Nexus Mutual is a decentralized insurance protocol built on Ethereum. Launched in May of 2019, Nexus offers user the ability to take out covers on smart contracts using their native token – NXM.
Nexus Mutual has been set-up as a company limited by guarantee in the United Kingdom and will operate under a discretionary mutual structure. A discretionary mutual structure means that all insurance claims are paid at the discretion of the Board (i.e. Nexus Mutual members). The company has raised an undisclosed amount from blockchain-based venture capital firms such as Kenetic, KR1, MilliWatt and 1kx.
The Nexus Mutual team has close to 10 members led by Hugh Karp who has over 15 years of experience in the insurance industry, including the role as CFO of UK Life Operations. Other notable team members include Board Member, Gareme Thurgood, who has 17 years of extensive experience launching mutuals in the UK and prominent Ethereum community member, Evan Van Ness.
The Need For DeFi Insurance
Since Bitcoin’s genesis block in 2009, we’ve seen countless instances of users losing their funds by misplacing private keys or stolen from hackers. User security and fund recovery has always been a problem. Unlike traditional banks or credit card companies, in crypto there’s no company to call up when your funds have been lost or stolen.
Unfortunately, this issue was compounded with the introduction of Ethereum and smart contracts in 2014. Many smart contracts in existence today are valuing storing contracts (meaning they store Ether) which could be vulnerable to hacks and other loopholes. The most widely recognized instance of a compromised smart contract was the DAO hack in 2016 where nearly 3.6M Ether was stolen from investors.
For crypto to progress towards the mainstream, we need to be able to mitigate the losses from these attacks. As it stands today, users who are self-custodying their funds have zero protection on their holdings and many DeFi smart contracts are unaudited and may hold security vulnerabilities. The need to establish a decentralized insurance protocol is arising as we are seeing more and more DeFi applications accrue millions in total locked value.
While insurance is not one commonly mentioned throughout the DeFi community, it is one sector which has a massive potential to provide investor protection and confidence to users interacting with value-storing contracts.
With this said, it is fairly early for Nexus Mutual as it recently launched in May 2019 but has quickly accrued 7.1k Ether (currently valued at $1.5M) in the mutual.
Introducing Nexus Mutual
Nexus Mutual uses a risk-sharing pool to allow anyone to purchase an insurance cover or contribute capital to the pool for future rewards.
The concept of insurance originally began when communities would pool together resources to mitigate themselves from common risk. Obviously, as communities and society began to grow and evolve, this model did not scale as it required a large amount of trust among many individuals. As a result, modern-day insurance companies began to take on this risk and the profit – leaving societal safety nets to profit-motivated companies working for their own interest.
Nexus Mutual aims to disrupt the insurance industry by transitioning the power from large insurance companies back to the individual. As such, anyone is allowed to participate as the mutual is wholly owned by its members. Members can contribute Ether (ETH) into the pool in return for NXM, the protocols native token.
The mutual’s first insurance product is smart contract covers for purchasing protection for value storing contracts (which are inherent to DeFi and TVL). In order for the mutual start processing claims, it waited to obtain 12,000 ETH – a milestone reached just two months after its launch in May.
The NXM token represents membership rights in the mutual along with the ability to participate in the ecosystem through claims and risk assessment and governance. The token model leverages a bonding curve (or a continuous token model) to determine the price of NXM driven by two main factors:
- How much capital the mutual has
- How much capital the mutual needs to meet all claims within a certain probability.
A bonding curve is used so tokens can be purchased at any time but at variable prices based on the amount of capital is locked in the mutual and how much of the capital is needed to payout the covers within the system. Moreover, members are entitled to a share of any capital held in excess of what’s necessary to pay potential claims. In other words, the more capital in the mutual, the higher the price of NXM.
This is important to note as Nexus Mutual did not conduct a traditional ICO nor are they planning to list on secondary exchanges.
NXM Use Cases
The NXM token is widely used within the ecosystem for a range of utility mechanisms and as the primary asset for accessing a membership in the mutual.
Purchasing a Cover
Users who wish to become a member can do so by purchasing the cover in ETH, DAI or NXM. The system will automatically convert contributions to NXM for users who decide to pay for the cover in ETH or DAI. Once the cover is purchased, a member burns 90% of the cover price in NXM tokens and retains the 10% to be used as a stake when making a claim.
Mutual members can stake to vote on claims assessment on whether or not a certain claim should be paid out. Members who vote with consensus are rewarded with NXM whereas users who vote against consensus have their tokens locked for an extended period of time. Lastly, any users who attempt to vote maliciously or fraudulently are subject to having their stake burned and kicked out of the mutual.
When assessing the risk on certain covers, users can signal their confidence in the security of the underlying smart contract by staking NXM. The more NXM staked on an individual cover, the lower the price of the cover. If the cover is purchased, the stakers receives NXM. On the other hand, if a valid claim occurs within a certain period of time (250 days) from the cover purchase, a portion of the stake is burned.
The last major utility use case for NXM is its overarching role in the governance of the mutual. NXM is used as a voting weight were simply participating in governance voting earns NXM. When voting in governance decisions, any NXM used is locked for with transfer restrictions applied for a period of time.
If you’re interested in diving deeper into the NXM token model, visit their token model page to get a better understanding at some of the math behind the price of NXM and the mutual’s capital requirements.
With this rise in DeFi and total locked value, being able to take out insurance policies on the smart contracts holding millions in value is a no-brainer. Nexus Mutual has taken an innovative approach in an attempt to provide the Ethereum ecosystem with insurance for the people.
Once the mutual has taken off and is processing claims, the team will naturally move to provide more decentralized insurance products using the protocol. With this in mind, we should expect to see crypto wallet coverage in the short term with more generalized traditional applications in the mid-to-long term.
The nature of accessibility in DeFi provides an intriguing opportunity for insurance applications to reach underserved markets. One example theorized by the team is the ability to provide insurance on earthquake damages in developed markets It goes without saying that one could imagine other viable applications in the near future to disrupt the multi-trillion dollar insurance industry.
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Analyst at Bankless – one of the leading resources for open finance. Lucas is an active contributor to the DeFi ecosystem with appearances in other notable DeFi outlets including The Defiant and Our Network. He has years of experience working with dozens blockchain and token startups where he focused on token economics, marketing, and growth.