Editor's Note: This article comes fromChain News ChainNews (ID: chainnewscom), Written by LeftOfCenter, published with permission.
Editor's Note: This article comes from
Chain News ChainNews (ID: chainnewscom)
Chain News ChainNews (ID: chainnewscom)
, Written by LeftOfCenter, published with permission.
As liquidity mining becomes more and more popular, more and more DeFi projects have begun to join the army of income farming (ie "liquidity mining"), and the total value locked on the DeFi chain has increased significantly. According to DeBank data, in just over a month, the total value locked in DeFi has grown from US$1 billion in early June to more than US$3 billion at present.
The data shows that in the past six months of this year alone, at least 10 hacking incidents have occurred, resulting in a small number of DeFi users losing a lot of money. With the growth of liquidity mining, the DeFi insurance business has become a very urgent need for DeFi investors, and it has also become a DeFi subdivision track that has attracted much attention.
Of the few decentralized insurance services out there, Nexus Mutual is one to watch. In just half a month, the price of its native token NXM rose rapidly from $3.8 on July 1 to the current $9.6, and reached its peak on July 12, with a price as high as $21, the highest growth rate within half a month. 6 times as much. At the same time, its market value also increased from US$16.8 million on July 1 to the current US$46.8 million, and once reached US$91.8 million, with a maximum growth rate of 4.4 times within half a month.
From the perspective of market value and currency price, Nexus Mutual has achieved good growth results. However, is Nexus Mutual really demand-driven growth, or a short-term pull? In addition to currency prices and market capitalization, what other fundamental indicators can be used for reference? What about these indicators?
To understand these issues, please continue reading below. Understanding before buying is the basic quality of a value investor.
What exactly is Nexus Mutual?
Users can use ETH to purchase NXM tokens and become risk assessors. It should be noted that the community members must pass KYC—that is, NXM tokens alone are not enough to become a member of Nexus Mutual, and they must pass KYC and be added to the whitelist before they can become risk assessors and participate in staking. For each specific insurance, NXM holders need to conduct a risk assessment and express their willingness to underwrite the insurance by staking the smart contract behind it.
For users who are not familiar with Nexus Mutual, let us briefly introduce the insurance model of Nexus Mutual.
Nexus Mutual allows users to purchase insurance for specific smart contracts to insure against accidents caused by smart contract vulnerabilities in some of the current mainstream protocols, such as Compound, Aave and Uniswap. Users can insure specific smart contracts on Nexus Mutual for an insurance period of 30 days or more. Each insurance is denominated in Nexus Mutual's native token NXM and allows payment in ETH or DAI.
Similar to traditional mutual insurance, Nexus Mutual is owned by NXM token holders who are also responsible for providing the capital behind the insurance. As the core asset to maintain the operation of the system, NXM tokens represent the rights and interests of community members, allowing users to purchase insurance, participate in claim assessment, conduct risk assessment through staking, and participate in community governance.
Users can use ETH to purchase NXM tokens and become risk assessors. It should be noted that the community members must pass KYC—that is, NXM tokens alone are not enough to become a member of Nexus Mutual, and they must pass KYC and be added to the whitelist before they can become risk assessors and participate in staking. For each specific insurance, NXM holders need to conduct a risk assessment and express their willingness to underwrite the insurance by staking the smart contract behind it.
It can be said that the staking mechanism is the core foundation of Nexus Mutual. The premise of a new insurance is that NXM holders are willing to stake it, and the amount of staking assets determines the purchase demand that a specific smart contract can meet.
Once community members become risk assessors, they can get benefits by participating in staking, which comes from the cost of purchasing insurance policies by users. The picture below shows the insurance fees generated by the smart contracts of various DeFi projects at present, and 50% of the insurance premium proceeds will be distributed to staking participants.
Of course, there are risks as well as benefits: community members’ participation in staking is also risky. Once an accident occurs due to the contract and the claim is passed, the mortgage tokens of the risk evaluator will also be destroyed first, so as to The insurer pays compensation. That is, they are both reward recipients and risk takers.
So far, Nexus Mutual has generated a total of 25 insurance claims cases, of which only 3 claims have been passed, and these 3 passed claims are all related to the bZx hacking attack. The largest claim amount is 30,400 US dollars, accounting for all Paid 90.7% of the claim. Regardless of whether it is rejected or passed, the consensus rate of each vote is as high as 99%.
Nexus Mutual founder Hugh Karp
Nexus Mutual was established in 2017 as a company limited by guarantee established in the UK and operates on a mutual insurance structure, which means that all insurance claims are at the discretion of the Board of Directors (ie Nexus Mutual members). This way, NXM holders have the right to decide whether a particular claim should be paid or not.
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Nexus Mutual founder Hugh Karp
Currently, Hugh Karp is the founder of Nexus Mutual, Karp has more than 15 years experience in the insurance industry, having served as CFO of UK Life Operations. Board member Graeme Thurgood has 17 years of experience leading co-insurance projects in the UK, and the board also includes Evan Van Ness, a member of the Ethereum community. The company has raised an undisclosed amount of funding from a string of blockchain VCs including Kenetic, KR1, MilliWatt and 1kx.
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Data speaks: DeFi insurance demand is strong
The data shows that as of now, Nexus Mutual's total effective insurance has grown to 9.1 million US dollars, which has increased by 69% compared with the beginning of July, and the highest peak once exceeded 9.27 million US dollars.
In terms of daily trading volume indicators, in the first half of 2020, the average daily trading volume of NXM tokens was only $11,175, and by July 2020, the average daily trading volume was $950,000.
A healthy growth signal is the relatively even distribution of insured funds across multiple different smart contracts, with 1Inch, Aave, Balance, Compound, Flexa, MakerDAO, and Synthetix each accounting for around 7-8% of the total insured funds .
To date, $104,000 has been paid out, a 73% increase since the beginning of the month.
It can be said that, in addition to the currency price and market value that are most sensitive to investors mentioned above, Nexus Mutual can be viewed from multiple indicators such as the total effective insurance, active policy allocation based on the fund pool, daily trading volume, and insurance premium growth. , can be said to have achieved significant growth. And this growth is accompanied by the rise of decentralized financial liquidity mining, which is largely driven by the demand for liquidity mining.
It is foreseeable that as more and more DeFi projects start liquidity mining, more and more funds are deposited on the DeFi protocol, and the risk of smart contracts undertaken by DeFi users is getting higher and higher. The growth of DeFi insurance products such as Nexus Mutual Will also be in the fast lane.
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Core Aspect: Joint Staking Mechanism
In terms of time, the data growth of Nexus Mutual's related indicators began in early July. In fact, this was due to the new Staking pledge system launched on July 3.
For Nexus Mutual, this is an important update of the token economic model and operating model. Among them, shortening the unlocking time of staking and increasing the return of smart contract pledgers can stimulate more staking funds.
Nexus Mutual has been using the "peer-to-contract" interaction mode before, that is to say, once there are enough NXM holders willing to participate in staking a smart contract, they will support the purchase of the contract. Insurance. The introduction of the joint staking mechanism allows NXM holders to provide insurance for *up to 10 different smart contracts* staking at the same time, which means that the original assets of the same value are magnified by 10 times and then staking is provided for underwriting, which improves the utilization rate of funds , which can promote members to underwrite more insurance policies and meet more insurance needs.https://app.nexusmutual.io/staking/new/add-contracts
In fact, it is the demand for DeFi insurance that drives the launch of the joint staking mechanism. Long before the launch of the joint staking mechanism, Nexus Mutual tweeted that it could no longer meet the underwriting demand from Compound and Balancer. In order to pay more potential claims, more ETH was needed to invest in the system.
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Pooled Staking can display the total amount of pledged assets denominated in token NXM in each insured contract, source:
However, the joint staking model means that under-collateralization may occur, but for the insurance business, under-collateralization does not lead to platform risks. Nexus Mutual stated that this is determined by its liquidity model, which means that the under-collateralization model is acceptable, and its guarantee amount can be guaranteed to be several times the total capital size without risk.
Specifically, because the MCR value representing Nexus Mutual's minimum capital requirement (Minimum Capital Requirement, minimum capital requirement) refers to the "minimum reserve capital size" required by the insurance pool, which is based on the total number of unresolved claims in the Nexus Mutual system, The value of each claim, the risk of each claim, and the correlation between claims) always maintain sufficient reserves to cover 99.5% of the claim liability in a given year, based on the outstanding The total number of claims, the value of each claim, the risk of each claim, and the correlation between claims change dynamically. Therefore, Nexus Mutual will always be able to cover all insurance claims unless multiple smart contracts fail at the same time.
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Why did the currency price increase?
It can be said that the popularity of liquidity mining has amplified the demand for DeFi insurance business. Nexus Mutual followed this opportunity and launched a joint Staking mechanism, which not only expanded the scale of the platform’s business, but also guided liquidity.
So fundamentally, is this NXM token price increase a short-term fluctuation or a long-term value capture? To explain this problem, it is necessary to start with the token model of NXM and understand what is the decisive factor for the value capture of the token.
In fact, the NXM token is unique in that it is priced using a bonding curve, meaning that the price of the token will grow with the adoption of the platform.
According to its token model formula, there are two main factors that determine the price of NXM tokens: Minimum Capital Requirement (MCR) and MCR%. Among them, Minimum Capital Requirement (MCR) refers to the "minimum reserve capital size" required by the insurance pool, which is generated based on the total number of outstanding claims, the value of each claim, the risk of each claim, and the correlation between claims , to ensure that 99.5% of the claim liabilities can be repaid in a specific year; MCR% is the ratio between the fund reserve actually held by the fund pool and the minimum capital requirement (MCR). When MCR% is greater than 1, it means that Mutual's actual holding of capital reserves (called "capital pool") is greater than the minimum capital requirement MCR, indicating that there are sufficient funds in the capital pool at this time.
This formula determines that the short-term price of NXM tokens will be driven by MCR%, while the long-term value depends on the steady growth of MCRETH.
Specifically, every single insurance purchase and claim will lead to a change in MCR%, which will directly affect the price of NXM tokens. Although it will also affect the change in the value of MCR, the magnitude of the change is obviously not as good as that of MCR% (ie The ratio between the amount of funds actually held by the fund pool and the minimum reserve requirement) is too large.
For example, when the amount of insurance purchases increases, the size of the capital pool reserve will increase. Although the MCR will also increase at this time, the growth rate will be smaller than that of the capital pool, which will lead to an increase in MCR%, thereby increasing the token price. Conversely, when a payment claim occurs, the capital pool reserve shrinks, but the MCR stays almost the same, which means that the MCR% drops, reducing the token price.
In the long run, the adoption of the platform becomes the key to the long-term value capture of the NXM token. Since each new insurance purchase will dynamically increase the minimum capital requirement (MCR, denominated in ETH) on a daily basis, specifically, when the MCR% is greater than 130%, the MCR will make a small adjustment of growth, increasing by 1% every day, Until the MCR% drops back to 130%. Therefore, the stable and continuous purchase of insurance leads to a steady increase in the value of MCRETH, which is the long-term driving force for the price growth of its native token NXM.
Notably, as demand for Nexus Mutual grew, Nexus Mutual CEO Hugh Karp initiated a proposal with the goal of rapidly expanding Nexus Mutual's capabilities. Specifically, the proposal named 83 proposes to reduce the MCR increase frequency from 1 day to 4 hours, which means that the value of 24-hour MCR can be increased up to 6 times, and finally reach the critical point of 100,000 ETH in MCR Then it will resume to once a day.
Hugh Karp said, "This proposal is actually sacrificing the potential for a large short-term price increase (that is, the MCR% growth rate will be smaller) for faster capital expansion, so that users' insurance needs can be met more quickly. Will likely reduce MCR% from current mid-140% to 130%. So there may be short-term sacrifices for greater medium-term gains.”
Therefore, there may be three reasons for the increase in the currency price: short-term insurance purchases lead to MCR% growth, NXM token price rises to generate buying pressure, or insurance purchase demand leads to continuous and stable ETH injection into the platform.
The data shows that the value of MCR% has indeed increased sharply in a short period of time. It peaked at 227% on July 12 and then fell back quickly. It is currently maintained at 185%, which means that the actual amount of funds held by the current fund pool and the minimum reserve The ratio between fund requirements is 185%, indicating that the funds in the fund pool are sufficient and solvent.
It is worth noting that although NXM tokens are not currently listed on any exchange, they have been forced to be listed by Bitker Exchange recently, causing a sudden influx of a large number of speculators to buy them one after another, resulting in a short-term skyrocketing token price. An important cause of bubbles.
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