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The argument for Proof of Stake in service industries

Comparing relevance of Bitcoin proof of work miners and insurance agencies

C Hazel

12 Jan 2018

Assumption: The concept of proof of stake will replace proof of work in every service industry as a means to reduce uncertainty based on the mutual efficiency and cost gains by participating entities.

Proof of work is the current process for reducing uncertainty between trading partners in cryptocurrencies. As blockchain technology redefines truth protocol as we know it, proof of stake will naturally replace proof of work because it is more efficient and reduces unnecessary cost. Occam’s razor says the theory that is simplest and contains the fewest assumptions is most likely true.

Ex. Bitcoin - Currently, the mining process is based on proof of work, which means the miner that completes the most computational work statistically measured is rewarded. The work is a function of computer processing times electricity - it is highly expensive and those who trade Bitcoin in the underlying transactions have a quasi illusory correlation to the amount of work performed. In other words, more mining work benefits miners, but does not equally increase benefit for Bitcoin owners, whose sole benefit from the miners is verification the transaction protocol is true.

Ethereum is looking to move towards proof of stake - whereby blockchain transactions will be validated based on stake, or percentage share in the value of assets in the blockchain. The computational power needed becomes static, and more emphasis is on the value of the asset in the transaction or chain. This is simply more efficient, sustainable, scalable and ultimately better for the community. The theory persists that proof of stake is equally safe and reliable for validating the truth as long as no one member controls more than 51% of the total stake, and even then the incentive to attack is dubious. The community achieves the same result (confirmation of truth in the block) without costing unnecessary computer power. Miners can then focus their resources on something more worthwhile for themselves (and the community).

Industry Case: Independent P & C Insurance Agency

Independent insurance agents are like Bitcoin miners in a proof of work model. They tie up valuable resources to validate truth or certainty between 2 partners - the client and insurance carrier. They often have to create new technology systems which add a layer between 2 native systems - the client’s enterprise risk system and the insurance carrier’s processing system. The agency is simply wasting time and resources by introducing unnecessary cost. The P & C insurance agency system today is similar to the Blockbuster Video retail business model of the 1990’s, and could disappear just as quickly. It should simply be the conduit or interface that connects the two native systems through a blockchain. In the new model - the inherent P & C product and risk management expertise of the “agent” or advisor is retained by the agent and that agent can now communicate directly with the client, or carrier without the assistance of any other intermediary, or support functionality. The agent gets paid by a percentage of the transaction fee captured in the blockchain between client and carrier.

Blockchain technology is not going away. It most certainly will evolve because there is tremendous opportunity to reduce and eliminate cost and friction between trading entities in many markets. As emerging technologies have done before, blockchain will force individuals and organizations to learn new concepts, some that may seem very foreign to them. Blockchain is still relatively unknown to those outside of the cryptocurrency and computer programming communities, but it is gaining mainstream recognition quickly. I firmly believe insurance will be one of the first major industries disrupted by blockchain for two reasons:

Insurance policies are digital assets based on trust (like cryptocurrency)

The potential gains in reducing cost by eliminating redundant service is significant

This website is intended to model what an insurance exchange might look like in the future. It is NOT an operating entity, just a glimpse of what is to come.