For those keeping up with the recent news surrounding Flash Loans, you may find solace in projects like Nexus Mutual which offer a layer of protection to those savvy enough to take advantage of smart contract covers.
Recent events led to us paying our first and second ever claims on Nexus Mutual!
📖Read about it here: https://t.co/CpLX6pXBXJ
— Nexus Mutual 🐢 (@NexusMutual) February 19, 2020
In our recent research piece, we dove into Nexus’s growth over the course of the past year in tandem with a suite of upgrades set to roll out in the coming months.
Paired with our Nexus Mutual being our sleeper pick in our DeFi 2019 year in review, we’ve been keeping a close eye on the project in recent weeks.
During ETHCC, we had the pleasure of talking with the project’s CEO – Hugh Karp – about the past, present and future of Nexus Mutual.
Let’s get into it!
Tell us a bit about your background?
I come from an insurance background. I’m an actuary by trade and I’ve worked for over 15 years in the insurance industry, most recently as the CFO for Munich Re’s Life Operations in the UK.
I stumbled across Bitcoin at some point and thought the tech was interesting but recognized there wasn’t much to do – Payments weren’t really my thing.
Once Ethereum came along, I started paying attention. I was very cautious in my approach as I wanted to be able to take a calculated approach to the legal & regulatory risks that were likely to arise.
Once we found a comfortable model, we started developing and eventually deployed in late May of 2019.
And what did that rollout strategy look like?
We always had ambitions to build the platform to offer many products. More importantly, we also wanted to match our initial product with something that the Ethereum community really needed.
We also recognized that the regular insurance industry wasn’t providing any meaningful cover for crypto-related risks. I remember watching the DAO being drained live and thinking ok, there’s obviously a huge need for coverage and something like Nexus can provide it.
Introducing Smart Contract Cover.
Something we are quite excited about @NexusMutual
— Hugh Karp 🐢 (@HughKarp) January 23, 2018
What was the grand vision?
With Nexus, we’re looking to offer a multitude of products beyond what currently exists. In order to get there, we need to test the systems and make sure the incentives work. If we can do that within the crypto native space first, then we can scale to a larger audience.
Why is protection necessary?
To be quite frank, anything with nascent infrastructure needs insurance. If you want to build anything – say a house, train or rocket – you need insurance. When you’re operating in the real world, you need coverage for any industry or sector to succeed.
Crypto today has no access to that product, especially seeing as the legacy insurance industry won’t serve it. With Ethereum building a parallel finance economy, it needs a relevant insurance layer to succeed.
Why use a mutual model?
The concept of a mutual is actually quite old. In short, a mutual is a group of people coming together to share risk – something which fits very well in the nature of blockchain.
The only reason we’ve moved away from a mutual (in legacy systems) to shareholders is that it’s a more efficient way of connecting capital with people. However, thanks to smart contracts, we can start to do that in a peer to peer fashion – effectively cutting out all the stuff in the middle and optimizing efficiency when it comes to capital pooling.
Let’s talk about the first claims which were paid out. Did it go as you expected?
Truthfully, we envisioned it would be a bit simpler. Overall, we were very happy with how it went as it tested all facets of the system which was great.
With the first claim, there was not a lot of info available immediately (many said it was oracle manipulation) which is not covered, ultimately explaining why the claim was declined. However, when the bZx post mortem came to light – we were able to see that there was a bug. This gave the cover holders a chance for the claim to be reworked.
With Nexus, everyone gets two goes at a claim. Despite the fact that we were messaging everyone and asking people to wait for more info, they inevitably still submitted claims.
I had a personal view on how claims should be paid but I tried to stay neutral. At the end of the day, I was happy with the outcome – the claims that got paid were genuine and it showed that our system works as intended.
On Valentines day someone used a flash loan, some clever trading and bypassed a logic check in @bzxHQ contracts to net over 1000 ETH.
The bypass in logic was the critical aspect and today @NexusMutual has delivered on its promise and paid out its first claims.
Very proud! 🐢
— Hugh Karp 🐢 (@HughKarp) February 19, 2020
How do you view staking on various contracts – What’s the signal there?
In short, staking against a smart contract should indicate that it is more secure. As our mutual develops and grows, that notion of “security” should become more meaningful.
We don’t discriminate, meaning anyone can stake to any contract using whatever method they wish. Over time, we hope to roll out tools to make it easier for nontechnical users to assess the security of a given smart contract.
And what about your partnership discussions – How have those been going recently?
We’re always looking for integrations which make it easier to purchase a cover. Over time, we’ll introduce tools and partners which allow users to quickly and easily purchase an insurance bundle. We’re eager to deliver partnerships which make sense for our users.
So where does that rank in terms of priorities?
First and foremost, we’re very focused on dealing with our recent disclosures and on-chain fixes.
We've had a challenging week at Nexus but I'm really proud of the team for how we've handled this.
Apologies if I've been slow responding to you, this is why 👇 https://t.co/CKsTs6xS2Z
— Hugh Karp 🐢 (@HughKarp) February 24, 2020
We’re also in the process of rolling out a new staking model which will enable new stuff to happen at a much faster pace. Partnerships discussions and integrations are running in tandem with that.
Let’s talk about the NXM token design. What were the thoughts behind it?
The whole point of a bonding curve is capital efficiency. We needed a way for the mutual to have enough money in it to play claims but it shouldn’t have excess capital that it doesn’t inherently need.
With a bonding curve, it’s easy for us to track capital on an ongoing basis with demand. Our curve is designed to make sure that the mutual is capital efficient and more importantly, undercollateralized.
That’s how insurance companies work – we’re the first DeFi protocol to be uncollateralized by design as it’s beneficial to the mutual as a whole. The more covers outstanding we have than capital, the better in terms of capital efficiency.
Nexus Mutual is undercollateralised 🚀
Capital efficiency is cruicial for growth. 📈
Being undercollateralised a core priciple of being a discretionary mutual.
Next stop: investment returns. 🐢
— Nexus Mutual 🐢 (@NexusMutual) February 26, 2020
The intention is to be many many times to be undercollateralized. At the end of the day, not all of our claims will be paid at the same time. Traditional companies like AIG will leverage upwards of 60x capital efficiency. Right now, all of DeFi is based on overcollateralized which is not capital efficient. We hope with this token model, we can change that.
Why is capital efficiency so important?
If you have an event that has a 1% probability of happening and you have to be fully collateralized, then the person taking the other side of that cover can only earn a maximum of 1%. But, if you under collateralize, the returns can be much higher.
If the price has to be 5% to attract that capital, the price of your cover is going to be higher. We envision that the number of covers will grow faster than capital into the pool – allowing us to scale in a traditional fashion.
As someone who’s worked in both the legacy insurance world and web3, what’re some of the key takeaways from this space?
It’s almost like asking what’s the difference between working at a traditional company verse any startup.
To start, the expectations are completely different. It’s on 24/7 and the speed is insane. It’s super exciting and tons of stuff is always going on. The innovation is super quick and energizing which I love. I’m based in London but our team is mostly distributed. We’re very remote which offers a lot of benefits as you have access to a wider talent pool.
I will say, if you have difficult problems or emergencies it’s definitely better to be in the same room but other than that – we’re getting better tools and people are getting more used to it. My biggest revelation is getting on the phone or on a video chat more than you think is necessary is always helpful.
What can people expect from Nexus in the coming weeks?
We’re constantly pushing forward with pooled staking. We invite you to get in the Discord and ask us questions as that’s where most of the action happens.
It’s worth noting that we offer NXM rewards for voting – giving new users a direct incentive to familiarize themselves with the project and participate in governance. Right now, most of our governance is getting 20-30% participation which we’re pretty proud of.
What’re some rising DeFi project people should keep an eye on?
I really like the guys building the Authereum wallet. If you haven’t checked it out – definitely take a look. It’s a great way to get started with a crypto wallet that feels great and is easy to use.
That’s the thing about this space. There’s always compounding innovation. Both us here at Nexus and the rest of the sector is only gonna get better.
I couldn’t be more excited to see what happens in the next year!
For those still with us, we hope you enjoyed this interview as much as we did.
Hugh’s background provides a ton of confidence that the project is handled with care, focus and expertise.
In the coming months, the unveiling of new features in tandem with a suite of notable integrations will likely propel Nexus to the main stage when it comes to insurance.
As we noted in our article on the inevitable hack of DeFi, smart contract covers are a critical piece of infrastructure which we’re excited to watch unfold.
Cooper is the Editor of DeFi Rate and a contributor to leading DeFi outlets like the Defiant and Bankless. He is active in the DAO ecosystem through projects like MetaCartel and Raid Guild where he seeks to incubate governance models and grassroots community development. He is an ambassador of Set Protocol and the Director of Fitzner Blockchain Consulting where he authors a weekly publication called Token Tuesdays. To stay up with Cooper, follow him on Twitter.