Depositors insurance?

[nayrB16]

I have been dwelling on the idea of how to insure bitcoins. Just bitcoins, not securities, bonds, or investments, just plain bitcoin deposits.

I understand that Bitcoin is inherently safe and anonymous and their is no need for a "bank". But the one thing Bitcoin does not offer is "assurance" for lost or stolen coins. And I wanted to present the idea here and see what the community thinks.

The problem of trying to insure a persons bitcoins is the ease of fraud, given the anonymous nature of Bitcoin. So to make an insurance option feasible I the insurer will retain the private keys to a bitcoin address that a depositor can use to store their bitcoins with the assurance of guarantee. If they are ever lost or stolen they will be replaced by the insurance they paid for.

When signing up for an insured Bitcoin address the depositor will provide a return payment address when they want to collect their bitcoins. The only way to change to depositors return address would be a verified account which would require documentation such as drivers license and corresponding bill such as utility, rental agreement, cellphone....etc with the same address.
During the application process 3 Bitcoin address will be used

                             Insured address to deposit to                Payment address for services rendered
                                                |                                                           |
                       111111111111111111111111111111111       1222222222222222222222222222222222

                                  Depositors return address
                                                 |
                       1333333333333333333333333333333333

The insured deposit address will retain the bitcoins deposited, they will not be pooled into a single address or account. This allows the depositor to monitor the insured address

The insurance rates are due monthly at the first with a 25% discount if you pay the first 12 months in advanced. Sorry but there are no refunds or pro rates, failure to pay the bill will have it deducted from the insured deposit, until depositor withdraws their bitcoins.

Instead of using flat fees or large percentage rates the insurance rate is calculated on the deposit using the equation y^3=.03/x where (x=your deposit)>0. This rate is calculated down to the 4th decimal space.

example deposit 10Btc the solution to the equations is 0.1442249570307408382321638310780109588391869253499350
and the fee would be the first 4 decimals 0.1442Btc per month

A 100Btc deposit would yield a rate of 0.0669Btc per month
if the first 12 months are paid in full then a 25% discount is added
0.0669*12months = 0.8028+25% discount=0.6021Btc per year

Again this is just something that I have been thinking of and wanted to know what others think about it.

[1715024960]

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[1715024960]

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[kjj]

Sweet!  A way to (nearly) double my bitcoins with no risk!  Where do I sign up?

[Draino]

if there was a way to make bitcoin insurance actually profitable in the early stages, i think this would be huge

think about how seriously insurance companies investigate their claims-- i imagine there would be some very intimidating questions to answer  regarding why the police report wasn't filed or why best practices weren't followed with wallet security.

edit:
now that i think about it, it's too bad a big player didn't have the funds/inclination to hire the appropriate people from insurance backgrounds and an army of lawyers to start that sort of thing up.

no insurance?  i won't do business with you
yes insurance?  they'll pound your ass into the ground on behalf of the depositors for negligent behaviour

[dissipate]

if there was a way to make bitcoin insurance actually profitable in the early stages, i think this would be huge

think about how seriously insurance companies investigate their claims-- i imagine there would be some very intimidating questions to answer  regarding why the police report wasn't filed or why best practices weren't followed with wallet security.

edit:
now that i think about it, it's too bad a big player didn't have the funds/inclination to hire the appropriate people from insurance backgrounds and an army of lawyers to start that sort of thing up.

no insurance?  i won't do business with you
yes insurance?  they'll pound your ass into the ground on behalf of the depositors for negligent behaviour

No respectable insurance company is going to insure a site that doesn't have regular security and account audits. Them asking questions after the fact about wallet security would just be idiotic, unless the exchange hid stuff from them.

[Draino]

if there was a way to make bitcoin insurance actually profitable in the early stages, i think this would be huge

think about how seriously insurance companies investigate their claims-- i imagine there would be some very intimidating questions to answer  regarding why the police report wasn't filed or why best practices weren't followed with wallet security.

edit:
now that i think about it, it's too bad a big player didn't have the funds/inclination to hire the appropriate people from insurance backgrounds and an army of lawyers to start that sort of thing up.

no insurance?  i won't do business with you
yes insurance?  they'll pound your ass into the ground on behalf of the depositors for negligent behaviour

No respectable insurance company is going to insure a site that doesn't have regular security and account audits. Them asking questions after the fact about wallet security would just be idiotic, unless the exchange hid stuff from them.

well that's sort of my point, being insured or insurable would help get us through this garbage phase with large online wallets being mishandled

i don't think we're audited would have the same marketing appeal as we're insured

[justusranvier]

Properly-priced deposit insurance would be expensive due to the nature of the risks involved.

[Melbustus]

I don't think you, the insurer, can hold the private keys. That essentially just adds risk to the system, and also requires additional counter-party trust.

I agree that there's a dire need in the bitcoin community for what I'll call "confidence services": security auditors, business auditors and reviewers, and insurers. I believe that's what the following thread is about: https://bitcointalk.org/index.php?topic=101832.0

These services will emerge, but it'll take time. Each will have to build a level of trust within the community in and of themselves, but if there are several (and they're independent), it could work. But it's going to take time.

[optimator]

I've been pondering the insurance question as well. I think what would be required would some type of audit to ensure compliance to a publicly agreed / vetted security policy. .

I see this as being a very legit business but initially applicable to the larger commercial businesses who 1) have the funds for initial compliance; and 2) can pass through the insurance costs to the consumer.

THEN insurance becomes a competitive differentiator.  (e.g., exchange 1 has a .5% fee, exchange 2 has a .6% exchange fee, exchange 2 insures your account up to 100,00 btc - who do you do business with?)

[benjamindees]

You understand that insurance is inherently fraudulent, right?  It can't exist without force, fraud, and eventual state backing.  If you pay for Bitcoin "insurance", the insurer is going to use your payments to set up ways to track you and all of your transactions.   You understand that, right?

I mean, people here just got done losing a whole bunch of Bitcoins in a fairly obvious ponzi scheme, so I feel obligated to point this out.

[Bitcoin Oz]

CPA https://bitcointalk.org/index.php?topic=85444.0

[finway]

Depositors insurance is a scam.

[dissipate]

You understand that insurance is inherently fraudulent, right?  It can't exist without force, fraud, and eventual state backing.  If you pay for Bitcoin "insurance", the insurer is going to use your payments to set up ways to track you and all of your transactions.   You understand that, right?

I mean, people here just got done losing a whole bunch of Bitcoins in a fairly obvious ponzi scheme, so I feel obligated to point this out.

HuH? How is insurance inherently fraudulent? Yes, many insurance companies are the scum of the Earth because states let them get away with a lot of bullshit, but that doesn't mean it is inherently fraudulent.

[P4man]

So to make an insurance option feasible I the insurer will retain the private keys to a bitcoin address that a depositor can use to store their bitcoins

The only thing in/assured here is that the depositor will lose his coins.

[Insu Dra]

Insurance is just a way to get other people to pay for your ignorance, negligence or bad luck ... in the end someone will have to pay for the lost value. I for one don't wane pay for other's ignorance or negligence. As for bad luck, shit happens learn how to deal with it, for true bad luck you can usually count on the community/people around you ... if you can't your probably doing something wrong to start with.

So no thx, I'l pass.
There is no need for any kind of insurance scam.

[Draino]

Insurance is just a way to get other people to pay for your ignorance, negligence or bad luck ... in the end someone will have to pay for the lost value. I for one don't wane pay for other's ignorance or negligence. As for bad luck, shit happens learn how to deal with it, for true bad luck you can usually count on the community/people around you ... if you can't your probably doing something wrong to start with.

So no thx, I'l pass.
There is no need for any kind of insurance scam.

Sounds like a solid contingency plan to me:

don't worry these things, my mom will hug me

[benjamindees]

You understand that insurance is inherently fraudulent, right?  It can't exist without force, fraud, and eventual state backing.  If you pay for Bitcoin "insurance", the insurer is going to use your payments to set up ways to track you and all of your transactions.   You understand that, right?

I mean, people here just got done losing a whole bunch of Bitcoins in a fairly obvious ponzi scheme, so I feel obligated to point this out.

HuH? How is insurance inherently fraudulent? Yes, many insurance companies are the scum of the Earth because states let them get away with a lot of bullshit, but that doesn't mean it is inherently fraudulent.

Basically, in the long run it is impossible to both cover worst-case losses and turn a profit.  The only way it works in the real world is via the fraud of fiat currency and the force of government backing.  Bitcoin has neither, thankfully.

[kjj]

You understand that insurance is inherently fraudulent, right?  It can't exist without force, fraud, and eventual state backing.  If you pay for Bitcoin "insurance", the insurer is going to use your payments to set up ways to track you and all of your transactions.   You understand that, right?

I mean, people here just got done losing a whole bunch of Bitcoins in a fairly obvious ponzi scheme, so I feel obligated to point this out.

HuH? How is insurance inherently fraudulent? Yes, many insurance companies are the scum of the Earth because states let them get away with a lot of bullshit, but that doesn't mean it is inherently fraudulent.

Basically, in the long run it is impossible to both cover worst-case losses and turn a profit.  The only way it works in the real world is via the fraud of fiat currency and the force of government backing.  Bitcoin has neither, thankfully.

Insurance is older than central banking money-from-nothing.  Policies have limits for the exact reason you are talking about.

[Insu Dra]

Insurance is just a way to get other people to pay for your ignorance, negligence or bad luck ... in the end someone will have to pay for the lost value. I for one don't wane pay for other's ignorance or negligence. As for bad luck, shit happens learn how to deal with it, for true bad luck you can usually count on the community/people around you ... if you can't your probably doing something wrong to start with.

So no thx, I'l pass.
There is no need for any kind of insurance scam.

Sounds like a solid contingency plan to me:

don't worry these things, my mom will hug me

I guess you rather leach on others to make sure your sweet life can keep on rolling, ow yha it's not leaching sins every one singed up on it, including the insiders (people) that will try to get value out of the system for what ever scheme they can come up with.

As for the 'mom' reference, grow up. If my house burns down I'm sure the people in this small town will provide everything I need to build a new one and we will deal with payments/reimbursement later. The same is true for any other situation, being financial, health or any thing else ... Why would they do that? Because they know they can count one me to do the same. Over here we still know, trust and depend our neighbors, if you want live in a community or a society where such help isn't a faq then thats your call.

Personally, I prefer this way of living and thinking over the kind where you are forced in to paying insurance to be accepted for anything else.

[Melbustus]

You understand that insurance is inherently fraudulent, right?  It can't exist without force, fraud, and eventual state backing.  If you pay for Bitcoin "insurance", the insurer is going to use your payments to set up ways to track you and all of your transactions.   You understand that, right?

I mean, people here just got done losing a whole bunch of Bitcoins in a fairly obvious ponzi scheme, so I feel obligated to point this out.

HuH? How is insurance inherently fraudulent? Yes, many insurance companies are the scum of the Earth because states let them get away with a lot of bullshit, but that doesn't mean it is inherently fraudulent.

Basically, in the long run it is impossible to both cover worst-case losses and turn a profit.  The only way it works in the real world is via the fraud of fiat currency and the force of government backing.  Bitcoin has neither, thankfully.

For insurance companies with incapable underwriters, sure. But as kjj points out, insurance is not inherently tied to fiat, and doesn't inherently fail. In the present environment, a number of the big guys clearly rely on government, but that doesn't have to be the case. Berkshire Hathaway comes to mind as an example of a substantial long-term independently viable insurance company.

For what it's worth, in a bitcoin world, better consumers would yield good insurance companies. Consumers should demand insurance companies that don't write stupid policies, and vote by refusing to give business to the undisciplined insurers.

A lot of this idealism relies on better consumers (more rational demand incentivizing better business behavior). In the current environment where most people expect to be taken care of by someone else (particularly government), consumers have little incentive to be discerning, so the system is broken. In a world without handouts and bailouts, would consumers be materially better; enough to generate a more disciplined, sensible business environment? I think it's an open question.

[freeAgent]

This does not seem useful at all to me.  What backs your claim of insurance?  Since the only way for someone to lose their bitcoins with you would be to have your accounts get hacked, what's to stop the hacker from getting access to your reserves as well?  You're also introducing more risk into people's bitcoin holdings.  The only reason I would store bitcoins in an account like yours is if I thought there was more chance of my bitcoins getting stolen while I was storing them personally as opposed to having you store them.  It doesn't make sense to me what would attract anyone to this idea.

[Draino]

Insurance is just a way to get other people to pay for your ignorance, negligence or bad luck ... in the end someone will have to pay for the lost value. I for one don't wane pay for other's ignorance or negligence. As for bad luck, shit happens learn how to deal with it, for true bad luck you can usually count on the community/people around you ... if you can't your probably doing something wrong to start with.

So no thx, I'l pass.
There is no need for any kind of insurance scam.

Sounds like a solid contingency plan to me:

don't worry these things, my mom will hug me

I guess you rather leach on others to make sure your sweet life can keep on rolling, ow yha it's not leaching sins every one singed up on it, including the insiders (people) that will try to get value out of the system for what ever scheme they can come up with.

As for the 'mom' reference, grow up. If my house burns down I'm sure the people in this small town will provide everything I need to build a new one and we will deal with payments/reimbursement later

i think the bolded parts are a contradiction

isn't it more like you'd be accepting the reality that absolutely terrible things can happen, and willing to pay for a service that will smooth out the bumps, instead of relying on pity?

i think i have some kind of independence complex though, and i would rather hedge risks rather than accept charity after a catastrophe

[Insu Dra]

I guess you rather leach on others to make sure your sweet life can keep on rolling
....
If my house burns down I'm sure the people in this small town will provide everything I need to build a new one and we will deal with payments/reimbursement later

i think the bolded parts are a contradiction

i think i have some kind of independence complex though, and i would rather hedge risks rather than accept charity after a catastrophe

What ? Unlike insurance, we actually repay our depth and the help you can expect depends exactly on your ability to do so, I would not call it pity or charity at all. It is a simple business deal that relay's on common sense and does not rely on a system open to abuse or leaches.

Hedging a few 100k by paying 100 usd a month for insurance sounds more like charity to me .... not to mention the faq that in most cases you can simply stop paying after you received your claim. Savings or hard assets are the only true hedge and let me tell you those are a lot easier to build up if you can drop all the charity scams ... euh sorry insurances.

As to independence ? Are you kidding me, with insurance you are bound to the company you pay, on top of that often they will dictate where to go and how to get things fixed. I can accept or refuse help from who ever I want, you tell me who's independent ?

As others pointed out, insurance is inherently fraudulent and flawed.

[Melbustus]

...
As others pointed out, insurance is inherently fraudulent and flawed.

You're confused. "inherently" != "often".

[Insu Dra]

...
As others pointed out, insurance is always fraudulent and flawed.

You're confused. "always" != "often".

there you go, fixed it for yha ....

[justusranvier]

Insurance is not inherently fraudulent.

It's nothing more than allowing customers to spread out the cost of large, infrequent losses over time into small periodic payments.

Every person who drives a car will eventually experience an accident of some kind. By buying insurance drivers pay for their accidents a little bit every month instead of getting a big bill all at one.

Over a driver's lifetime he will pay the insurance company more than the cost of the accidents he's experienced (insurance companies don't work for free). This excess is the price of predictability.

In a free market the cost of insurance would tend towards its optimum value, but of course whenever coersion is involved proper pricing goes out the window.

The theoretical equilibrium monthly cost for deposit insurance would be something like: [(the average amount of bitcoins a depositor will lose at a particular institution during the next 10 years)/120 + (insurance company operating costs and profits)]

[Insu Dra]

Every person who drives a car will eventually experience an accident of some kind. By buying insurance drivers pay for their accidents a little bit every month instead of getting a big bill all at one.

Over a driver's lifetime he will pay the insurance company more than the cost of the accidents he's experienced (insurance companies don't work for free). This excess is the price of predictability.

In a perfect world this would be the case but it's far from true for all cases. A down to earth example is a car crash with heavy casualties, in allot of cases this will result in costs that exceed the life time contributions of the people involved. For these cases the insurance company's rely on investments and/or insurances between them to pull the balance sheets up again. But in the end some one always has to pay and thats always the people paying insurance in the first place.

On top of that people have the choice to stop paying insurance after they have received a big claim, in that case who payed for it ?

And keep in mind this is a down to earth example, if your talking about insuring deposits or securities scale of numbers goes up dramatically and someone ends up paying for that as well.

On a side note: What happened after Katrina in the usa ? Every one had to start paying more to cover that one event.

In a free market the cost of insurance would tend towards its optimum value, but of course whenever coersion is involved proper pricing goes out the window.

Exactly, some personal examples:

- Long time ago in Belgium after a storm a tree fell on my house, I start calling around for prices and inform the insurance. The offers I got personally where about 20-45% cheaper then those so called experts made for insurance company, they ended up paying about 35% more then the guy I would have worked with. Forced insurance by local city law, you can't own a house without it.

- Not so long ago in Sweden someone drove against my car in a parking lot, again I call around and inform insurance. This time the price difference was 50% and they ended up paying 50% more then I would have payed for the repairs. Forced insurance by state law, you don't get license plate without it and you are not allowed to drive a car without plates.

In both examples the insurance company picked the more expensive option even after I pointed out the cheaper alternative. They prefer to work with "partners" .... And no the personal offers I got where fully legit, no book keeping tricks involved.

You don't have to look far to find many more examples, some even very extreme and it's not hard to create your own.

No mater how fair the insurance company wants to be the whole concept of insurance is flawed and pulls in people looking to make some easy money. There are to many parties and variables involved to regulate it with 100% certainty and the scale of risk management ends up being nothing more then speculation.

I would say your monthly cost for deposits demo was missing 2 (or more variables) variables:

[(the average amount of bitcoins a depositor will lose at a particular institution during the next 10 years)/120 + (insurance company operating costs and profits) + "(Internal) Scams" + "(Internal) Partners" + ...]

The end result of insurance is always the same a majority ends up pay for a minority, the minority ether has some really bad luck or more likely is trying to scam the system one way or a other. Insurance fraud schemes are older then the banking system it's self, the scams where possible before banks excited and got even easier after banks where introduced.

[justusranvier]

I would say your monthly cost deposit demo was missing 2 (or more variables) variables:

[(the average amount of bitcoins a depositor will lose at a particular institution during the next 10 years)/120 + (insurance company operating costs and profits) + "(Internal) Scams" + "(Internal) Partners" + ...]

The end result of insurance is always the same a majority ends up pay for a minority, the minority ether has some really bad luck or more likely is trying to scam the system one way or a other. Insurance fraud schemes are older then the banking system it's self, the scam where possible before banks excited and got even easier after banks where introduced.

Since the fraud drives the up price there would be less of it in a free market because there would be no laws forcing people to buy. Mandatory insurance laws effectively subsidize the fraud.

[Melbustus]

In a perfect world this would be the case but it's far from true for all cases.
...

I'm gonna stop ya right there... This is essentially an admission that you're statement "Insurance is inherently flawed" [emphasis added] is false. To spell it out ever further: if "it's far from true for all cases", you're implying that it is true in some cases.

What you really mean to be saying is that insurance is usually a rip-off. I completely agree with that, but making blanket absolutist false statements is not helpful.

[Insu Dra]

I would say your monthly cost deposit demo was missing 2 (or more variables) variables:

[(the average amount of bitcoins a depositor will lose at a particular institution during the next 10 years)/120 + (insurance company operating costs and profits) + "(Internal) Scams" + "(Internal) Partners" + ...]

The end result of insurance is always the same a majority ends up pay for a minority.

Since the fraud drives the up price there would be less of it in a free market because there would be no laws forcing people to buy. Mandatory insurance laws effectively subsidize the fraud.

I agree, problem is that insurance often enforces it self even in a free market, once it exists people will often stop offering you services unless you are insured. Thats also a result of free market mechanics where people want maximize profit by reducing risk.

Insurance is the fast and easy way out but from my point of view the wrong way. People need to learn how to insure them selfs and there environment, long term the best way to do that is to build up assets and that can be done allot faster without paying in to insurance schemes. And yes that is hard in a time where people are trained to rely on government to tuck them in at night.

Thats why I made my initial statement:
"Put a penny aside for a rainy day"
Insurance ? not thx I'l pass ...

I'm gonna stop ya right there... This is essentially an admission that you're statement "Insurance is inherently flawed" [emphasis added] is false. To spell it out ever further: if "it's far from true for all cases", you're implying that it is true in some cases.

What you really mean to be saying is that insurance is usually a rip-off. I completely agree with that, but making blanket absolutist false statements is not helpful.

Ok, I see what you mean, let me blame that on translating, working on it.

Personally I believe a insurance can work mathematically but due to all the variables and parties involved it is impossible for any type of insurance company to work on a large scale and/or long term without being abused. I hope that clears that up a bit.

[Draino]

What ? Unlike insurance, we actually repay our depth and the help you can expect depends exactly on your ability to do so, I would not call it pity or charity at all. It is a simple business deal that relay's on common sense and does not rely on a system open to abuse or leaches.

Charity is exactly the word for what you're describing.  I think I would be grateful, but also stubbornly unable to accept others pay for my "ignorance, negligence or bad luck"--or at least I'd feel like I owed these people more than I could possibly repay-- and I would certainly not expect or rely on it to.. insure.. customer assets.

[Insu Dra]

What ? Unlike insurance, we actually repay our depth and the help you can expect depends exactly on your ability to do so, I would not call it pity or charity at all. It is a simple business deal that relay's on common sense and does not rely on a system open to abuse or leaches.

Charity is exactly the word for what you're describing.  I think I would be grateful, but also stubbornly unable to accept others pay for my "ignorance, negligence or bad luck"--or at least I'd feel like I owed these people more than I could possibly repay-- and I would certainly not expect or rely on it to.. insure.. customer assets.

Please explain to me how insurance isn't charity ? Every one paying insurance simply seem to accept that all there money goes to others bad luck unless you encounter some of your own.

I'm not sure how it works in English but in Dutch charity translates directly to words that grew out of religion. A word used to stop people from helping one and other, there would be people abusing them if they did and to combat that you had to pay charity to the congregation, the leaders of said congregation would make sure the help got to the people that "needed" it. To me it just seems very funny how the word "insurance" is now used by corporations in the exact same manner and people seem to "believe" in it.

Lending your neighbors some of your assets, accepting handouts from support groups, paying insurance, ... there just different systems to protect your self and your fellow man from bad luck. Two of them being centralized and hard to protect against abuse, the other decentralized and easy to not pay towards abuse.

and I would certainly not expect or rely on it to.. insure.. customer assets.

I would never insure,  I would prefer to give them a higher return or cheaper services. However in case of costumer assets I would make sure I have other assets or means to back them up. And no I'm not just talking, believe it or not there are people out there that do business this way.

I once asked my costumers for a advance on payments to replace a small server farm after a fire and they did exactly that in return they got years worth of services. It was ether them or a loan with high interest. They where happy with the service, trusted me and realized the loan would mean more expenses for me and higher prices for them. (the same would have been true if I had insurance, it would have lead to higher prices for them)

[benjamindees]

Okay, after consideration, I will retract my assertion that insurance is inherently fraudulent.

But a fully-collateralized Bitcoin underwriter would need to hold up to half of all Bitcoins in existence, on top of collecting fees to cover costs.  Worse, much worse, in order to minimize these costs, and maximize its profits, a Bitcoin insurer would use this considerable clout to impose draconian regulations upon the entire Bitcoin economy, whether you opt for insurance or not.

And then there is the gangland warfare that would result from competing insurers, to consider.

So, in my opinion, this is another example of something that you are perfectly welcome to copy from the mainstream financial system, and incorporate into Bitcoin, if you want.  But you had better understand the consequences of doing so.  I really don't think it would be worth the cost in the long run.