OpenFi: Nexus Mutual
Nexus Mutual pioneered a decentralized approach for providing coverage to losses in DeFi. In this post, I delve into Nexus Mutual and the role it plays in the DeFi ecosystem.
Disclaimer: The following piece is simply a summary of my opinions and should not be construed as investment advice or regulatory analysis.
O: Opportunity - How large is the Total Addressable Market? Does the project disrupt an existing market, or does it create a new market?
Score: 3.5/5
DeFi is a highly experimental and risky intersection of technology and finance. Decentralized applications hold more assets than ever within their smart contracts. User funds are exposed to various risks, such as hacks, exploits, and rug pulls. The question naturally becomes - "how do I, as a user, manage these risks?"
Nexus Mutual tackles this by being one of the first and largest protocols to offer decentralized risk coverage called “mutuals,” similar to traditional insurance but more decentralized. The project provides cover for a number of risks across DeFi. It's important to note that the platform is legally not considered insurance because claims are assessed by members of the Nexus Mutual DAO.
Total Addressable Market or "TAM" can be viewed in a few different ways. Comparing Total Value Locked ("TVL"), Nexus Mutual currently ranks 22nd on DeFi Pulse with $314 million TVL. TVL in DeFi on Ethereum is around $49 billion at the time of writing. In comparison, no other DeFi insurance protocol has over $10 million TVL.
A second way to measure TAM is to look at traditional cybersecurity insurance, which plays a similar role in mitigating technology risks. Based on research from Mordor Intelligence, the global cybersecurity insurance market is currently valued at $7.4 billion and expected to grow at a CAGR of around 24% over a 5 year forecast period (2021-2026). We are beginning to see traditional financial institutions experimenting with decentralized technology and governance. In March 2021, Aon, the world's second-largest insurance services firm, recently announced a pilot for Nayms, a decentralized risk management platform that provides cover against hacks and bugs. As more players join the space, there will be more competition, innovation, and an overall bigger pie.
P: Product - How innovative and differentiated is the product? Is there product-market fit? How easy is it to use the product (i.e. good user interface and experience)?
Score: 4/5
Nexus Mutual enables users to better assess and manage risk. To do this, Nexus Mutual's ecosystem includes two parties: (1) DAO members who pool funds to cover claims, and (2) users who pay the members for this cover.
Here's how it works:
Users sign up on the website and pay a small one-time fee of 0.002 ETH (or around $5 based on current prices).
They undergo AML/KYC (as it's required for UK entities like Nexus Mutual) and then become legal members of the DAO.
Each DAO member provides cover, or deposits, for trusted DeFi projects by buying and staking NXM, the platform governance token. If a DeFi user wants to buy cover for a specific product, a request must be submitted for a vote with the coverage amount and duration.
If the request is approved, the user pays a premium to the platform's DAO for the coverage
When a user suffers a material loss on the underlying DeFi protocol, a claim for payout can be submitted for a vote. Nexus Mutual charges a deposit of 5% of the cover premium per claim to discourage fraudulent claims.
Claims are assessed and voted on by the DAO within 72 hours of submission, usually with a community discussion in the Nexus Mutual Discord.
Nexus Mutual distinguishes itself by offering a clean, institutional-grade UI/UX. Anyone can join as a member of the DAO by going through KYC and purchasing NXM using DAI or ETH. Users interact directly with the smart contracts themselves, bypassing the manual intervention common in traditional insurance services.
The protocol currently provides three types of cover:
Yield Token Cover: protects against yield-bearing token de-pegging.
Protocol Cover: protects against a hack on a specific protocol.
Custody Cover: protects against halted withdrawals and haircuts on funds stored on centralized exchanges.
In total, there are over 90 types of cover available on the platform today. These pools cover over 70 different DeFi protocols and centralized exchanges including major players like Uniswap, Curve, Yearn, Aave, BlockFi, Coinbase, and FTX.
Since its inception in 2017, Nexus Mutual has covered and paid out claims for some of the biggest and highest-profile DeFi events in history. These include the BZX flash loan event in February 2020 and the Yearn Finance hack in February 2021.
Nowadays, a lot of new insurance and risk management protocols are popping up including Opium Finance, Nsure Network, Union Finance, and Tidal Finance. These competitors focus on more specific niches, which also enables them to offer better rates, more types of cover, or cross-chain compatibility. As more platforms launch, I expect there will be entirely new product segments such as reinsurance markets and risk derivative offerings.
E: Experience - Does the team have any previous experience building software and technology? Is the team well-versed in blockchain? What previous experience does the team have to ensure success?
Score: 5/5
According to its website, Nexus Mutual has a lean team with around 7 employees, 6 advisors, and 6 Community Fund multi-sig participants. Its core team has deep experience in blockchain development, big tech, and finance/insurance. Key members include:
Hugh Karp (Founder): Before founding Nexus Mutual, Hugh was the CFO of Munich Re's Life portfolio. He has over 15 years of actuary and insurance experience at both Munich Re and MLC & NAB Wealth.
Roxana Danila (CTO): Prior to Nexus Mutual, Roxana was the Co-Founder and CTO of Nectar, a UK-based cloud computing company. Prior to Nectar, Roxana worked at Facebook in software engineer and tech lead roles.
Ricky Tan (Head of Business Development): Ricky was previously the Founder of TokenData, a high-profile crypto research company. Prior to TokenData, Ricky worked in various business development roles at Adyen, Earnest Inc., and ABRA. He started his career as a global commodities trader at JP Morgan.
To date, Nexus Mutual has raised over $4.1 million in total funding through two token sales in 2018 and 2021. Key investors include 1confirmation, Blockchain Capital, Version one, Semantic Ventures, Kenetic, Kr1, Collider Ventures, and 1kx.
N: Network Effects - Will more people in the network benefit when others join? Are there high switching costs and stickiness in using the platform?
Score: 5/5
Nexus Mutual has significant network effects built into its platform. First off, it benefits from a first-mover advantage. Since its inception, it has captured most of the DeFi risk cover market and continues to dominate with over 90% market share. It offers the highest number of risk pools and supports the largest mix of underlying DeFi protocols. Similar to most things in DeFi, liquidity fosters stability. With more capital, Nexus Mutual is better able to pay out claims to users.
The other important thing to consider is that while the coverage and claims process is decentralized through its DAO, Nexus Mutual's whole ecosystem is closed and centralized. Users can only participate by going through the website, undergoing KYC, and receiving an identity within the system. The NXM token, which is required for pretty much everything on the platform, is only available for purchase on the Nexus Mutual website. Although wrapped versions are available on the website and on decentralized exchanges, they do not offer any utility apart from financial exposure to the token.
NXM can only be transferred to other Nexus Mutual members and can only be sold back for ETH through the platform's official redemption process. There are several restrictions on redemptions based on factors such as overall liquidity, outstanding coverage, and purchase/redemption price spreads. The closed design of the platform inherently drives more participation from users and members already in the system.
F: Fundamentals: Do the underlying unit economics make sense within the current network? How quickly are users growing? How much value has been transacted or locked up?
Score: 4.5/5
Nexus Mutual has grown year-over-year in terms of both TVL and users. Even with the recent market downturn, TVL has more than doubled year-to-date from $118 million in January to over $300 million currently. The platform’s TVL is closely tied to the price of Ethereum, as ETH is the most commonly used form of collateral.
Based on analysis by Dune Analytics, total users on the platform have grown significantly over time. In 2020, Nexus Mutual’s user count grew over 10x from under 300 at the beginning of the year to over 3,000 by December. So far in 2021, user growth has grown over 50% to about 4,700 users.
To date, over $3 million in claims have been accepted and paid out to users. Nexus Mutual requires users and members to perform duties and have some knowledge of DeFi protocols and associated risks. When successful claims occur, members of affected pools may lose all of their staked tokens in the payout. In the short term, this hurts the members financially. However, in the long term, members are encouraged to vote for legitimate payouts, or else trust in the system would erode. And of course, there is the possibility of Nexus Mutual becoming insolvent should the claims paid out exceed the overall capital pool. This hinges on participants having the subject matter expertise to assess risk and create the right incentive structures for both members and users.
I: Incentives - Are there proper cryptoeconomic incentives in place for network stakeholders and users to support blitzscaling?
Score: N/A
Because Nexus Mutual relies on a closed ecosystem with no cryptoeconomic incentives beyond the mechanisms built into the platform, this section is not applicable for this post.