The Differences Between Traditional Insurance and Democratized Insurance

Pana DAO
4 min readJul 21, 2022

A great relationship is based on two main principles. First, appreciate your similarities and second, respect your differences. — Unknown

Over the centuries, insurance has been a great enabler by creating enough security for companies and individuals to take risks they otherwise would be unwilling to take. In the world of capitalism, this meant setting up a counterparty who would share the risk but be rewarded for their willingness to participate. When large groups come together to share the risk/reward, they are often called syndicates.

The trouble with traditional insurance and crypto insurance as it’s been shaped so far is that the counterparty and the market maker are highly incentivized to deny claims in order to boost margins. For this reason, contracts are complex, the terms very nuanced and certain types of insurance are typically unavailable. Insurance companies use humans to interpret claims — people who have a conflict of interest in retaining their margins and loss ratios. To be clear, this does not imply bad intent, it’s just the lack of certainty which makes it difficult for many to trust insurance let alone afford it.

In our view, here are the top six problems with traditional insurance:

  1. Premiums are expenses (you cannot expect to receive payment)
  2. Claims are intentionally denied
  3. Covered are incentivized to make claims
  4. Parametric insurance is impossible (blanket insurance is typically not profitable
  5. Insuring frequently occurring events is impossible (claims would eliminate gains)
  6. Small or variable premiums is impossible (due to high fees and high operational costs)

With these problems in mind and the target audience being those who are underserved, we created a protocol that replicates the same incentives that originally created the insurance industry and syndicates, but with fewer downsides and risks. Remember, the underserved can be any entity/person, but the least privileged are those living below the poverty line and in countries where insurance is culturally unaccepted or simply unavailable.

You can read our GitBook to learn more but as a quick summary, here are the top six solutions the Pana Protocol brings to the insurance industry:

  1. Premiums are investments (payment is guaranteed from the associated NFT treasury)
  2. Claims are 100% honored
  3. Covered are incentivized to hold (holding may lead to more favorable returns)
  4. Parametric insurance is possible (blanket insurance is defined in smart contract “law”)
  5. Insuring frequently occurring events is an important feature (removing uncertainty from insurance is a major level up)
  6. Receiving small or variable premiums is key (this is only possible by eliminating intermediaries and operational costs)

During our internal modeling of the Pana Protocol, we created the following diagram to illustrate how the protocol works and will make the illustration the subject of an upcoming AMA:

We started our journey using first principle thinking and reconstructed the same process that syndicates use to generate yield but made it possible for everyone to participate as a syndicate member. For the resulting protocol to not be a security and more importantly, to recreate the extrinsic incentives that syndicates experience to keep their capital in the pool, NFT collections are used as the asset and a different treasury is associated with each NFT collection as the incentive.

Additionally, to reduce slippage during a parametric buy-back (payout), the Pana Protocol utilizes a unique innovation called Loss Ratio Pegging (LRP). Unlike other protocol owned liquidity (POL) protocols like Olympus, Klima and many others who accumulate treasury and use it like a venture capital fund, the Pana master treasury exists to manage supply in its liquidity pool(s). By keeping supply at a steady level, the LRP mechanism dampens volatility for entry and exit participants, providing more stable liquidity for insurance activities while retaining potential upside for participants. You can read more of the specifics in our GitBook section covering LRP. While it can’t correct for single trade slippage, LRP helps to smoothen the forces of volatility and liquidity — here is a quick summary:

1. Volatility

a. The forces of asset volatility are a good thing because they create growth potential, but wild swings are generally unhealthy

b. LRP smoothens the wild swings

2. Liquidity

a. Too little liquidity can increase volatility, too much liquidity can decrease volatility, but excessive liquidity can also create volatility that lags market conditions and subsequently creates momentum that is difficult to curb

b. LRP maintains a steady supply in protocol owned liquidity pools

LRP is intended to provide some level of predictability to individuals and syndicates, while also providing growth potential that makes Pana an investment, not an expense.

Lastly, the design of the Pana Protocol is also intended to protect DAO participants. By creating NFT collections, DAO participants help create the marketplace. But syndicate members democratically operate each NFT market with the results fully dependent on the independent actions of its owners. This democratic process backed by smart contract code (instead of human underwriters and claims agents) helps democratized insurance open a new chapter in insurance without relying upon DAO participants to arbitrate and otherwise operate a traditional business.

This is a complex industry and we welcome questions in our Discord server. We look forward to launching the Pana token in the weeks ahead! Come join us and support moving insurance innovation forward for the underserved.

A Humble Mission to Serve the Underserved. A Bold Goal to Provide Insurance to Everyone.



Pana DAO

Pana DAO is the first crypto protocol built to facilitate parametric insurance using a model similar to the time tested Lloyd’s of London syndicate model