Unit6 - Subjective Questions

Challenges in Traditional Insurance:

• Fraud: High costs due to fraudulent claims and lack of verified historical data.
• Inefficiency: Manual paperwork, slow processing times, and human error.
• Lack of Trust: Customers often distrust insurers regarding claim payouts.
• Data Silos: fragmented data across different departments or companies.

Blockchain Solutions:

• Enhanced Fraud Detection: A shared, immutable ledger ensures that claims and asset ownership are history-verified, preventing double-dipping or fake claims.
• Automation via Smart Contracts: Policies written as code (Smart Contracts) execute automatically when conditions are met, reducing administrative costs.
• Transparency: All parties share a single version of the truth, increasing trust between insurers, reinsurers, and customers.
• KYC/AML Efficiency: Shared identity verification reduces the time and cost of Know Your Customer (KYC) processes.

A blockchain-based life insurance claim process automates the verification and payout mechanism, minimizing emotional stress for beneficiaries and reducing administrative delays.

The Workflow:

1. Smart Contract Creation: Upon policy purchase, a smart contract is deployed containing the policy terms, beneficiary details, and payout conditions.
2. Event Occurrence (Death): The policyholder passes away.
3. Oracle Integration: The blockchain connects to a trusted off-chain data source (Oracle), such as a government Death Registry or hospital database.
4. Verification: The Oracle pushes the death certificate data to the smart contract. The contract verifies:
   • Is the policy active?
   • Does the death certificate match the policyholder's identity?
5. Execution: Once verified, the smart contract triggers the payout function.
6. Settlement: Funds are automatically transferred from the insurer's reserves to the beneficiary's wallet/account without manual intervention.

Benefits:

• Drastic reduction in settlement time (from weeks to minutes).
• Elimination of manual paperwork for grieving families.
• Prevention of fraudulent death claims.

Smart Contracts in Insurance:
Smart contracts are self-executing contracts where the terms of the agreement between buyer and seller are directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network.

Parametric Insurance Example:

Consider flight delay insurance:

• Condition: If a flight is delayed by more than 2 hours.
• Data Source: The smart contract connects to an air traffic database (Oracle).
• Execution: If the database reports a delay hours, the smart contract automatically initiates a refund or compensation to the traveler.
• Result: No claim forms need to be filed; the payout is instant and deterministic based on the parameters set.

Blockchain addresses the interoperability and privacy issues currently plaguing Electronic Health Records (EHR).

Key Applications:

1. Patient-Centric Data Control:
   • Patients own their data rather than hospitals.
   • Patients grant access keys to providers, ensuring privacy and consent management.
2. Interoperability:
   • Different hospitals often use incompatible databases. Blockchain serves as a connective layer where a pointer (hash) to the record is stored, allowing authorized doctors to access the full history regardless of where it was created.
3. Data Integrity:
   • Medical records are hashed and stored on the ledger. Any unauthorized alteration to the medical history would change the hash, alerting the network to data tampering.
4. Efficiency:
   • Reduces administrative overhead in transferring records between specialists and insurance providers.

Blockchain enhances the pharmaceutical supply chain by ensuring provenance and preventing counterfeiting.

• Traceability: Every step of a drug's journey (Manufacturing Distributor Pharmacy Patient) is recorded on the blockchain.
• Counterfeit Prevention: Each drug unit is assigned a unique hash/ID. If a duplicate ID appears or the supply chain history is broken, the drug is flagged as potentially fake.
• Compliance: Automated logging ensures compliance with regulations regarding storage conditions (e.g., temperature monitoring via IoT sensors linked to the blockchain).
• Recall Management: If a batch is defective, manufacturers can instantly identify exactly where those units are in the supply chain and issue targeted recalls.

Asset Management on Blockchain:
It involves the issuance, tracking, and trading of assets on a distributed ledger. This replaces traditional centralized registries with a decentralized system that offers real-time settlement and transparency.

Tokenization:
Tokenization is the process of converting rights to an asset (physical or digital) into a digital token on a blockchain.

• Physical Assets: Real estate, gold, art, or commodities.
• Financial Assets: Stocks, bonds, or equity.

Mechanism:
An asset valued at can be divided into digital tokens, where each token represents a share of ownership worth . This allows for fractional ownership, making high-value assets accessible to smaller investors and increasing market liquidity.

Current Problem:
Traditional trade lifecycles involve multiple intermediaries (brokers, clearinghouses, custodians), leading to settlement times of or (Trade date + 2/3 days). This traps capital and increases counterparty risk.

Blockchain Transformation:

1. Real-Time Settlement ():
   • By using a shared ledger, the trade and the settlement happen almost simultaneously. Ownership transfer is recorded immediately upon payment.
2. Delivery vs. Payment (DvP):
   • Smart contracts ensure that the asset is transferred only if the payment is received, removing the risk of one party defaulting after the other has performed.
3. Reduced Costs:
   • Eliminates the need for reconciliation between different banks' internal ledgers, as everyone shares the 'Golden Record'.
4. Capital Efficiency:
   • Collateral requirements are reduced because trades settle instantly, freeing up liquidity for financial institutions.

KYC (Know Your Customer) and AML (Anti-Money Laundering) Challenges:
Currently, banks perform KYC individually. A customer must submit the same documents to Bank A, Bank B, and Bank C, resulting in redundancy and high costs.

Blockchain Solution:

• Shared Identity Ledger: A customer completes KYC once. The verified identity hash is stored on a permissioned blockchain.
• Access Rights: When the customer goes to Bank B, they grant access to their verified identity proof. Bank B validates the digital proof without re-processing the raw documents.
• Immutability: An audit trail of identity checks and fund movements is permanently recorded, making AML tracking more effective for regulators.
• Cost Reduction: Financial institutions share the cost of verification and reduce the onboarding time for clients.

Electronic Currency:
Electronic currency (or digital currency) is money that exists only in digital form and is exchanged over computer networks. It includes cryptocurrencies, virtual currencies, and central bank digital currencies.

Distinction:

Double Spending:
Double spending is a flaw in digital cash schemes where the same single digital token can be spent more than once. Since digital data can be easily copied, a malicious actor could send a file representing money to Merchant A and the same file to Merchant B.

How Blockchain Resolves It:

1. Decentralized Verification: When a transaction is broadcast, network nodes check the history of the specific coin/UTXO (Unspent Transaction Output).
2. Consensus Mechanisms (e.g., PoW/PoS): Transactions are grouped into blocks. To add a block, the network must agree on its validity.
3. Timestamping and Ordering: If User tries to send 1 BTC to and the same 1 BTC to , the network accepts the transaction that is confirmed first in a block. The second transaction is rejected as invalid because the inputs are already spent.
4. Immutability: Once recorded, the transaction cannot be reversed to spend the coins again.

Real estate is traditionally an illiquid asset requiring high capital entry. Blockchain enables Fractional Ownership through tokenization.

Benefits:

• lowered Barrier to Entry: Instead of buying a whole property for , an investor can buy a token representing ownership for .
• Liquidity: Tokens can be traded on secondary markets 24/7, unlike physical property which takes months to sell.
• Diversification: Investors can spread capital across multiple properties globally rather than locking it into one building.
• Automated Revenue: Rental income can be distributed automatically to token holders via smart contracts based on their ownership percentage.

Privacy Challenges:

• Public Visibility: In public blockchains, transaction data is visible to all nodes. Storing patient data directly on-chain violates privacy laws (e.g., HIPAA, GDPR).
• Immutability: The 'Right to be Forgotten' is difficult to implement because blockchain data cannot be deleted.

Mitigation Strategies:

• Off-Chain Storage: Store the actual medical records in a secure off-chain database (IPFS or private servers) and only store the hash (pointer) on the blockchain.
• Permissioned Blockchains: Use private consortium blockchains (e.g., Hyperledger Fabric) where access is restricted to verified hospitals and insurers.
• Zero-Knowledge Proofs (ZKPs): A cryptographic method allowing a party to prove they know a value (e.g., "I am over 18" or "I have a valid prescription") without revealing the underlying data/identity.

Reinsurance Context:
Reinsurers provide insurance to insurance companies to manage risk. The traditional process involves complex data sharing and reconciliation between the primary insurer and the reinsurer.

Blockchain Role:

1. Shared Ledger: Both the primary insurer and reinsurer share a real-time ledger of active policies and claims.
2. Automated Treaty Execution: Smart contracts can model reinsurance treaties (contracts). When a primary insurer pays a claim that hits a specific threshold, the smart contract automatically triggers the recovery claim from the reinsurer.
3. Risk Modeling: Accurate, immutable historical data allows reinsurers to model risk more precisely.
4. Result: Reduces the settlement time between insurers and reinsurers and eliminates disputes over data discrepancies.

Current Scenario:
Cross-border payments rely on the correspondent banking network (SWIFT). It involves multiple hops between banks, high fees, and takes 2-5 days to settle.

Blockchain Impact:

• Disintermediation: Blockchain creates a direct peer-to-peer link between the sending and receiving banks, bypassing intermediary correspondent banks.
• Speed: Transactions settle in seconds or minutes, regardless of geographic distance.
• Cost: Fees are significantly lower as intermediary cuts are removed.
• Transparency: Both parties can track the funds in real-time.
• Liquidity Management: Banks do not need to keep pre-funded Nostro accounts in every currency, freeing up trapped capital.

Examples include Ripple (XRP) and Stellar (XLM) networks facilitating these transfers.

The lifecycle of a digital asset on a blockchain involves the following stages:

1. Issuance (Origination):
   • The asset details (ownership, value, metadata) are defined.
   • A smart contract mints tokens representing the asset on the blockchain.
2. Trading:
   • Buyers and sellers place orders on an exchange or peer-to-peer.
   • Orders are matched cryptographically.
3. Clearing and Netting:
   • Smart contracts verify that the seller has the asset and the buyer has the funds.
   • Unlike traditional systems, clearing is often instantaneous.
4. Settlement:
   • The atomic swap occurs: Ownership of the token is transferred to the buyer, and payment (crypto or stablecoin) is transferred to the seller simultaneously.
   • The ledger is updated.
5. Servicing/Corporate Actions:
   • If the asset generates dividends or interest, the smart contract automatically distributes payments to current token holders.
   • Voting rights (if applicable) are exercised via the blockchain.

Despite the benefits, several barriers hinder mass adoption:

• Regulatory Uncertainty: Insurance is a heavily regulated industry. Laws regarding smart contracts and digital assets are still evolving.
• Legacy Systems: Insurers have massive investments in existing IT infrastructure. Migrating to blockchain is complex and costly.
• Standardization: For a shared ledger to work, competitors (insurers, reinsurers, brokers) must agree on common data standards and governance, which is difficult.
• Scalability: Public blockchains may not handle the transaction volume of a global insurance company, necessitating the development of private/side-chain solutions.
• Privacy Concerns: Insurers are hesitant to share data on a ledger that might be accessible to competitors, even if encrypted.

Challenges in Clinical Trials:

• Data falsification.
• Under-reporting of side effects.
• Lack of reproducibility.

Blockchain Solutions:

1. Proof of Existence: Researchers can hash their protocols and data plans before the trial starts. This prevents them from changing the hypothesis mid-trial to fit the results (p-hacking).
2. Immutable Data Logging: Patient vitals and trial data are time-stamped on the ledger. This ensures data cannot be altered later to hide negative outcomes.
3. Patient Recruitment: Smart contracts can match patients to trials while preserving anonymity.
4. Consent Management: Blockchain records informed consent, ensuring patients explicitly agreed to the trial terms and can revoke access if needed.

To store Electronic Currency, users utilize digital wallets. The distinction lies in internet connectivity.

Hot Wallets:

• Definition: Wallets connected to the internet (e.g., Mobile apps, Exchange wallets, Desktop software).
• Pros: Convenient for frequent trading and daily payments.
• Cons: Higher risk of hacking and malware attacks.
• Use Case: Keeping small amounts for operational expenses.

Cold Wallets:

• Definition: Wallets kept offline (e.g., Hardware wallets like Trezor/Ledger, Paper wallets).
• Pros: extremely secure; immune to online hacking attempts.
• Cons: Less convenient; requires physical access to the device to transact.
• Use Case: Long-term storage (HODLing) of large asset values.

Concept:
Blockchains are closed systems; they cannot access data outside their network (off-chain data). Oracles are third-party services that feed external information into the blockchain.

Critical Role:

1. Insurance:
   • A smart contract for crop insurance needs weather data to trigger a payout. An oracle fetches weather data from meteorological stations.
   • Life insurance needs death registry data.
2. Asset Management:
   • A tokenized stock trading on a blockchain might need the current fiat exchange rate (e.g., USD/ETH price) to calculate fees.
   • Real-world events (e.g., a company merger) need to be fed to the ledger to update asset metadata.

Without Oracles, smart contracts would be limited to only using data that is already generated within the blockchain itself.

The Problem:
Medical billing fraud involves charging for unperformed services, unbundling codes (charging separately for procedures that should be together), or phantom billing.

Blockchain Solution:

• Service Validation: When a doctor performs a service, it can be logged on the blockchain and cryptographically signed by the patient (via their private key) at the point of care.
• Automated Auditing: Smart contracts can check billing codes against the diagnosis codes in the shared ledger. If a mismatch or illogical combination is found (e.g., two surgeries on the same day in different cities), the claim is automatically flagged.
• Immutable History: Once a bill is submitted, it cannot be altered. This prevents 'upcoding' (changing a code to a more expensive one) after the fact.
• Result: Saves billions of dollars for insurance companies and reduces premiums for patients.