Decentralized autonomous risk transfer on the blockchain

Abstract

The rise of blockchain technology and other technological accelerators enables a fully automated decentralized autonomous risk transfer. In this chapter, we explain the functionality and operating principles of this new method of risk transfer. We provide an overview of the corresponding institutional arrangement and its challenges. We identify two main challenges, namely ensuring the quality of the product and gaining a critical network size. A feasible solution for these problems is the usage of system-specific tokens, which are used as a form of digital collateralization. In a short case study, we scrutinize how these theoretical concepts can be translated into practice and show the potential of the idea. While flight delay risk is already handled through decentralized autonomous risk transfer, the biggest benefits can be realized by decentralizing crop and hurricane insurance, including a seamless transfer of the risk to capital markets.