Story from

Why Crop Insurance Is Such A Compelling Use Case For Hybrid Smart Contracts

When people think about hybrid smart contracts, they typically think about decentralized financial (DeFi) products, which consist of code running on a blockchain that guarantees a certain outcome (like interest rates) based on definitive truth about off-chain events (like market value) as determined by decentralized oracle networks (DONs).

On yesterday’s in-depth episode of Real Vision, host Ash Bennington and Chainlink Co-founder Sergey Nazarov discussed another compelling use case for hybrid smart contracts: decentralized insurance, particularly crop insurance for farmers in emerging economies. 

Bennington said these parametric insurance products not only have tremendous economic value; they exemplify how hybrid smart contracts can improve the everyday lives of people living around the world in a way that’s both visceral and easy to understand.  

“I think DeFi is often a little bit abstract for people, particularly if they’re not in the space, but crop insurance is something that feels very concrete,” Bennington said. “It’s something that people can get their head around.”

Crop insurance hybrid smart contracts utilize DONs to arrive at consensus about weather events through many different data sources, then trigger automatic payouts when the conditions of a policy are met. Because hybrid smart contracts execute based on math and physics, they are accessible to anyone with an internet connection, without the need for an insurance company. 

“You can basically codify a farmer’s relationship to risk in the form of an on-chain insurance contract,” Nazarov explained. 

Bennington said it’s easy to picture the impact hybrid smart contracts have on people whose livelihoods depend on their ability to protect themselves from extreme weather events like drought, flooding, heat waves and cold spells.

“You could imagine a system where a farmer, whether it’s in Zimbabwe or Indiana, has a particular insurance contract with an insurance company that basically reads: if there is more than five inches of rain in a 12-hour period, they get flood insurance compensation.”

In this way, hybrid smart contracts are substantially more reliable than the current system, which relies on humans to prove that a weather event happened – a process that is time-consuming, expensive and ultimately susceptible to manipulation. 

“In the smart contract world, this all takes place on-chain in a way that becomes irrevocable, immutable, so that neither party can either decide not to pay a premium or decide not to pay out a claim once something is validated,” Bennington said. 

Nazarov believes crop insurance is such a meaningful use case for hybrid smart contracts because it helps people manage the types of business-related risk for which many modern financial products were created.

“Many futures contracts, many financial products weren’t invented for speculative reasons,” he said. “They were invented so that business owners could manage away risk and continue to operate their business even if there was a drought. Even if there was too much rain or not enough rain or any number of other factors.”

Nazarov highlighted teams like Arbol that have already integrated Chainlink to build decentralized crop insurance that’s accessible to anyone, anywhere. That’s the other, I think, truly fascinating thing is that anybody with an internet connection can now get crop insurance regardless of their local legal system and regardless of their trust or faith in an insurance company.”

That’s really, in many ways, the revolutionary part about this,” Bennington agreed, adding that decentralization through hybrid smart contracts is more than “an incremental improvement” to the way insurance works.

“This idea that you can have things that exist on-chain in an unalterable way, in a way that can’t be gamed, in a way that brand, in a way that reputation is not the dependent factor for understanding whether or not you are going to get paid really is a massive philosophical shift in the way that we think, not just about insurance or financial products, but about contracts and about business and about commerce much more generally.”

Sign up for a free account to watch Ash Bennington’s full interview with Sergey Nazarov on the July 19th episode of Real Vision.

Have an idea for a story?

If you’re interested in submitting content to be considered for publication, please carefully review the Chainlink Today Content Submission Guidelines to help you get started. We’re excited to hear from you.

Related Stories