Self-insurance is a risk management method where a company or an individual decides against using third-party insurance firms (which usually charge a premium in excess of expected losses). To this end, an entity sets aside a certain pool of funds that would be used in case of an emergency—and without paying any extras.
In Celsius’s case, this means that the platform will likely gradually accumulate a “rainy day fund” that will be used to cover unexpected losses that could affect its users.
However, Mashinsky did not explain which losses would be considered “insured.” While hacker attacks are a prime example of an emergency that should be covered by insurance, there are many other risks associated with cryptocurrencies.
Launched in 2018, Celsius Network allows its users to earn yields—regular payouts and interest—on their cryptocurrency deposits and various other services such as loans and wallet-style payments.
The price of CEL has stabilized around $5
The price of CEL has stabilized around $5. Image: CoinGecko
Apart from being utilized in an array of internal functions, Celsius’s native token CEL can also boost users’ yields if they pay with it for something.
Over the last 30 days, CEL’s price decreased from around $6 all the way down to $4 but has stabilized around $5 since then.
Crypto banking and financial services platform Celsius Network (CEL) plans to self-insure its users’ funds against unforeseeable losses, its co-founder and CEO Alex Mashinsky announced on Twitter today.
Unfortunately, Celsius does not provide an insurance policy for users’ assets other than those that are kept in cold storage through their custodian, Fireblocks. This represents a small fraction of the total assets under management (AUM). There is no insurance for crypto counter-party risk.
One of the most common questions about Celsius Network is related to funds security. This is a very important question to ask when dealing with companies that lend your crypto to generate you a sweet yield and you should stay away from companies that fail to provide you with a clear and transparent answer to this question.
In a recent article, I have already discussed how Celsius Network’s business model works, what are the risks associated with it, and how Celsius handles those risks.
In this article, I want to address some more specific topics to give you a good understanding of how the funds are secured in every step of the process and why Celsius Network has the best security model in the industry.
These are the topics I will cover:
Which type of insurance is normally used by all crypto lenders
Why this type of insurance will not cover you in case of borrowers’ default
How Celsius Network solves the insurance problem
Which type of insurance is normally used by all crypto lenders
When you ask about insurance and security you should know that there isn’t a one-size-fits-all solution that covers every possible scenario.
Companies that claim that they are not really acting in your best interest and you may be surprised to find out that your funds are gone if something unexpected happens. Look at what happened to Credit if you want an example.
Most insurances are available only for funds sitting in Cold Storage. An example is Bitgo, one of the most popular custodians. On their website it is stated that:
The $100 million policy covers digital assets where the private keys are held 100% by BitGo Trust Company or BitGo, Inc. in the event of:
Third-party hacks, copying, or theft of private keys
Insider theft or dishonest acts by BitGo employees or executives
Loss of keys
Why this type of insurance will not cover you in case of borrowers’ default
The issue here is that when a company generates yield or interest by lending out your funds, these funds are not sitting in cold storage most of the time by definition. So if the answer you hear from any crypto lending company is your funds are safe because we have cold storage insurance, be aware that there are only two possible ways this could end:
Your funds are actually in Cold Storage, therefore the interest you receive is not earned but subsidized, which sooner or later will lead to bankruptcy and you may lose all your funds.
Your funds are not in Cold Storage and the company where you deposited your funds is lying to you, which is not a good indicator of trust if you are running a crypto lending operation.
This is something that Alex Mashinsky, CEO of Celsius Network, repeats over and over again almost in every AMAs, as you can see in this clip below.
Pro Tip: if you want to see the video above with subtitles in your own language, check this out!
How Celsius Network solves the insurance problem
Celsius has put in place one of the best security models in the industry and this is how it works.
1) Building a fortress by moving from Multisig to MPC
One of the things you want to make sure is that key management is done properly. Here are two clips where both Alex Mashinsky and Nuke Goldstein (CEO and CTO of Celsius) explain what MPC is and why it is better than Multisig when it comes to key management and security.
What is MPC?
2) Hot Wallet insurance
Why is MPC safer than Multisig?
- Because Celsius Network uses MPC through its custodian (Fireblocks), they have insurance for Hot wallets. This type of insurance covers any loss of coins while in transit. Here is a clip with more details.
READ NEXT: How to buy CEL Token with minimal fees?
3) Committing to using Celsius Network’s balance sheet first
Celsius Network is a profitable company, which means that they generate cash. Alex Mashinsky, CEO of Celsius, has stated multiple times that in case something unexpected happens they will use their balance sheet first (worth $2B at the time of writing).
4) Building a self-insurance plan
On February 5th Alex announced this initiative by Celsius which will cover all coins slowly out to institutions.
In the last AMA on February 12th Alex provided also more details on how the self-insurance will work
If you have additional questions regarding security, insurance or anything else related to Celsius Network there are multiple channels you can use, like Telegram, Twitter, etc. You can also use this new search engine which will search through all the videos and find the best answer to your question.
