Category Archives: Derek Jones

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What is the Insurance Protocol for a Decentralized Exchange?

As experts predict, the next Bitcoin bull run will be prompted by an influx of institutional investors. Blockchain companies are fighting to create the best custodial solutions that will entice these investors into this new asset class. One thing is certain, what they are looking for is insurance to cover their assets, just like what is obtainable in mainstream finance.

The cryptocurrency insurance industry is quickly growing, yet there is a substantial lack of transparency over who is insured, to what extent, and by whom. Estimates put the total amount of available cryptocurrency insurance at USD 6 billion; not a lot when considering that the top three exchanges handle over USD 1 billion in trades a day, let alone the total market cap of around USD 140 billion.

Bitcoin News spoke with Derek Jones, co-founder of new decentralized cryptocurrency exchange UnitedCoin. Like every insurance policyholder it seems, there was a lot of information that non-disclosure agreements kept him from sharing. He could not for one, share who his insurance provider is or whether they had previously paid out claims for cryptocurrency exchanges.

Jones was able to explain how exactly UnitedCoin’s insurance policy works, which is particularly valuable information in understanding how peer-to-peer transactions can be covered by insurance policies.

“We insure all the investments that are in hot wallets. The way the exchange works is that 98% of funds are actually in cold storage and the 2% of funds that are actually in hot wallets are completely insured,” Jones explained to Bitcoin News. The hot wallets are insured up to USD 100 million, but they are looking to increase this amount. With the current insurance policy model and its limitations, cold storage is the only way that they can right now guarantee security for investors.

While Jones admittedly did not know of any insurance policies that have been paid out to any cryptocurrency exchange after a hack, apparently, the majority of companies that suffered security breaches did not have cold storage practices in place, which he says is one of the larger issues that jeopardizes security.

As a victim of the Cryptsy exchange hack, Jones’ view is that nobody should invest in a cryptocurrency exchange that does not have insurance.  ”To be honest, I don’t know why you would use an exchange that is not insured unless you are very comfortable with the fact that you could lose all your money.”

UnitedCoin also has FDIC insurance in the US which covers fiat currency, and insured accounts in Europe. The cryptocurrency is stored in cold storage and whenever there are transactions taking place on the platform, the money that is being sent back and forth is in a token form. That tokenization is what represents all of the actual transactions. However, when someone wants to withdraw funds, it is taken from the cold storage.

Jones’ father’s former bank holds the record in the US for a newly formed bank reaching USD one billion in assets the fastest. The record when he started was five years, and they achieved it in 18 months.

Influenced by some of his policies that did not only insure profits but also reduced fees for users, Jones was inspired to create a new revenue model for his exchange. ”With crypto, I saw that there was something else we can do. Because transactions create a lot of revenue for you as a company, people who are supporting the network should benefit from that revenue. We take 20% of those net revenues each month and divide it amongst members.”

He noted that this is similar to the actions of American Express.

The platform’s native token UNIT launches with the IMO, an initial members launch. Potential members are required to go through a know-your-customer (KYC) process to register.

 

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Image Courtesy: Amelia Trapp, Bitcoin News

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