As the NFT (non-fungible tokens) marketplace skyrockets, so do the incidents of crime that result in digital creators having their assets stolen by hackers and cybercriminals. The regulation of this new form of cryptocurrency is yet to be secured. However, insurtechs are increasingly answering the call when it comes to new market demands in our brave new world. We spoke to Edward Ryall, co-founder of Neptune Mutual - a parametric platform that explores new avenues in creating user-centric risk protection products on the blockchain.
Q: Why has the NFT market exploded over the past two years?
The total market cap of cryptocurrency reached $3trn in 2021, according to a report by PitchBook Data. In this context, it is easy to understand that there is a large and growing appetite to find and invest in digital assets that show potential to grow in value. Predicting the future can be a little tricky, as anyone who has bought a meme coin will know, and so when it comes to investing in digital assets it is helpful to break the problem down into its two component parts: supply-side and demand side.
Whilst the demand side of price prediction requires judgment, knowledge, and ideally a little help from Lady Luck, it is much easier to pin down what is required on the supply side, which can be pinned down to a single word: scarcity. And now we are starting to home in on the answer to the question why has the NFT market exploded? NFTs provide the ability to create scarce digital assets, and if, correction IF, you can invest in a scarce NFT where there is a growth in demand, the stage is then set for very significant returns.
Q: Is the NFT market potentially a flash in the pan trend? Or are digital assets here to stay? If so, why?
NFTs are just one form of digital asset. Not only is this NFT market growing, but it is also evolving, from ownership of “static” assets to ownership of data-driven, AI supercharged “intelligent” assets. On this basis alone, prospects for future growth seem to be very significant.
Digital assets have one attribute that contributes to their value, and that is their liquidity, or put another way, the ease with which ownership can be transferred. A good example of this that should resonate with readers is the ownership of property. I think in most countries, the buying and selling of land/property is slow and complicated, usually involving lawyers and weeks of administration. Contrast this with digital assets on the blockchain that can be transferred across the globe in seconds, and it provides some insight as to just one way in which ownership of digital assets is beneficial. Progressively, we are likely to see growth in the link between the registry of ownership of physical world assets taking place in the digital world.
Q: How vulnerable are creators in the NFT and digital asset marketplace at this moment in time?
Firstly it is important to understand and make the distinction between the security/vulnerability of blockchains, and the security/vulnerability of applications that use smart contracts which interact with the blockchain. Blockchains are inherently secure, smart contracts on the other hand can be vulnerable to attack. As most people interested in this industry will know, the news is full of examples on a regular basis about hacks and exploits of different projects, and of course, this is the very reason behind the need for the solution designed by Neptune Mutual.
Q: What kinds of losses do creators and investors face, and are there any safeguards in place to recover them?
Projects work hard to protect themselves and their ecosystem from attack vectors used by cybercriminals, however as can be seen in the news, the many technical safeguards that are put in place are, by themselves, insufficient to provide complete protection.
There are some examples of recovering stolen digital assets, and of course, specialist cybersecurity firms can help in this respect, but this generally takes time and often depends on the “goodwill” of hackers that initiated the attack in the first place, so probably not something anyone would want to rely on.
Q: What kinds of protection does Neptune offer digital creators - and how does it work?
The Neptune Mutual protocol uses parametric cover as opposed to discretionary insurance. It has an easy and reliable on-chain claim process. This means that when incidents are confirmed by the NPM token holder community, the resolution is fast and payouts to all covered policyholders are guaranteed.
We are already working on plans for version two of our cover product that will be particularly relevant to covering a diverse range of metaverse virtual assets.
Q: What kinds of technologies are offering the most secure forms of cover?
In terms of financial protection against hacks and exploits, the question about “security of cover” can be broken down into two elements.
The first is the question of risk associated with the discretionary aspect of most on-chain policies. In particular, one of the challenges of traditional insurance is the mismatch in understanding between the insured and the insurer about what is covered by the insurance policy.
When it comes to blockchain, due to the highly technical nature of blockchain risks, this problem becomes an order of magnitude more difficult to resolve. It is therefore a frequent problem that policyholders pay for protection, and then when they incur a loss and make a claim, find out that the specific type of technical attack that caused their loss wasn’t in fact covered by their policy.
The second element, and risk, relates to the extent to which cover policies are backed by capital in the event of an incident. In most cases, there is insufficient capital to meet the demand of all policyholders, and this is justified on the basis of risk diversification and the need to provide high returns for those providing the capital. One can see that there are opposing interests at play in terms of capital efficiency and usage between liquidity providers that provide capital (security) and cover policyholders that rely on it in the event of an incident. Providers of liquidity will want to see high returns that result from fractional reserves, whilst policyholders will prefer to be assured a payout by having a high percentage of minimum capital requirement.
At Neptune Mutual, we believe that the parametric model we have designed provides the best form of financial cover for a whole variety of reasons.
Q: What changes would you like to see happening in the space over the next few years to better protect the interest of artists?
We believe that awareness of security is the first step towards protection; awareness will then drive action. It is important for the whole blockchain community to take a broad spectrum of actions to protect the ecosystem. Ignorantia juris non excusat, or “ignorance is no defense”, is a well understood and universal concept. The same principle can be applied to the blockchain space. In the real world, financial protection is commonplace to protect our physical and intangible assets, and most people would recognise the danger of a hope-for-the-best approach to protection. So in answer to the question, I would like to see the adoption of financial protection become the norm for an industry that already has $3trn of assets.
About the author: Edward Ryall is a co-founder of Neptune Mutual, an on-chain parametric cover company. He is also the CEO of AVE-chimera, a quantum chemistry and materials science company accelerated by Airbus and the CEO of Ryall Energy family office. He is based in Bordeaux, France.