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It isn’t easy to keep up with the myriad of DeFi protocols spurring on the market every day. A sector with more than $14 billion in locked value protocols will always be a target for scams and hackers. In this high-risk environment, the need for a decentralized system of insurance is imperative.
Nexus Mutual is a decentralized insurance platform that aims to give policyholders more power over their liquidity funds. The platform works as a peer-to-peer network in which users share equal responsibility for the global insurance fund.
Nexus aims to make DeFi and yield farming a safer environment for old and new investors. But, how reliable and scalable is this alternative to the classic financial insurance system? We’re here to find out!
What is Nexus Mutual?
Nexus Mutual is a DeFi insurance protocol built on the Ethereum blockchain that enables its users to fund and access insurance funds without a traditional insurance company’s intermediary presence.
As its developers put it, Nexus “uses the power of Ethereum so people can share risk” and cuts the middleman with all its fees and policy costs. This way, users can pay less for their insurance and benefit from a peer-to-peer network’s security to protect their funds.
Nexus Mutual operates by using the United Kingdom’s discretionary mutual model, through which policyholders can take part in the decision-making process concerning the evolution of the platform. Every user shares a part of the network responsibility regarding functionality, risk, governance, and assessing claims.
Nexus Mutual’s developer is Hugh Karp, the former CFO of UK Life and an avid supporter of blockchain technology. His development team also includes insurance expert Reinis Melbardis and the head of the engineering team, Roxana Danila.
Nexus Mutual was released in May 2019, after the publishing of an extensive and detailed whitepaper. The document also detailed how you can become a Nexus member by paying a small membership fee of 0.002 ETH, then undergoing a KYC (know your customer) process, and finally agreeing to the way Nexus Mutual Ltd, a real UK-based company, operates.
The Nexus protocol has a native currency, called NXM, which provides holders with access to the network and the benefits that come with it. NXM helps people pool risk together without the need for an insurance company.
How Nexus Mutual Works
Nexus works by exploiting a clause within the British insurance industry that has inconclusive regulations and goes by the name of “discretionary mutual.” In it, members do not possess any contractual obligations to pay claims, therefore drastically reducing insurance costs.
On Nexus, users join the mutual insurance network by purchasing NXM tokens and becoming participants in the decentralized autonomous organization (DAO). Once inside, they can vote on development decisions and receive incentives for paying genuine claims.
Nexus aims to profit from the ever-increasing yield-bearing options in the developing DeFi ecosystem while avoiding smart contract risks at the same time. When protocols require new liquidity resources, users can take the Nexus insurance before feeding it with new funds and have safe access to its yields.
Nexus aims to make a risk assessment and pricing scalable by increasing user power in the DAO to ensure optimal delivery of its services. More people will be interested in participating in the network if they can choose and price the value of risks within Nexus Mutual. Therefore, the value of the cover funds will enhance proportionately.
Nexus Mutual Features
Since its inception, Nexus Mutual has increased its number of features to get closer to its goal of becoming the go-to insurance platform in the DeFi space. Below are some of the features that have influenced its evolution and popularity so far.
The traditional insurance sector establishes a clear divide between the insurer and the policyholder. The latter has very little or no saying at all in the development of costs and claims that their insurance can provide. Therefore, the insurance company has most, if not, all of the power in this relationship.
Nexus Mutual wants to turn the tables on the traditional insurance system, rebalance the scale, and give the policyholder the most power. This reorientation of insurance functionality is possible thanks to blockchain technology and the decentralized, permissionless environment, which platforms like Ethereum can provide.
Nexus Mutual is a growing community in which people can decide on its direction and development by voting on which proposals to pass or deny. The platform uses an advisory board that first examines the recommendations before subjecting them to a community vote.
The advisory board is also the link between the blockchain-based network and the real world. Voters can take part in the protocol’s governance by providing NXM tokens, the native currency in which they also receive rewards for their participation.
Buying Smart Contract Cover
The crown jewel of Nexus Mutual products is Smart Cover, a fund that covers potentially lost funds due to smart contract hacks or non-intended use of code.
Users can purchase Smart Cover for a fixed amount that differs depending on the smart contract’s value. However, in the event of a hack, the claim’s value is assessed and then voted on by the community.
As soon as the cover of a smart contract is active, Nexus members can claim it. Any user who engages in this process has to stake at least 5% of the network’s locked value when purchasing the cover.
At the time of this writing, Nexus Mutual had nearly $95 million in locked value. Considering the large sum needed for staking, it is more difficult, if not impossible, for malicious entities to make unfounded claims.
Contrary to the traditional insurance system where a company assesses policyholders’ claims, on Nexus, it is the community that assesses individual claims.
Thanks to a platform feature, any member can become a claim assessor and receive incentives for their participation. Several assessors can take care of a claim. However, when they cannot reach a consensus, the rest of the assessors on the network become part of the process, and upon voting, the claim reaches a solution.
On Nexus, members can also become risk assessors by betting their NXM tokens on smart contracts with codes that they consider secure enough for use. They can also stake their tokens on the assessing members who they regard as expert enough to review the smart contract code.
The Nexus Mutual Token (NXM)
The native currency on Nexus Mutual is NXM, which is an ERC-20 token built on the Ethereum blockchain.
Nexus members can stake NXM on smart contracts if they trust in their security. Additionally, they can use them for farming yields on supported platforms. They also receive NXM tokens as incentives and rewards for their participation in the governance of the network.
Other NXM functions include:
- Playing an essential part of the voting mechanism.
- In risk assessment to lower the price of a cover
- In claim assessment
- In buying the protocol’s Smart Cover
Nearly 90% of the NXM tokens involved in the Smart Contract Cover are burned. As of December 2020, NXM has a market capitalization of $110,550,512. No less than 5,063,157 NXM are in circulation out of a total supply of over 6 million NXM. One NXM is trading for roughly $22.
The Bottom Line – A Guide to Nexus Mutual
Some of the DeFi protocols out there are successful, stand-alone brands in the industry. Others quickly turn out into failures and scams, a probability that is ever-increasing nowadays. Undoubtedly, insurance services like Nexus Mutual have the essential role of helping investors trade, farm, and provide liquidity without worrying about their funds disappearing overnight.
Nexus Mutual helps increase the reliability and relevance of the DeFi sector and the entire cryptocurrency industry. Its development into an appealing DAO should attract even more investors who now can count on a blockchain replica of the traditional insurance system.