The Black Insurance Architecture — How to Design a Smart Contract Insurance Platform
In the past, we have compared enterprise blockchain platforms. We have discussed the considerations around choosing the right platform for enterprise blockchain applications. We have philosophized about the tokenization of the insurance business. We have even looked at a concrete example of implementing an insurance policy in smart contracts. What we have not covered so far is how to build such an insurance platform from scratch. What are the components required? How do they interact?
In this article, we will look in detail at the Black Insurance platform architecture.
Black Insurance runs on a platform based on two separate but connected blockchains. The architecture is based on the premise of interfacing a public part of the system with a privacy-preserving consortium blockchain. Private consortium blockchains require participants to be authenticated and allow the implementation of private data channels. Both measures can help companies to meet KYC and regulatory requirements. The latter are particularly abundant in the insurance business, meaning it would be almost impossible to run a fully-fledged insurance platform entirely on a public blockchain.
Public blockchains, on the other hand, allow tokenized assets to be exposed publicly, adding value and transparency to tokenized business models.
Thus, the Black Insurance platform combines the two models, in order to leverage the best of both worlds.
The above figure illustrates the components that constitute the Black Insurance platform. Hyperledger Quilt is used to implement a gateway between the public and private blockchains that constitute the Black ecosystem. We will talk about this inter-blockchain communication below, but let’s focus on the components first.
Public Blockchain Components
The Ethereum blockchain serves as a host for a number of smart contracts constituting two “bank components” for a number of tokens and a Decentralized Autonomous Organization (DAO).
The Black token bank smart contracts are responsible for the distribution management of the Black platform token, a utility token providing access to insurance products and services. Black tokens can be obtained through the Black Insurance ICO or secondary trading. Black syndicate tokens (BST) are managed by the BST smart contracts. Each BST security tokens represents membership to a single Black Insurance syndicate.
The aforementioned DAO represents a board of directors responsible for voting on governance issues, such as Black token direct sale pricing, token burn events, and reserve rates.
It makes sense to host these components on the public Ethereum blockchain for transparency reasons and for ensuring free token movement and valuation.
Private Blockchain Components
In contrast, all components hosted on the other side of the inter-blockchain gateway are subject to privacy and authentication considerations. The internal workings of the Black platform’s insurance and investment services are implemented in Hyperledger Fabric.
The stakeholders in this internal ecosystem can be categorized into two groups, insurance value chain stakeholders, and investment value chain stakeholders. The former includes:
- Insurance product creators responsible for launching the insurance products and writing the policies.
- Insurance agents and brokers doing the distribution, i.e. selling policies to customers.
- Claim handlers that deal with the validation and processing of smart contract generated insurance claims.
Note, that these roles may overlap. In fact, one of the main advantages of the Black Insurance ecosystem is that the traditional boundaries in the insurance industry are softened. For instance, it is feasible and indeed desired, that brokers can take on the role of a product creator.
The investment stakeholder group consists of the following:
- Syndicate investors that hold BST tokens as a form of investment.
- Syndicate operators responsible for the management of a syndicated fund and portfolio.
- Reinsurers as part of risk management.
Three main component types are available to these stakeholders. At the heart of the platform a single Platform Core channel implements common functionality enabling insurance products, insurance syndicates, and their interactions. A channel in Hyperledger Fabric is a private data and communication channel, basically a separate ledger. Some more fine-grain privacy protection beyond channel privacy is necessary for the platform core. One of the advantages of Hyperledger Fabric is that primitives for this fine-grained privacy management are readily available in the form of private transactions and zero-knowledge proofs.
Each insurance product has its own Policy Admin channel. Therefore, insurance products are separated in terms of data access and privacy. Policy Admin channels hold the chaincode (Hyperledger Fabric terminology for smart contracts) for insurance policies and related processes.
Similarly, each syndicate is provided with a separate investment channel, allowing for the privacy protected implementation of investment cashflow models within syndicates.
Operating the platform on a public and a private blockchain has several advantages, as explained above. Unfortunately, this architecture also requires atomic swaps between the two platforms, one of the blockchain’s current challenges. The term “atomic swap” refers to interchanging assets on different platforms atomically, meaning within an indivisible context or transaction.
As already mentioned, Hyperledger Quilt is used to implement a gateway between the public world of the Ethereum blockchain and the private world of Hyperledger Fabric. Quilt is an implementation of the Interledger protocol, which is purpose-built for connecting different ledgers consistently.
Details on how the gateway works can be found in our previous article on the subject. In summary, the gateway allows users to move their Black or BST tokens from the Ethereum to Hyperledger Fabric and vice versa.
Industry-driven Design Decisions
The above explanation is meant to serve as an overview of how the Black Insurance platform has been designed. However, it also serves as a general example of how enterprise blockchain architectures have to be developed within the constraints of a certain industry, even if they will completely revolutionize that very industry.
Privacy and regulatory concerns influence enterprise software of all kinds, and blockchain-based models are no different. However, with some cunning design decisions and a bit of creativity the correct balance can be found.