Published on October 3rd, 2013 | by P2P Lending Advice


Insurance joins the peer to peer phenomenon

The Ripple peer-to-peer system of ‘virtual money’ has just launched a new insurance platform known as Peercover. It uses ‘cryptomoney’ known as ‘BitCoins’ which act as a decentralised currency, the value of which is secured by the peer-to-peer honour system.

It may come as a surprise to many, but all banking systems are based on trust. Just examine a UK currency note; “I promise to pay the bearer on demand the sum of…” Cash is just paper without the value we attached to it. Likewise, investments such as government bonds are only traded because we trust they will be honoured. BitCoins are traded exclusively between friends on a closed social networking system supported by Ripple. ‘Peercover’ allows users to form peer groups who effectively ‘underwrite’ any specified event or circumstance. Whilst this would include insured loss events, it may also cover any other premise such as ‘I promise to lose 3 stone in weight by Christmas’.

According to Jared Mimms, co-founder of Peercover, “Peercover is the first distributed peer coverage service by the people for the people.” In Mimms’ words, what distinguishes Peercover from other insurance systems is that you are covered by “people you trust”.

Unfortunately, not everyone is convinced by the stability of a decentralised honour system. Although the BitCoin virtual currency is completely decentralised, the Ripple platform is a ‘distributed’ platform, controlled by a handful of validators. It therefore operates in exactly the same way as PayPal and Amazon. The problem exists with its use of decentralised virtual money (whose value is based on trust) hosted on a validated distribution platform. There is a potential for huge exchange rate fluctuations, since the currency is located on a single distribution platform. Validators are also members of the BitCoin system, and may therefore ‘self-validate’, a flaw open to fraud and abuse. Finally, the BitCoin system also allows loans in the form of “IOU’s”. This injects further instability in to the system and could theoretically precipitate the system’s entire demise (c.f. the Icelandic banking collapse)

Peer-to-peer systems are a great way of doing business with a group of trusted and loyal friends. Unfortunately, as your group expands, members will ultimately include people of whom you actually know very little. With monetary exchanges based purely on trust, at which point to you return to more stable, mainstream currency?

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