Re:Bitcoin’s Rise: What If It Is Not A Bubble?
by T-hawk on Wednesday April 03, 2013 @02:32PM
(#5488052)
It's not possible within Bitcoin. An insurer as you describe is certainly possible -- but relies on a level of trust or force outside the Bitcoin protocol. A Bitcoin insurer can never be compelled to pay out its promise. Insurance in fiat currency works because there is a level of legal recourse that can apply force if necessary: you sue the insurer and the court seizes funds from their bank account. Insurance in Bitcoin alone can't work because the insurer's promise can't be enforced. A bitcoin cannot be seized except by gaining control of its wallet.
Hypothetically, the legal system could enforce Bitcoin contracts in this way, with legislation that a Bitcoin wallet can be seized under the threat of other penalties such as imprisonment. But until that happens, Bitcoin insurance and shorting can only exist as far as you trust the insurer or the lender trusts the shorter, because there is no ultimate avenue of forcible recourse.
The solution involves the insurance companies understanding the risks involved, forcing Bitcoin companies to implement specific security measures designed to mitigate risk, and accepting the fact that they will have to pay out a certain percentage of trades. The premium charged for the insurance plus the deductible cost to make a claim reflects the risk of fraud + expected profit. This is a solved problem in the insurance industry already.
The only remaining question is which insurance company will put sufficient effort into understanding the risks so that they can issue a product to meet whatever market demand exists?