just talk us through what that architecture is, why that’s necessary to enable what you’ve built?

Brandon:

So at launch, we’re looking at a product first launch, token second. So when we do a very closed system where you have just early stakeholders in the network, the token doesn’t become as integral, but when you want to decentralize the system and you want a community to come together, basically, to create the social and economic good that traditional insurance will provide through our network, that’s where the token becomes an integral part of the system. In our model, we use, and you made the point earlier, very large capital pools like insurers have. We use a very large capital pool as one network staking system.

In that system, stakeholders can come into this network and they can bond their Ethereum to our network, and when they bond the Ethereum, we mint the FSD token. The FSD token then acts as semisynthetic to the system itself. Its price is represented on a few factors. One is the amount of Ethereum in the capital pool, but also, there are long-term drivers looking at adoption of the product, as well as the short-term driver would be the immediate need of the capital pool. Is it overfunded or underfunded? Those factors come into the token pricing model.

So as a stakeholder though, you hold the FSD in your wallet. The FSD then is able to basically represent your position within the network. When you do that, you’re using the large capital pool. As losses are paid in the system, we’re pulling Ethereum in order to pay claims within our network. So when you pull the Ethereum, there’s a marginal decrease in the value of each token you hold, but there is no permanent loss of that token because through strong actual modeling, the capital pool should continue to grow year over year with underwriting profit and the lack of expenses that the system has.

So if you start with X in the system, you’re going to have X plus your underwriting profit, which one of the main drivers is the amount of ETH in the capital pool, so the token price itself is increased. So there’s no liquidation factor that you see today in the systems. That’s where we have a non-permanent loss versus a permanent loss where staking in today’s system is a one-to-one staking mechanism where you stake the project pool and then you liquidate the stakeholders, and the stakeholders are only getting a very small portion of a premium, and so the risk reward ratio, it’s always one to point something. It’s never one over one. You know what I mean? You never get to a one to three or one to five or one to 10. Never happens in the system because the concentration of risk is so great in those systems, and concentration of risk is the capital efficiency killer of any strong capital efficient model.

So in our system, the FSD token is used in a few different ways. One, to represent the system as I explained, but two, holding FSD builds a conviction score in our system. When you build a conviction score, that represents your proportional amount of rewards that are paid as others leave the system because we have a mint and burn function on our curve. So when you burn the FSD in order to exit the position, it’s an unlocked position, so stakeholders can leave when they want, but you pay a tribute fee in order to leave. So when the tribute fee is paid, it is distributed to all token holders who remain in the network.

So this conviction score that is driving the amount of rewards that you receive, so it’s incentivizing long-term holders, believers in our network, and those that are really looking to create the social and economic benefit that insurance alternative products can provide to the space. Additionally, we use it for governance within the system. So in a decentralized system, governance is very important. So that conviction score that you’re using, we apply that to governance thresholds and allow users to help govern the network.

Ian:

This was one of the things that was really interesting when I was reading the white paper is it’s set up that the community is the one deciding when to pay out on a claim. I can imagine there’s all sorts of unusual incentives that that model creates. Talk a little bit about how you’ve envisioned that and how you expect it to work.

Brandon:

Well, ultimately, if you’re not looking at liquidation of a stakeholder, and there’s more benefit by acting fairly than unfairly because the marginal decrease in the token value, we expect by opening the governance system and allowing everyone to vote on claims that it can, and this is in defi losses, and we can talk a little bit more about the product launch, but in a defi loss, if you’re not liquidated and you have this open voting system that you don’t have to stake to vote, which can call into question the objectivity of the voting because you’re basically in this moral and financial dilemma in the current systems as to when I vote, if I vote fairly, then they can liquidate my assets and if I vote unfairly, they burn my stake. So you can’t really create a fair system in that way.

So what we’re looking at is if there’s more incentive for the user, for our stakeholders and our participants to act fairly through marginal decrease in value of tokens and at the end of any year we expect an underwriting profit, then it makes sense that the user is able to vote fairly within our system, and we don’t vote on individual losses. So to increase participation in the system, you only vote on the event. So I’ll use an example like a Cream Finance hack. Is Cream Finance something that we intended to pay out based on in sharing this loss, based on the type of loss it was? You vote once in the system. If the answer is affirmed, yes, then all other losses in the system aren’t necessary to vote individually on them. So if you are a participant in the Cream Finance hack and you’ve lost assets, then now, you’re just sent over to one of our partners, Halborn, who then verifies that you were part of that loss event, and then the system, we can expedite the payout for you.

So as a participant in governance, you’re voting one time, but you get paid every single time somebody has a loss because they pay an assessor’s bounty. So every time to open the claim, I paid this assessor bounty, I’ve only voted one time, and I may get paid 200 times in a defi loss because there could be a global loss where a lot of people are affected by that loss. So in defi, it works differently than in personal wallet theft protection. In personal wallet theft protection, we look at it differently because there is a higher likelihood of fraud in that system because you can spin up a secondary wallet, you can just claim to be phished. So now we work with NAXO, which is an elite group of cyber investigators, former special agents from the FBI, and these guys are top of their field, and we have an arrangement with them where we’ve had this formal agreement where they come in and basically assess all the losses for us on an individual basis, and they’re basically creating a trust score for the individual loss.

That trust score is then used by the governance committee to pay out the loss because if we can trust the individual that is making the claim, then we believe that we can trust that this claim is legitimate. So it expedites that system by using this disinterested third party that has a reputation online, and what they’re trying to do is just create fairness in the system as well with all of us. So it really expedites that system. Then on top of that, we use Chainalysis, reactor tools, and some other things as well in order to really dial that in and make sure that this isn’t a user that’s generating insurance fraud on our system.

Ian:

I hadn’t even started thinking about the variations of fraud here, but that seems like you’re going to be faced with probably a lot of people who are attempting to pull off something like that where they hack themselves, in fact.

Brandon:

You know if in the system if you do that, then you’re setting NAXO and Chainalysis loose on you. I wouldn’t want that as an individual. I have to be fairly sophisticated to do that, but we’ve also put in loss controls in the system and thresholds that keep us resilient. One of the things is to start off our system with offering coverage from one to 100 ETH in value. In doing that, we prevent very, very large losses or any one individual from having an overwhelming negative effect on our capital pool. We can scale that up as we get loss experience and we see how it goes, but it will satisfy the masses. That’s really been what we’ve been after from the beginning is to foster web3 adoption and to really deliver critical infrastructure to the space.

Ian:

Give me a sense of what it costs me to insure a personal wallet. You gave that range of amounts that I can insure, but let’s say I’ve got 10 ETH in my MetaMask. What does a policy cost?

Brandon:

So policy cost is 1.95%, and it’s not so much a policy as much as it is a membership into our network. So the network is based around cost sharing of others’ losses. So as stakeholders come into the network or contributors contribute to the network, they’re sharing in the losses of others for the reward system that’s put in place. So ultimately, 1.95% is the launch membership cost, but like I said earlier, with loss experience that we can toggle that up or down. Our experience and our frequency and severity numbers show us that we believe we can come down off of that number and we can even get as close to 1%, which I think would be very palatable, but through the market research, we found that 80% of people still want to buy our product at 1.95, and it’s not to have some huge underwriting profits. We just want to make sure that we remain resilient early in the system and that if our frequency or severity is the threat to any InsurTech startup really is going to be early when you don’t have the hundreds of millions of dollars of assets that you’ve built over time.

So that’s where we have to be as cautious as we can, but the nice thing is if you want to insure roughly two $10,000 of assets, cost you $195 for the year, and this is an annual membership into the network. Also, we don’t cover, I’m sorry, we don’t exclude wallet types or chain types. So we’re chain agnostic in the coverage that we offer. The only difference is that you will have to get paid back in ETH or DAI in our system earlier in the system, and then we will eventually migrate over to paying in the chain in which you lost the assets. You can elect the chain to get paid back in, but right now it’s ETH or DAI, and it still works for all wallet types.

Ian:

That actually seems incredibly reasonable to me, given that the risk of loss that I think a lot of people are exposed to in the ecosystem today. So shifting to slightly different topic, as I understand it today, the insurance industry is incredibly regulated. There’s state level regulators in the US, and prices are controlled, policy premiums are controlled on a lot of products. There’s federal backing for certain types of products like flood zone insurance. It’s an incredibly complex landscape, which I think has built a bit of a moat. That’s why there’s these really large companies that make lots and lots of money in insurance. What does that mean for you? Have you had to navigate the regulatory world in order to bring this product to market?

Brandon:

We did go and explore that route, but to your point, there is regulatory moats that have been created. This is a titan industry. You don’t just jump in. One thing that we did find through all of our research was that using a cost sharing network, one, it lends itself amazingly well to decentralization. So that was a starting point, but two, cost-sharing in the US is widely used as an insurance alternative for the healthcare industry. It was born out of Christian ministries, ultimately parishioners coming together to share the loss of others who couldn’t afford health insurance, and then it’s developed into an industry now, and it doesn’t fall within the purview of insurance commission.

So if you can model that same system with people all coming together, like-minded individuals sharing the loss of others that share the same beliefs, then we’re able to mimic that system and operate as an insurance alternative. When you overlay a modern actuarial model on top of that, you get a very resilient system.

Ian:

Interesting. So a cost-sharing network means that you’re not technically an insurance product and, therefore, you’re not under the insurance commissioner.

Brandon:

So it operates differently. There’s no central group. There’s no promise to pay. There’s no contractual obligation, which also causes a lot of the contention with inside of the insurance sector and the end user, the insured, where every time as … It’s not lost on the insured that every time a traditional insurer pays a claim, it’s to their own detriment, but in our system, we believe we can create more of a social and economic benefit to everyone in the system, those contributors to the network, as well as those members in the network where we can have this fully robust system where everyone wins and there are no losers.

Ian:

This is a really exciting model. So I’ve been to the website. I’ve clicked the join the wait list button. I’m now eagerly anticipating when I get to join. Talk to us as we wind down the conversation a little bit about the roadmap from here. When does this open up for general participation? When can I get my insurance policy on my personal wallet?

Brandon:

So membership will start, is anticipated right now in Q3. So we completed our final audit. We’re in a code freeze. We’re developing the DAP a little differently now because this has been multiple iterations of this product. Like I mentioned earlier, we have three different products built out. We’re launching with One to start. So we’ve really focused the DAP and redesign down to just the personal wallet theft protection and really focused heavily on the user experience. We believe that web2 experiences seem to be smoother and less clunky than a web3 experience as it stands today. So what we’ve done is really focused on that user experience, trying to make that a seamless process so that the users and members of FairSide network can sign up in minutes and not take a very long time in that process.

It’s still a permissionless system for us to get in, for the user to get into the system, and that takes around two minutes, which is a very reasonable amount of time. So for us, the idea of launching product first and our roadmap is Q3, then we launch staking, and this is a sophisticated model. It is going to take some time for us to dial in actuarial models so that they can be supported by the community and not the founders in a core group of governance level members, but I think we can get there relatively quick, definitely, hopefully, before Bitcoin goes to the moon, but it is a nice time to launch.

This is a great time to launch because if you launch in the height of a bull market, then there’s so much distraction in the system. The token also causes some issue of distraction when you have a very strong product. So for us, holding back on the token to a later date really allows the user to focus on the usability of our product and how important it is to the ecosystem. When you have a token involved, the token itself can distract people away from how good the product is when you have volatility within your token.

So really, the focus is product first, token second, and then start to develop into these other lines of coverage, the defi and the exchange and third party risk, but we also have models. Right now, we’re built to be high frequency, low severity, which is why we limit it to 100 ETH, but there are more catastrophic models when we start to look at how we want to cover protocols. So the protocol can get coverage because we believe that the user has one line of cover, but there’ll be a coordination of benefits. If you look at some of the defi protocols, it’s cost prohibitive for them to purchase a billion dollars in insurance coverage for all their staked assets, but if you have coordination of benefits through two different segments of FairSide where the protocol can purchase a layer of cover and then individuals purchase a layer of cover as well, then you get coordination of benefits and we’re able to fully support the ecosystem on all levels.

Ian:

Amazing. You’ve spent a long time before launching FairSide in the traditional insurance business. Do you envision a future where the products you’re building at FairSide become mainstream, part of that every insurance carrier has an option like this?

Brandon:

I definitely believe that we’ll go mainstream, and our focus is on bringing adoption to web3. So that’s one of the reasons we focused on our distribution points as being the wallets and indexes and top projects in the space because we need to get product and brand awareness out there, especially as first move around personal wallet protection, it becomes necessary that people have this awareness of what you’re doing because we’ve seen through the market research too that a vast majority of people don’t even know that insurance exists in the space on any level. So for us, it’s getting that awareness out there to the individual.

I definitely see it being mainstream at some point. FairSide, the way it’s been designed and built, we can tackle nearly any type of loss, and it doesn’t have to be just crypto. What we’ve developed can move into flood and into crop and into all these other forms of coverage. It is not isolated to crypto. We just intend on conquering crypto first, and then once we’ve hit some critical mass there, we can look at other product lines, but definitely, it’s a mainstream product.

Ian:

Amazing. Well, I’m really looking forward to the product launching later this year and being able to participate. Brandon, thanks so much for joining us on Public Key.

Brandon:

Yeah, I appreciate it. Thanks so much for having me.

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