{"id":1193,"date":"2022-06-03T14:18:05","date_gmt":"2022-06-03T14:18:05","guid":{"rendered":"https:\/\/www.evertas.com\/?post_type=resources&p=1193"},"modified":"2023-01-10T17:40:37","modified_gmt":"2023-01-10T17:40:37","slug":"nft-insurance-types","status":"publish","type":"resources","link":"https:\/\/stg.evertas.com\/resources\/nft-insurance-types\/","title":{"rendered":"NFT Insurance Types"},"content":{"rendered":"\n
There\u2019s a lot of interest in NFTs, and Evertas gets a lot of inquiries about NFT insurance. With that in mind we spent a lot of time developing the definitions and framework needed to create NFT insurance policies. If you\u2019re interested in such policies please have your broker contact us<\/a>.<\/p>\n\n\n\n Broadly NFTs can be broken up into Off-Line and On-Line NFTs.<\/p>\n\n\n\n Off-Line NFTs would represent ownership of assets that exist disconnected from the Internet, this could be art, wine, gold, jewelry, or even a digital file that’s stored off-line (think archival copies of things like the gold record on Voyager). This would be like a deed, title, or ownership registry. It is important to note that Off-Line NFTs do not <\/em>include synthetic assets designed to track the value of an off-chain assets.<\/p>\n\n\n\n On-Line NFTs would represent ownerships of assets that exist on the Internet, this could be purely blockchain based items (e.g., stored on IPFS) or on a normal server (could be a specific URL or file location).<\/p>\n\n\n\n For Off-Line NFTs, the asset of value is off-chain, and thus the NFTs act more as a record of ownership\/title than as something with endogenous value.\u00a0 Whatever entity that controls the off-chain asset has care, custody, and control of the asset and not <\/em>the Off-Line NFT (i.e. the Off-Line NFT does not ultimately control the underlying asset).<\/a>\u00a0This means the Off-Line NFTs mainly need to be insured against losses resulting from some failure of their record keeping.<\/p>\n\n\n\n Other considerations to keep in mind (to prevent or limit losses) would be for the Off-Line NFT to clarify where the underlying asset is, how it is protected\/insured, and what would happen if a Hard Fork were to occur (see Hard Fork considerations below).<\/p>\n\n\n\n Off-Line NFTs are valued based on the ownership percentage of an underlying asset as represented by an NFT, thus there is implicit trust in a central authority which is overseeing the care custody and control of the asset. This authority should have an ability to reset the ledger, freeze NFTs, and issue replacement NFTs if needed (for an analogy think of how USDT and USDC can be \u201cfrozen\u201d). When some sort of failure occurs, it should be fairly straight forward to restore things to their proper state. Losses are likely only to occur when a failure of an Off-Line NFT system causes some monetary damage (such as opportunity cost\/loss) or causes some sort of irrevocable loss of the underlying asset (e.g., if someone can acquire enough of the Off-Line NFTs to order a sale of the underlying asset and that asset cannot be recovered).<\/p>\n\n\n\n In the event of a hard fork, there has to be clarity built into the Off-Line NFT<\/em> as to what chain will be considered the chain of record. If this is not the case any insurance policy would have to clearly and unambiguously lay out which is the chain of record (and what would happen if it is not clear).<\/p>\n\n\n\n For On-Line NFTs, the asset of value is the NFT<\/em> and sits on-chain: whoever has the On-Line NFT owns\/controls the asset. Fundamentally, as these are purely on-chain assets, the custody and control considerations are identical to those of any other digital asset or token.<\/p>\n\n\n\n The biggest issue with On-Line NFTs is determining the value of the On-Line NFTs. Given the transparency afforded by blockchain transactions, recreating the conventional appraisal approach—with all its opacity, gladhanding, subjectivity, and conflicts of interest—is insanity. To this end there are a number of ways to determine the value of an NFT.<\/p>\n\n\n\n Some of the variables that we can use for price determination are:<\/p>\n\n\n\n Using these we can formulate several different approaches to valuing an NFT.<\/p>\n\n\n\n It should be noted that there are companies that have their own proprietary tools for valuing NFTs<\/a>, assuming those tools are vetted and the pricing mechanism makes sense, they could be used to asses price on their own or as a supplement to any other mechanism.\u00a0 We also want to highlight that even after an asset is stolen we can use trades of the stolen NFT to help determine the value (this is not possible with conventional art), and, should all other valuation methods and tools fail one can fall back to valuations as done in the traditional art world.<\/p>\n\n\n\n Regardless of the method used the price must account, and adjust for, any wash trading, or other activity that would artificially inflate the price; the transparency afforded by NFTs allows for this to be done\u2026something nearly impossible in the conventional art world.<\/p>\n\n\n\n These are the same as with any other token or pure digital asset. Both assets after have value which needs to be determined (see above). For insurance coverage, one would need to look at their policy form.<\/p>\n\n\n\n Hybrid NFTs have attributes of both Off-Line and On-Line NFTs. An example would be an NFT representing ownership of a physical object, but where you add some additional functionality to the NFT (e.g., some artwork representing the object). Another example would be an on-line NFT, that grants you access to an actual club or events (interestingly you could have a situation where an On-Line NFT becomes an Off-Line NFT if the membership benefits afforded by then On-Line NFT turn into its main value).<\/p>\n\n\n\n Here the value of the NFT will be determined by looking up the value of the underlying physical asset and using the On-Line NFT analysis above.<\/p>\n\n\n\n In the event of a hard fork, there has to be clarity built into the Hybrid NFT<\/em> as to what chain will be considered the chain of record. If this is not the case any insurance policy would have to clearly and unambiguously lay out which is the chain of record (and what would happen if it is not clear). It is conceivable that the On-Line portion of the Hybrid NFT could still have value on the secondary chain and could be covered after a fork, but that would have to be dealt with in your specific insurance policy.<\/a><\/p>\n","protected":false},"featured_media":1060,"template":"","meta":{"_acf_changed":false,"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","inline_featured_image":false,"_links_to":"","_links_to_target":""},"categories":[1],"resource-tag":[],"acf":[],"yoast_head":"\nOff-Line NFTs<\/h2>\n\n\n\n
Valuation and Loss<\/h3>\n\n\n\n
Hard Fork Considerations<\/h3>\n\n\n\n
On-Line NFTs<\/h2>\n\n\n\n
Valuation and Loss<\/h3>\n\n\n\n
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Hard Fork Considerations<\/h3>\n\n\n\n
Hybrid NFTs<\/h2>\n\n\n\n
Valuation and Loss<\/h3>\n\n\n\n
Hard Fork Considerations<\/h3>\n\n\n\n