The Web3 market continues to mature, with an ever-growing influx of projects that are building the infrastructure for a decentralized future.
But like with any disruptive technology, the path to mainstream adoption is littered with stumbling blocks and risks, and this is especially true when it comes to the volatile world of digital assets.
To gain venture capital funding, investor commitment, community participation, and mainstream adoption, projects need to find ways to mitigate risks and move forward. Insurance is the key to unlocking many of these doors. Let’s take a deeper look at why insurance is crucial for the success of Web3.
Encourages community participation
Whilst the Web3 ecosystem has made huge strides in recent years, there is still a long way to go before it can rival centralized systems in terms of stability and trust. Hacks, scams, and cyber theft are all too common, and these incidents often result in a loss of community trust
In addition, the Web3 ecosystem is moving so fast that it’s hard for people to assess the risks and keep up with all the latest changes. For example, is the newest blockchain platform safe to use? Are there bugs in the smart contract code that hackers can exploit? Is it safe to use a hot wallet?
These are all valid concerns, and even with assurances people are often still hesitant to get involved. This is where insurance can help. For example, if a DeFi project is covered by Smart Contract Failure Insurance, then people will know that the project’s smart contract protocol has been audited and insured against any code-related errors.
Insurance can also be used to cover user funds in hot wallets and other storage solutions. This type of coverage is especially important in light of the recent multimillion-dollar hack on hot wallets in the Solana ecosystem, including TrustWallet and Phantom.
By underpinning the project with insurance, businesses can show their commitment to mitigating risk and provide some much-needed peace of mind for community participants.
Removes potential roadblocks and secures a talented Board
If Web3 is to become as big as we all think it will, then we need to make sure projects are able to thrive and reach their full potential.
One vital coverage that projects should consider is Directors’ and Officers’ (D&O) Liability insurance. D&O provides coverage for defense costs and damages (awards and settlements) arising out of wrongful acts allegations and lawsuits brought against an organization’s board of directors and/or officers, as well as the entity itself.
We recently saw the SEC charge Ripple and two executives conducting a $1.3 Billion unregistered securities offering. Ripple is a huge organization, and when a business of its size gets hit with these charges, it just goes to show no project is immune from the same treatment.
In another case, four crypto firms have been sued for nearly £10 Billion over alleged collusion to delist the BSV token off their exchanges. With the Binance CEO using Twitter to encourage other exchanges to delist BSV, investors claim that “anti-competitive behavior” led to losses of £9.9 Billion in 2019.
Without D&O insurance, a project could find itself embroiled in an extensive and pricey legal battle, quickly draining its resources.
Successful businesses have been able to scale because they’ve attracted high-quality decision-makers to the top of the business. Before joining a project, senior leaders know they’re going to be exposed to a long list of D&O exposures.
From narrowing regulations to new and emerging technologies to increasing shareholder activism to litigation and securities actions – the stakes that come with getting involved with these businesses couldn’t be higher.
Having D&O in place from the outset signals to high-quality senior leaders that you’ve got their back, and allows the project owner to assemble a Board who knows what it takes to build and develop a successful business.
Opens the door to capital funding
Projects must have the fundamentals in place to catch the attention of major investors. This means having a solid business model, a well-developed product, and a team that’s passionate about what they’re doing.
Another non-negotiable is the business’s insurance plan. The more the company can mitigate risk, the more attractive its project will be to potential investors, especially in emerging industries like Web3.
For example, a BTC miner may look to get Commercial Property insurance to cover their facility in the event of a fire, while a DApp development team may seek out Cyber Liability Insurance to protect themselves against any data breaches or hacking attacks.
Traditional sources of funding would be unapproachable without these types of policies in place. Insurance is a key part of any investment project, and not having insurance would be viewed as a red flag by most investors.
Some parting thoughts…
Insurance helps attract investment, build trust in the community, remove obstacles, and bring in a high-performing Board that can take the business to the next stage of its development.
If we want Web3 applications and protocols to reach their full potential, then we need to make sure they’re properly insured. But that doesn’t mean all projects can be given the same coverage.
Each project is unique and has different risks to consider. That’s why it is important for Web3 projects to work with an insurance company that creates custom coverage that’s tailored to their specific needs.