10.3 Insurance-Backed NFTs: Clarification

Disclaimer：Insurance-backed NFTs on InsuranceDAO.World are designed solely for the purpose of covering digital assets within the blockchain ecosystem. These NFTs provide protection against risks unique to DeFi protocols, NFTs, and tokenized assets, but they do not provide coverage for physical assets or traditional financial instruments. Participation in this decentralized insurance system requires an understanding that it is not a substitute for conventional insurance products that cover real-world assets and liabilities.

By using InsuranceDAO.World and engaging with insurance-backed NFTs, you acknowledge and accept the inherent risks associated with blockchain technology, including smart contract vulnerabilities, oracle failures, and governance issues. The coverage provided by these NFTs is explicitly limited to the terms outlined within their respective smart contracts and does not extend beyond the blockchain ecosystem. Users are encouraged to evaluate their individual risk tolerance carefully before participating and to consider additional risk management strategies.

InsuranceDAO.World introduces a pioneering form of decentralized insurance coverage through insurance-backed NFTs, which are unique digital assets that encapsulate specific insurance protection for DeFi protocols, NFTs, and other tokenized assets. These NFTs inherently embed insurance coverage within their structure, but they are fundamentally distinct from traditional financial insurance products. Rather than providing protection for physical assets or liabilities, these NFTs represent a novel solution for safeguarding digital assets within the blockchain and decentralized finance (DeFi) ecosystem.

Innovative Nature of Coverage

Unlike traditional financial insurance, which typically covers tangible assets or liabilities, insurance-backed NFTs are designed to address the unique risks associated with blockchain-based assets. These risks include, but are not limited to, vulnerabilities in DeFi protocols, market volatility in NFTs, and liquidity crises affecting tokenized assets. Each NFT leverages smart contracts that autonomously define the terms of coverage, including the specific risks covered, the conditions under which claims can be made, and the mechanisms for calculating and processing payouts.

These insurance-backed NFTs offer a fully transparent, programmable insurance solution that is directly integrated into the blockchain. The coverage, premium calculations, risk assessments, and claims processes are managed and executed through decentralized, code-driven mechanisms, eliminating the need for traditional intermediaries like insurance companies. This decentralized approach ensures that the risk management process is more direct, faster, and transparent than conventional insurance models.

Embedded Terms and Conditions

The coverage associated with each insurance-backed NFT is explicitly encoded in its smart contract. These terms and conditions govern the scope of coverage and outline the exact circumstances under which a claim may be initiated. Coverage may extend to, but is not limited to:

• Failure of DeFi Protocols: Protection against risks arising from vulnerabilities in smart contract code, protocol bugs, or malicious attacks that affect decentralized applications or DeFi platforms.

• Loss of Liquidity in Tokenized Assets: Safeguarding against unforeseen events such as market crashes or liquidity shortages that affect the value or tradability of tokenized assets, including NFTs.

• Volatility in NFT Markets: Insurance coverage designed to protect against the depreciation of value in NFTs caused by sudden market fluctuations or external economic factors impacting the NFT market.

It is crucial to understand that the coverage provided by these NFTs is strictly limited to digital assets within the blockchain ecosystem. These insurance-backed NFTs do not extend to physical assets, liabilities, or risks outside the blockchain or traditional financial sectors. The scope of coverage is confined to specific risks inherent in decentralized and tokenized markets, and as such, cannot be used for traditional assets or real-world liabilities.

Payout Structure

In contrast to traditional insurance products, which typically disburse payouts in fiat currencies or tangible assets, claims under insurance-backed NFTs are settled in arrUSD, a stablecoin pegged to the value of SOL (Solana). The payout amount is calculated based on the terms encoded in the specific NFT’s smart contract, which defines the parameters for determining the claim’s value according to the type and severity of the covered risk.

This unique payout mechanism facilitates blockchain-native transactions, ensuring transparency and efficiency in the claims process. Additionally, the use of a stablecoin like arrUSD helps mitigate the inherent volatility of cryptocurrency markets, providing a more stable and predictable claims payout system, particularly during periods of market turbulence.

Risks Specific to Blockchain Assets

While insurance-backed NFTs provide significant protection within the digital ecosystem, it is vital to recognize that these NFTs are specifically designed to cover risks associated with blockchain assets. Consequently, these NFTs do not extend coverage to physical or traditional financial assets. They serve as an innovative tool for digital asset protection within the DeFi, NFT, and tokenized asset markets, but do not replace traditional insurance products that cover tangible assets or liabilities outside the blockchain space.

Blockchain-based insurance solutions inherently carry distinct risks that are not typically encountered in traditional insurance models. Examples of these risks include:

• Smart Contract Vulnerabilities: Exploits or bugs in the smart contract code governing blockchain protocols can expose users to risks, including loss of funds or invalidation of claims.

• Oracle Failures: Incorrect or manipulated data feeds provided by decentralized oracles can lead to inaccurate risk assessments, causing mispricing of premiums or improper claims disbursements.

• Governance Failures: Issues within the governance models of decentralized platforms may result in unintended consequences that affect the stability of the assets covered by these insurance-backed NFTs.

Thus, while these NFTs offer robust protection for digital assets, users should acknowledge that the protection is limited to the risks inherent within the blockchain and DeFi ecosystems. These NFTs do not offer coverage for risks associated with physical events or external liabilities outside the blockchain context.