Editor's Note: This article comes fromBlue Fox Notes (ID: lanhubiji), reprinted by Odaily with authorization.
Blue Fox Notes (ID: lanhubiji)
Blue Fox Notes (ID: lanhubiji)
, reprinted by Odaily with authorization.
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purchase insurance
Nexus Mutual currently mainly provides insurance services for the DeFi field, and provides community mutual assistance insurance against possible risks of smart contract vulnerabilities in DeFi protocols. It is the blockchain version of community mutual insurance. So, specifically, what is Nexus Mutual all about?
It mainly consists of three parts: buying insurance, underwriting, and claiming.
purchase insurance
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To purchase smart contract insurance for DeFi protocols, you must first be a member of the Nexus Mutual community. To become a community member, you need to pay a fee of 0.002ETH. After becoming a member, you can purchase insurance for the DeFi protocol. Also, it is important to note that there are 17 countries where users cannot become members due to compliance and regulatory reasons.
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As can be seen from the figure above, the premiums for different agreements are different. For the same number of days and amount of insurance, Bancor’s premium is more expensive than Aave’s.
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To purchase DeFi insurance, community members must first choose a specific protocol, and then choose the number of days of insurance and the amount of insurance. At present, the optional period of insurance is 30 days to 365 days, and users can set it freely; the insurance assets can choose ETH or DAI, and the amount has the maximum underwriting capacity according to the amount in the underwriting pool. For example, as of the writing of Blue Fox Notes, the maximum ETH that can be insured by Compound V2 is 14,409 ETH, and the insurable DAI is 5,602,438.
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* underwriting
On Nexus Mutual, DeFi users purchased insurance, so where did the funds for insurance coverage come from? A pool of funds provided by users from the Nexus Mutual community. Like users who purchase insurance, to participate in underwriting, users must first become members.
Why are Nexus Mutual users willing to cover? Because you can get the benefits of underwriting. At present, the accumulated premiums are more than 774ETH, worth more than 300,000 US dollars, among which the Curve stable currency pool has the most premiums.
Users will first choose a smart contract that they think is safe, and then decide to deposit the corresponding amount of tokens to earn premiums. Users can adjust their coverage at any time. At present, several DeFi protocols with the largest amount of tokens pledged by users: Compound V2, Curve All Pools, Synthetix, and Aave have more than 300 pledgers, and more than 240,000 pledged NXM. According to the current price, these protocols Smart contract underwriting capital pools of more than $10 million.
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(The DeFi agreements with the largest underwriting pools on Nexus Mutual all exceed US$10 million)
Community users deposit NXM in Nexus Mutual's underwriting pool. So, how do users get NXM tokens? To obtain NXM, users need to use ETH to purchase after becoming a member. That is to say, it is equivalent to depositing ETH into the fund pool to obtain NXM. Therefore, NXM value support is also related to the rise and fall of ETH value.
If a risk event occurs in a smart contract of a DeFi protocol, community users who purchase insurance for the protocol can file an insurance claim. Insurance claims are assessed by claims assessors. To become a claims appraiser also requires staking NXM. Claims assessors will also be rewarded accordingly.
There are now 26 claims filed, 3 approved and 23 rejected. Among them, the successful claims were all compensation events in February 2020 due to a loophole in the bZx smart contract. The payout came to $34,304.16.
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(Achieved 26 claims on Nexus Mutual, 3 successfully passed)
NXM Value Capture
In essence, Nexus Mutual is also a liquidity pool model. Community members provide ETH funds to Nexus Mutual, and users get NXM tokens by depositing ETH. Partially similar to the Uniswap liquidity pool model, users will receive liquidity share tokens after providing liquidity. NXM is equivalent to the liquidity share token of the fund pool in Nexus Mutual, just as Uniswap's liquidity providers can obtain transaction fee income, and NXM holders also have the opportunity to capture premium income.
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From the price calculation formula of NXM, it can be seen that MCR% has the greatest impact on the short-term price of NXM, and the capture of its long-term value mainly depends on MCR, which is the minimum capital requirement. The increase in MCR (Minimum Capital Requirement) mainly depends on the increase in the amount of insurance purchased. From this perspective, the value of NXM mainly depends on the fundamentals of the scale of insurance demand. If DeFi as a whole continues to rise, so will the demand for smart contract insurance.
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In the short term, MCR% has a more significant impact on the price of NXM. In August, MCR% had two high points, one was on August 11, reaching 165.0339%, and the other was on August 21, reaching as high as 170.6783%. These are also two small high points in August. The impact of MCR% on the price of NXM is obvious. As shown below:
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Because MCR% is related to the growth of the underwriting fund pool and MCR. Then, the rise or fall of MCR% is related to the relative growth rate of the underwriting fund pool and MCR. When the MCR rises faster than the growth of the underwriting fund pool, the MCR% will drop, which will lead to a decline in the price of NXM in the short term. Therefore, when we pay attention to the price of NXM, we should observe the changes of MCR and MCR%.
At the time of writing Blue Fox Notes, the MCR% was 161.62%. Since MCR increases by 1% every four hours (instead of increasing by 1% every 24 hours before), unless the underwriting fund pool grows faster, otherwise this will lead to MCR% Decline. A decrease in MCR% will lead to a decrease in the price of NXM. Therefore, friends who invest in NXM cannot fully follow the logic of traditional token demand for investment, because the decline in MCR% will lead to a decline in the price of NXM in the short term.
Overall, the support for the price increase of NXM mainly comes from the fundamentals of its business. If the amount of insurance purchased is rising, then MCR is also rising. An increase in MCR means an increase in the price of NXM. Of course, this also means that if the MCR falls, its price will also fall. From this perspective, investing in NXM, from a long-term perspective, mainly depends on the scale of its purchase insurance funds, that is, the demand for its business itself, and at the same time pays attention to the growth of its underwriting capital pool.
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In addition, the issue of the competitive landscape must also be considered. If the Nexus Mutual insurance business is taken away by a new competitor, the price of NXM will also drop. Therefore, an important consideration for long-term investment in NXM is whether you are optimistic about the competitiveness of its insurance business. From this perspective, NXM also has certain uncertainties. If its insurance business is preempted by newcomers such as YFI, it may have an impact on its MCR and MCR%.
The value of NXM is naturally related to ETH
Since MCR is denominated in ETH, to a certain extent, owning NXM is equivalent to owning exposure to ETH. Let's take a look at the volatility of NXM USD pricing and ETH pricing, and there is a large correlation between the two.
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(USD price and ETH price trend of NXM)
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*Nexus Mutual has first-mover advantage
Nexus Mutual's current strength lies in its footprint. It is one of the first projects to explore DeFi insurance. When we mention the track of DeFi insurance, Nexus Mutual is a project that cannot be ignored and cannot be bypassed.
It can be seen from the figure below that ETH in its underwriting fund pool has grown very rapidly in the past month.
(Nexus Mutual's asset pool is growing rapidly)
The figure below shows that the overall pledged NXM on Nexus Mutual has grown rapidly, exceeding 3.8 million, accounting for about 53% of the total. Since its pledge unlock period reaches 90 days, it shows that many users are optimistic about it.
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(NXM pledged on Nexus Mutual is growing rapidly)
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*The pool of underwriting funds is not an unbreakable moat
From the above description, from a business perspective, we can see that Nexus Mutual itself is mainly composed of three aspects: underwriting, insurance purchase, and claims.
First of all, the fund pool provided by the insurer is the basis for supporting the entire Nexus Mutual insurance. DeFi insurance services cannot be provided without the pool of funds provided by the underwriter. Therefore, the primary competitiveness of DeFi insurance is the size of the funds in its underwriting pool. The core of attracting funds lies in its rate of return.
Of course, this is not just a problem with Nexus Mutual, the entire DeFi insurance field will have the same problem. So, how to increase the income of the insurer? This becomes the key to DeFi insurance. This one may require creative solutions. Through liquidity mining or other modes?
In addition, users who purchase insurance will also reduce their willingness to purchase if the premium is too high. How to achieve a balance between the two is also an important consideration.
*The weakness of Nexus Mutual
At present, if you want to purchase insurance and underwriting on Nexus Mutual, you must first be a member of its community, and KYC is required to become a member. Due to compliance and regulatory reasons, users from 17 countries around the world are currently unable to become members, including India, Russia, China, Japan, Mexico, Iran and other countries.
