This past Wednesday, Arbol was excited to announce a deal with blockchain company Chainlink that will allow us to offer our users a smart weather protection product for farmers and businesses.
This product is built on the foundation of blockchain technology and utilizes Arbol’s smart contracts along with decentralized weather data provided by Chainlink to offer users a product unlike any other on the market. At Arbol, our goal has always been to revolutionize the way that farmers and businesses hedge and build resilience against climate risks. Extreme weather or one bad season should not have to mean financial ruin for hardworking farmers and business owners. Our deal with Chainlink allows us to offer contactless, smart weather protection to anybody with an internet connection, anywhere in the world. When the threshold for loss in their agreement is met, they get paid. It is that simple. No more inefficiency, no more human adjusters, and no more haggling with insurance companies over the terms of the policy.
We are excited about what this deal means for the future of our platform and its ability to continue to faithfully serve our partners and stakeholders. It allows us not only the opportunity to make smart, effortless weather protection accessible to those who need it around the world, but it also allows us to create better value for our users.
We are also excited about being able to introduce our platform to a new audience that may have been previously unfamiliar with who we are, what we do, and what we have to offer. We have received some questions in recent days about how the platform works, and more specifically, how we create liquidity for weather contracts.
The weather risk space is littered with failures such as weather futures on the major exchanges. The primary reason was that these efforts failed to build real distribution and ended up being sporadic speculating instruments with little liquidity and few use cases for real world users. Similarly, in the blockchain space, we are often asked, “What about Augur?” Having the ability to set up a weather betting contract on Augur is a long way from capturing the trillions of dollars of real-world weather risks faced by farmers and businesses globally.
Weather contracts would have little to no liquidity if it was just ad hoc risk. For example, if you wanted to bet on rainfall tomorrow in New York City you might occasionally find someone to bet against you. At the end of the day, this is a gambling market that on its own will not generate stable liquidity. True liquidity is built when you partner either with others who need to use the market to manage risk or with investors who can build cash flows to earn yield. Once you have these bedrock participants, speculators will flock to wherever liquidity exists, and returns are available.
Arbol creates this bedrock of liquidity by developing products that cater to large scale client bases that have exposure to the weather. This includes products that protect against a variety of weather risks that range from droughts for farmers to varying wind speeds for wind energy operators to rainy days for leisure industry businesses. Our proprietary pricing models use machine learning to offer accurate pricing for any weather contract regardless of size by incorporating weather risks and the pricing of other market participants, given that this market is opaque and does not have easy screens to check pricing.
This bridges the gap between the very high minimum sizes that reinsurers will consider ($250,000+ in premium) and the various needs of farmers and businesses. The resulting portfolios of weather contracts are highly diverse across locations and weather risk types, which results in much higher risk-adjusted returns than when too much risk is concentrated in one area (ex. Florida hurricane risk). These pools of liquidity in large portfolios can be then bid on in capital markets creating a real market instead of one-off-bets on weather.
Our deal with Chainlink offers us a way to keep adding scale to our platform, allowing for more types of contracts. This in turn refines our diversification and improves the returns on these contract portfolios. This deal, along with our growing user base will allow us to broaden the adoption of parametric coverage and build resilience to weather risks.
I am excited about this new chapter and all of the opportunities in front of us to make smart, effortless weather protection accessible to those who need it around the world. To date, we have been privileged to serve hundreds of institutional clients ranging from small farms to large corporate clients transacting tens of millions of dollars in risk. I look forward to continuing to serve our ever-growing user base as we look to expand access to parametric products that provide smart protection against a growing list of global climate challenges.