Understanding Web3 Insurance

In this article, we'll explore the emerging world of Web3 insurance, a crucial component for businesses operating in the decentralized digital economy. We'll delve into what Web3 insurance is, why it's necessary, what it covers, and how Web3 risks differ from other high-growth companies.

Vouch's is the leading broker for Web3 companies, and we can help you gain a comprehensive understanding of Web3 insurance and how it can protect your digital assets and operations.

What is Web3 insurance?

Web3 requires a specialized insurance program design for businesses operating in the decentralized web ecosystem. Unlike traditional insurance programs, Web3 insurance programs are tailored to address the unique risks and challenges associated with blockchain technology, cryptocurrencies, and decentralized applications. 

Key differences that legacy brokers miss:

• Coverage for digital assets like cryptocurrencies and NFTs
• Protection against smart contract vulnerabilities and failures
• Adaptability to rapidly evolving technological landscapes

For example, a Web3 insurance program might cover losses resulting from a smart contract bug in a decentralized finance (DeFi) application, something that traditional insurance policies would likely not address.

Why legacy insurance brokers don't cut it for Web3

Legacy brokers face significant hurdles in adapting to blockchain and decentralized systems. The complexity of these technologies often outpace the traditional insurance industry's understanding, leaving many of these brokerages ill-equipped to serve the emerging ecosystem. This knowledge gap is exacerbated by the rapid pace of innovation in the blockchain space, which demands quickly evolving insurance solutions. Legacy insurance brokers, burdened by legacy systems and knowledge gaps, frequently struggle to match this pace. 

On top of that, evaluating risks in the digital asset space requires specialized knowledge that most brokers lack, making it difficult to accurately assess and price policies for blockchain-based entities. The constantly evolving regulatory landscape for cryptocurrencies and blockchain technology further complicates matters, creating a moving target for compliance and risk management. As a result, many established insurance providers find themselves unprepared to navigate the unique challenges of the Web3 revolution.

The Web3 economy has unique needs, including: 

• Protection against hacks and exploits in smart contracts 
• Coverage for losses due to private key mismanagement 
• Insurance for decentralized autonomous organizations (DAOs) 
• Protection against regulatory risks in an evolving legal landscape

Understanding the value of built-for Web3 insurance broker

Web3 insurance has been overlooked in the past primarily due to a lack of viable options. Traditional insurers were hesitant to enter this space due to its novelty and perceived risks — Many still struggle to keep pace. Investing in purpose-built Web3 coverages like those offered by Web3 Protection Policy from Corix offers several benefits. 

Personalized, customizable Web3 coverage benefits include:

1. Tailored protection for specific blockchain and crypto risks 
2. Coverage for novel organizational structures like DAOs 
3. Reduced personal risk for entrepreneurs 
4. Improved chances of surviving market downturns 
5. Meeting increasingly common requirements in the industry 
6. Enhanced credibility with clients and partners 
7. Faster claim processing due to better understanding of the technology

What should a Web3 insurance program cover?

When building a Web3 insurance program, it's important to cover the unique risks that decentralized technologies bring. From protecting digital assets and smart contracts to addressing cybersecurity threats and regulatory uncertainties, a Web3 insurance program should be designed to mitigate the most pressing vulnerabilities in the blockchain space. Tailored coverages designed to protect Web3 companies and their stakeholders generally include types of coverage:  Directors & Officers (D&O), Errors & Omissions (E&O), Cyber, and Crime. 

Directors & Officers (D&O)

Directors & Officers (D&O) Insurance is essential for protecting company leaders from personal losses if they are sued due to their roles as directors or officers of a business. 

This type of coverage is particularly crucial for Web3 startups, as it provides personal asset protection, which can be a key factor in attracting top talent to leadership positions. For example, a crypto exchange startup preparing for its Series B funding round might add D&O insurance to reassure potential board members that they are shielded from potential lawsuits. 

Errors & Omissions (E&O)

Errors & Omissions (E&O) Insurance, also known as Professional Liability Insurance, protects businesses against claims of inadequate work or negligence. For Web3 companies, this coverage is especially important as it can address issues such as errors in smart contracts or failures in decentralized applications. For instance, a blockchain development company offering smart contract auditing services might add E&O coverage to safeguard against potential claims of missed vulnerabilities. In the fast-moving and complex Web3 environment, where technical errors can have significant consequences, E&O insurance is essential to protect against the risks of negligence.

Cyber

Cyber Insurance protects businesses from risks associated with the internet and information technology infrastructure. In the Web3 space, this coverage is especially vital, as it shields companies from threats like hacks, data breaches, and cyber attacks targeting blockchain networks and cryptocurrency wallets. For example, a decentralized finance (DeFi) protocol may add cyber insurance as it expands its operations and handles larger amounts of user funds, ensuring protection against potential cyber threats that could disrupt or compromise the system. In the digital world of Web3, cyber insurance is crucial for safeguarding both companies and their users.

Crime

Crime Insurance protects organizations from losses resulting from criminal acts like theft, fraud, or embezzlement. In the Web3 space, this type of insurance is particularly important, as it can cover losses from hacks, social engineering attacks, or insider theft of digital assets. For instance, a crypto custody service may add crime coverage as it grows its client base and the value of assets under its management increases, ensuring protection against potential criminal activity that could jeopardize valuable digital assets. In the decentralized world of Web3, crime insurance is crucial for safeguarding against financial losses caused by criminal acts.

Additional policies to consider

Once the key components of a Web3 insurance policy are in place, there are several additional coverages to explore for full protection.

You should also consider expanding your E&O to include AI Insurance to build a comprehensive Web3 mitigation strategy. AI insurance safeguards your company from risks unique to artificial intelligence, including algorithmic errors, discrimination, and intellectual property violations. With AI playing a pivotal role in decentralized finance, security, and customer interactions, having the right coverage protects you from financial losses due to faulty algorithms, regulatory issues, or lawsuits. As AI evolves within blockchain, specialized insurance allows you to innovate confidently while managing risk effectively.

General Liability Insurance is vital to safeguarding your business against everyday risks like property damage, bodily injury, and personal or advertising injury claims. Even in the Web3 space, where digital assets and cybersecurity often take center stage, traditional risks still exist. Whether it's an accident at your physical office or an issue during in-person events, General Liability Insurance ensures you're covered for these unforeseen challenges, making it an essential part of your comprehensive risk management strategy.

How to assess your coverage needs

Assessing your insurance needs in the Web3 space can feel like navigating uncharted waters for good reason — because it is! You're blazing new trails in blockchain technology, pushing the boundaries of decentralized systems, and redefining the digital economy.

You need an insurance broker that's as innovative and adaptive as your business. But where do you start? How do you evaluate risks that are as novel as the technologies you're developing? 

It's time to take a strategic approach to safeguarding your Web3 venture. Take these first steps to help determine your coverage needs. 

Get an assessment of potential risks

Your first step to securing the right insurance for your Web3 company is a thorough risk assessment. Begin by identifying your digital assets, including cryptocurrencies, NFTs, and smart contracts, and evaluate any vulnerabilities in these areas. Review your cybersecurity measures, ensuring you’re prepared for potential hacks or breaches. Additionally, assess your regulatory compliance and any operational risks. 

Vouch can help you identify must-have coverages and the coverages you should add later, when you reach the next phase of growth. We can create a tailored insurance program for you that protects your company from both traditional and Web3-specific risks.

Identify all digital assets and their values

To identify all digital assets and their values, you’ll need a comprehensive inventory of your Web3 company’s assets. Start by listing cryptocurrencies, NFTs, and tokens, and then assess their current market value, which can fluctuate daily. Use blockchain explorers to track and verify asset ownership. Don’t overlook smart contracts, decentralized applications, or digital wallets. 

Be sure to regularly update this inventory to reflect any changes. By maintaining an accurate record of your assets and their values, you’ll be better prepared to secure the appropriate insurance coverage.

Evaluate smart contract dependencies

To evaluate smart contract dependencies, begin by identifying every contract your Web3 company relies on, including third-party integrations. Assess each contract’s purpose, its interaction with other contracts, and the potential risks if one fails. Review the security measures in place, ensuring they follow best practices. Pay close attention to any contracts that handle sensitive transactions or data, as these may pose higher risks. 

By thoroughly evaluating these dependencies, you’ll better understand where vulnerabilities lie, allowing you to secure the right insurance for potential failures or breaches.

Assess regulatory compliance risks

To assess regulatory compliance risks, start by identifying the laws and regulations that apply to your Web3 company, both domestically and internationally. Review key areas like data privacy, anti-money laundering (AML) requirements, and cryptocurrency-specific regulations. Conduct regular audits to ensure your operations are aligned with current legal frameworks, as non-compliance can lead to fines or legal actions. Stay ahead of changes by monitoring updates in blockchain regulations. 

This proactive approach will help you secure the right insurance coverage while protecting your company from compliance-related risks.

Consider potential vulnerabilities in your technology stack

To assess potential vulnerabilities in your technology stack, start by conducting a thorough review of each component, from blockchain frameworks to smart contracts and digital wallets. Identify any weaknesses in third-party integrations, legacy systems, or outdated software that could expose your company to security threats. Perform regular security audits, penetration testing, and code reviews to ensure resilience. Pay special attention to areas that handle sensitive data or transactions. 

By addressing these vulnerabilities, you’ll be able to secure the right insurance and protect your business from potential technological risks.

Vouch: The Premier Broker for Web3 Insurance

At Vouch, we’re focused on ensuring high-integrity Web3 companies get the insurance coverage they need to build a strong, lasting business. Our knowledgable brokers understand the unique exposures of Web3 and know the right insurance carriers for your risks.

By carefully marketing your program to our carrier partners, we can offer attractive terms at affordable premiums to keep your growth on track.

Now is the perfect time to get your insurance program in place. Being proactive about insurance ensures you’re ready for whatever comes next. Connect with our Web3 team to review your risks and coverage needs. It’s all about securing your business for the long haul and the Vouch team is ready to assist you.