#ethereum hack

Parity has released a statement in which they explain which are the possibilities to unlock the frozen funds. Parity Tech states that they prefer the hard fork solution and that they will work to gain consensus in the community.

Image from Wikipedia

What is reinsurance?

Reinsurance is insurance that is purchased by an insurance company from one or more other insurance companies (the “reinsurer”) directly or through a broker as a means of risk management. Objective is to reduce their exposure to loss by passing part of the risk of loss to a reinsurer or a group of reinsurers.

 The reinsurer enters into a reinsurance agreement with the ceding company. This contract details the conditions upon which the reinsurer would pay a share of the claims incurred by the ceding company. The reinsurer is paid a “reinsurance premium” by the ceding company, which issues insurance policies to its own policyholders.

 This helps keep the companies in the industry financially viable, more so, after a after a disaster such as a major hurricane, because the risks and costs are spread and there’s sufficient capital available in the event of claims.

 Usually the agreement is shared between a large number of reinsurers. The reinsurer who sets the terms (premium and contract conditions) for the reinsurance contract is called the lead reinsurer; the other companies subscribing to the contract are called following reinsurers. As an alternate, one reinsurer can accept the whole of the reinsurance and then pass it on in a further reinsurance arrangement to other companies. This is an enormously complicated process with many prior dependencies that are difficult to monitor and trace back to the original source.

All of this risk transfer sounds awfully similar to the subprime mortgage crisis in the US which later shook the world. A complex series of opaque and illiquid financial instruments were sliced and diced into a series of increasingly complex derivatives, the notional value of which ended up being many times greater than the size of the underlying mortgages. Homeowners, the people responsible for paying the underlying mortgages, eventually defaulted on those mortgages and this resulted in investors in these derivatives losing a lot of money.

 Enter Blockchain And Smart Contracts

Ok so what does this has to do with blockchain or even smart contracts for that matter? After all this technology didn’t even exist mainstream back then if at all it existed. Rather it is still in experimental stage. However, in a hypothetical world, if Blockchain-enabled smart contracts had been used in the financial system, there would have been fewer opportunities for this to happen as the problems through the chain could have been instantly highlighted as they began to occur. Smart contracts reside on a Blockchain and they allow a real-time auditing of who owns what.

Smart contracts and all of the transactions (including those transactions that create derivatives from underlying assets) would be fully auditable; in this case you would know who owned what tranche of a CDO, who issued which mortgages that made up the different tranches of the CDO, and, even, if the system were designed well, which homeowner signed which mortgage documents.