Xfers has successfully concluded a pilot test to demonstrate how the XSGD stablecoin can enable the transfer of event risks via Zilliqa blockchain-based smart contracts. The pilot was conducted for Swiss fintech company Cerchia and serves as proof-of-value to gear up operations on the Zilliqa blockchain and alternative use cases for XSGD investments and settlements.
What does Direct Risk Transfer mean?
Risk transfer traditionally refers to shifting the risk of losses or damages due to events (e.g.: business interruption due to pandemic, air pollution, storms, others) to or from a third-party agency, contractor, vendor or supplier, for instance via a contract. Today, smart contracts are emerging as an efficient tool to digitise event risk transfer (i.e.: unforeseen occurrences causing losses) management.
Cerchia’s flagship product - Direct Risk Transfer (DRT) - is a bilateral financial agreement between any protection buyer and protection seller to transfer event risk. It is fully automated on the blockchain with smart contracts, oracles and stablecoins (XSGD).
Facilitated by the Cerchia DRT smart contract, the test was conducted from 9 April 2021 to 24 April 2021. As part of the pilot, Xfers and Zilliqa entered into a DRT deal executed by a smart contract, simulating the relationship between a protection buyer and protection seller. The case study was risk transfer in the environmental sector, using the Central Singapore Air Pollution 24H Index (PSI) as the metric.
The smart contract was designed to pay out 499 XSGD, known as the notional payment, to the protection buyer if the PSI reached an "unhealthy" level on its scale (i.e: PSI >101). 1 XSGD was transferred to Cerchia as a platform fee.
A maximal daily observation of the PSI values provided by the Singapore National Environment Agency (NEA) is fetched directly from their public API and then sent to an oracle smart contract. This data is then queried by the DRT smart contract on-chain. These observations of NEA serve as a reliable and independent source of truth.
In the event that the PSI for the Singapore central region reached 101 (“unhealthy”) levels, the notional payment would be triggered to the protection buyer. If such level was not reached until deal maturity on 24 April 2021, a notional payment would be triggered to the protection seller. In our test, the PSI was not triggered and hence, the notional payment was sent to the protection seller. This test demonstrates how blockchain technology, oracles and stablecoins can be used to better facilitate risk transfers.
A Comparison To Traditional Risk Transfer
Compared to traditional risk transfer markets, DRT has inherently no counterparty credit risk as all notional (amount of protection) is securely locked in escrow in the smart contract. With the smart contract powered by the Zilliqa blockchain, which boasts a short block time and low transaction fees, transactions can be confirmed quickly. With XSGD, deals can be settled instantaneously and converted at a 1:1 rate back into Singapore dollars. With these distinct advantages, DRT has the potential to scale and measure up to the existing alternative risk transfer market with its insurance-linked securities (currently amounting to an outstanding volume of US$ 46B globally in 2020) and contribute significantly to the total DeFi total value locked (TVL as at US$ 50B in early 2021).
Aymeric Salley, Head of StraitsX said “While we have seen tremendous traction for our XSGD stablecoin in digital assets markets over the past few months we are thrilled to also be collaborating with Cerchia on building applications in more traditional markets such as the risk transfer market, as we believe that the disruption potential of stablecoins for such applications is the highest in the long term.”
Matt Dyer, Head of Sales & Marketing at Zilliqa said, “The Zilliqa community is often asking for more ways to use their XSGD stablecoin and this offers a great opportunity to do that and I’m really excited to see this business grow. Moreover, this use case is a great example of the power of using blockchain and oracles to disrupt an industry and evidence of what I consider to be actual digital transformation.”
Michael Rey, CEO and Co-Founder at Cerchia said “Bringing a real-world finance use case to the blockchain requires a variety of features like razor-thin transaction fees, near-time confirmations and all components like oracles and stable coins to seamlessly work together. That’s where Zilliqa has unique competitive advantages and why we are excited to bring Direct Risk Transfer to life in the Zilliqa ecosystem, with strong support from partnering with Zilliqa and Xfers.”
Zilliqa is a high-performance, high-security blockchain platform built for business, catalysing open commerce with its secure-by-design smart contracts, and low-cost transactions for digital assets.
Developed through academic research, Zilliqa is helmed by a team of experienced scientists, leading engineers, financial services specialists, and venture creators. Driven by the mission to commercialise blockchain-based application, Zilliqa focuses on use cases across asset securitisation, decentralised and open finance, incentivised marketing, and secure tokenisation — the conversion and representation of assets as digital, blockchain-based tokens.
In 2019, Zilliqa became the first public blockchain platform to be built on sharded architecture, with smart contracts written in the platform’s secure-by-design programming language, Scilla.
For more information, visit zilliqa.com.
Cerchia aims to create a new way to address insurance coverage and pension risk gaps simultaneously. By applying a novel approach to risk transfer that is both scalable and efficient, Cerchia works towards sustainable societies.
Direct Risk Transfer is a bilateral digital contract that executes autonomously thanks to the distributed ledger technology. It is fully adapted to the real world and can reliably settle in fiat currencies. Direct Risk Transfer allows participants to buy or sell event risks securely and efficiently, with market-driven pricing, and without a need for insurance, exchanges or structures.
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