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Chain News ChainNews (ID: chainnewscom)
, Record: Nick Tomaino, Founding Partner of Encrypted Venture Capital 1confirmation, Compiled by: Leo Young, Released with Authorization.
In the five years since Ethereum launched, on-chain capital flows have taken many forms: hundreds of millions of dollars have flowed to venture funds, such as the decentralized autonomous organization DAO in 2016; billions of dollars have flowed to crowdfunding, such as the ICO boom; billions more flowing into lending and exchange products like DeFi in 2020. Whether these products can go out of the field of encrypted assets and reach more audiences remains to be seen. But if you pay attention to the core value of the open global financial platform, the answer is self-evident.https://nexustracker.io/
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Insured smart contract insurance will increase nearly 240 times in 2020, source:
1confirmation has been a Nexus Mutual member since last year, and I have monthly calls with Hugh to discuss progress. Recently, the market's interest in Nexus Mutual has doubled, so this time I specially recorded the conference call so that people can understand our previous discussions, and can better understand the Nexus Mutual project and the decentralized insurance business.
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Hugh Karp, Founder, Nexus Mutual
Core point of view:
In the future, there will be incentives for project cold start "shield mining contract" (shield mining contract)
Institutional Investors Don’t Hate KYC
In the future, the pricing model and funding model will be fully on-chain, and gradually realize decentralized governance
In order to solve the transaction fee problem, the Layer 2 solution using Optimistic Rollup is preferred
Hugh Karp : Products will be more flexible, such as limited payouts for losses
The following is the full text of the conference call, with simple deletions.
We've spent the last six months focusing on supply-side funding, which is our main weakness. We are fortunate that the product is in great demand, both from hedge funds and from big players in the industry who need smart contract insurance. But our funds are not enough to cover all needs. So the past six months have been mainly about expanding funding. We've had a lot of success the last six weeks. Our funding scale has grown from $4,5 million to $60 million. We have developed rapidly in this regard, and at the same time, we have made some mechanism adjustments through governance proposals, and the inflow of funds has been smooth.
Hugh Karp : Yes.
Now we have accumulated capital. The more the better, of course we have enough money to start selling a lot of insurance. From here on out, we're going to turn our attention to the demand side. There are a lot of important things involved. One is to build a distribution method that makes buying insurance easy and convenient, ideally with one click on a third-party website. Now everyone can only buy insurance on the Nexus website, not through third parties. Insurance products generally work better at the point of sale. The other is to expand the product layout. We are working on new insurance products like stack risk that cover all risks associated with DeFi. For example, the failure of the oracle machine. This is probably the direction in which we are most strategically shifting right now.
Hugh Karp : Nick Tomaino: About three months ago, there were several contracts that reached the maximum limit, right? I remember it was 20% of the total sum insured.
Nick Tomaino: It seems that there is an existing contract that reaches the maximum sum assured, which is Yearn, right?
Hugh Karp : Yes.
right. Our current insured products include Synthetix, Compound, Balancer, and Aave. It was a bit of a surprise that the Curve policy also reached the maximum limit of the policy. Previously there were many cases where the limit was reached, now there are only a few. The insurance market has also grown significantly in recent years. good phenomenon.
Hugh Karp : Nick Tomaino: So, that means figuring out how to get more demand now, don't you think?
Yes.
Nick Tomaino: Interestingly, Yearn is the only contract that hit the limit. The willingness of this situation may vary. why do you think Yearn Total Locked Volume (TVL) is not the largest either. Why Makerdao, Compound, and Aave have not reached the limit even though their TVL is high?
I think it's more about risk awareness. Because Andre's products are tested after they are launched.
Hugh Karp : I know products are audited. Maker, Compound, and Balancer have all been tested in use and have undergone more traditional security audits. This awareness-level risk is a little bit different.
Another possibility is the pledge aspect. Now that we have a considerable amount of funds in our fund pool, we have to guarantee the interests of the pledgers and benefit them as much as possible. At the same time, it is also necessary to ensure that a lot of insurance is sold to ensure that the process is efficient and the returns are good. Personally, I think this aspect is very critical. To satisfy the pledgers and at the same time ensure that demand is generated, then the rewards for the pledgers will be there, and the funds will come in when needed. Pledgers put funds in and there is market demand, which forms a good positive feedback loop.
Nick Tomaino: You mentioned interesting market moves like Yearn. These are newer and more experimental, and the insurance demand for such products may be higher. Another recent example is Yam. But getting collateral for these contracts to price the policy is also a challenge. In the early days of Yearn, the team pledged to let the contract participants get a good price? Or auditor pledge? How do you think about getting collateral for new contracts to get a reasonable price? Because in our portfolio, we also talked yesterday with the upcoming launch team, they are happy to provide insurance for users. But the policy pricing will only be reasonable if someone pledges it. What do you think about this question?
Hugh Karp : New product cold starts are a problem. There are still big obstacles to solving this problem. Yam is a good example. Almost no one pledges, and no one buys insurance. After that, the project has loopholes. Insurance is useful at this time, but a cold start protocol is required.
A solution we are working on that may solve this problem is the "shield mining contract". The working principle is that you have a new agreement online, you have governance tokens, and you can reward certain tokens to the Nexus pledgers in the insurance contract. In this way, you will get rewards for staking, instead of staking there, because the insurance price is high and no one buys it. This can break through the barriers when going online. This example is important, we want to make sure the staking process works.
Nick Tomaino: Yeah, that makes sense. Will we know if any large contract audit firm holds NXM? Examples include well-known audit firms such as Open Zeppelin. Seems like this could be the solution. I also communicated with the project founder yesterday, and they are now conducting an audit. After the audit is completed, the auditor also holds NXM, pledges it, and obtains rewards. This should also be a cold start approach, getting insurance reasonably priced so that users can buy it. Has this approach been adopted?
Hugh Karp : I know there are auditors who hold tokens and are involved. But more individual auditors than corporations. I think this approach is very important. We really wanted to do a cold start and get the network working. I think there are some cultural barriers to overcome. For example, auditors often say, “Our job is to audit, not to invest our own money. We are a service provider and we don’t have a lot of money.” There are still small obstacles that we will overcome. We'll be digging deeper, and we've gotten great advice from the community.
For example, minting new NXM tokens, providing auditing companies based on past history, etc. They can then stake tokens to earn rewards, but the initial reward tokens can never be sold. This will work better.
Hugh Karp : Nick Tomaino: I like it that way. Has the proposal been published? Or is it just a community idea?
Is a community forum discussion idea. I think it's time to put it into practice.
Hugh Karp :Nick Tomaino: Yeah, I really like the idea. You explained that there is a reason for the yearn token to have a hard cap, and it would not make sense for other types of tokens to follow the same method. Every time I open the Nexus Tracker and see that new contracts are constantly being pledged and insured, I feel very excited. This is a good indicator for new projects. But some teams don't have NXM tokens, or don't think about insurance. If the new project has been audited and the code is reliable, it can be pledged by NXM and get a reasonable price. I think this is very important. Yearn is the team for staking. Do you know why a lot of NXM is staked as a new project?
I think it's because the project has been around for a while. Some team members pledge to obtain certain insurance. After that, the machine gun pool changed obviously, so the new product functions launched by Andre completely changed the way of using the entire platform, and then the insurance began to increase significantly.
Nick Tomaino: I think the idea of "shield mining" is very interesting. Although it seems that the new "yield farming" and many new things in DeFi are not so risk-averse. I'm curious, are many other programs also interested in insurance? From the perspective of the project side, this will lead users to be more careful. From the perspective of the project side, what are the advantages of this kind of "shield mining" by pledging NXM to earn governance tokens of the new protocol?
Hugh Karp : I think this will attract more institutions to provide liquidity. Several times, four or five institutional liquidity providers of DeFi protocols contacted me, expressing interest in the product, but they did not want to participate without insurance.
The truth is, insurance can help protocols cold-start liquidity. It also means that security is important to us. They also have the option to purchase insurance. But I prefer to provide collateral, because it is more in line with the interests. If the agreement buys insurance on behalf of the user, it means that if there is any problem, the project will be responsible instead of making the user responsible. This is also the idea we want to spread in the DeFi field. For me, it's better. We can help the cold start of the insurance market, but whether to buy or not is up to us.
Hugh Karp : Nick Tomaino: Do you need to change the Nexus smart contract to start "shield mining"? Can it be done now? When do you expect projects to use "shield mining"?
Yes, we already have smart contracts that are largely separate from the Nexus system, but read system data for key reward distribution. So that's a different contract. Currently under development. It's finished now and will be published soon. There will be many projects interested in this and will be linked to their project releases. We are ready.
Nick Tomaino: Very good. The other aspect that we've talked about before is that I'm not sure if delegation is going to matter in the short term. 1confirmation As a fund, we hold NXM, but do not have the technology or time to audit smart contracts, but we are interested in entrusting the pledge to trustworthy individuals or companies with technology and time. What is your opinion on delegated pledge? Will it be enabled in the short or long term? Will it make smart contract pricing more efficient? (Personally, I think entrusted pledge is very important to increase the effective insurance policy you mentioned above.)
I love the idea. It just won't happen in the short term. Others may be more important, but we will continue to pay attention.
Hugh Karp : Our current focus is on the staking reward structure. Still in the research stage, we will not prepay the rewards, but rewards with the staking time. If an insurance policy is added to the pledge pool after the transaction, the pledger will still have risks, but he may not be able to get a lot of rewards. This is a better coordination of interests.
We're really looking at staking methods, it's key for us. To ensure that it is in everyone's interest.
Nick Tomaino: We have invested since last year, and one risk is smart contract outsourcing. You plan to attract good engineers to the project. I think Roxanna (CTO) is an obvious candidate. What has the team been up to lately? What are your priorities for selection?
Hugh Karp : We have a great team, everyone is very engaged and there is a lot of work to do. The hardest thing right now is prioritization. Lots of ideas and great features waiting to be implemented. In a field where DeFi is changing so fast, it is especially important to focus on the most important things, and it takes time to develop smart contracts, which is a big challenge.
The team is developing well and continues to recruit. We are hiring Solidity developers. There is also the director of business development, who is mainly responsible for business integration, B2B sales, this position is very important to us.
Nick Tomaino: I know B2B is your long-term focus, and you've been doing it. So you're going to get BD to do the work?
yes. Lead integration work, work with projects that want to participate in "shield mining", and hedge fund-like database sales.
Hugh Karp :Another aspect that can be greatly improved is the creation of customized products . For example, Nexus can cooperate with Maker, and if there is a problem, new coins will be minted to restructure the system funds. Nexus can also do stack reinsurance, accepting certain risks. Having governance tokens participating in this model is more likely to bring value.
You also have the possibility to sell pay-at-the-floor insurance. We can work with other protocols to protect against black swan risks. We do not insure all rights. We can take on most of that as the business grows, and that's what BD does.
Nick Tomaino: The capital pool is getting bigger, there seems to be a lot of things to do, I think we need to find the best direction. There are plenty of people outside of the crypto asset space who are familiar with traditional insurance. The profits of traditional companies come from float (float) equity, which is to invest funds from the pool of funds. Now the fund pool only has ETH, I think ETH is a good investment at present. How do you plan to manage the capital pool? It is to use the funds in the fund pool, whether it is ETH or other tokens, to do other things.
We will definitely do it. The current plan is to build an ongoing mixed-type strategy where we'll put 5% of our assets here, 10% of our assets there... constantly balancing the funds. When we get to a certain scale, it's important to have reasonable assets to back liabilities.
If we have many ETH policies, we will hold ETH priced assets. Hold USD assets if there are many Dai policies. It is necessary to ensure that the system is effective and the income is guaranteed. This is a matter of development prioritization and timing.
Hugh Karp :What needs to be careful is that the assets held on the chain must be ERC20. We don't want to take too much risk if we invest in insured tokens. Because if we pay, we not only have to pay compensation but also lose assets, which is bad. We have to choose less risky assets.
Currently investable assets are relatively small, so these features have not been rolled out yet. But it is indeed planned.
Hugh Karp : Nick Tomaino: At present, many people have high hopes for Nexus and have won the support of many DeFi insiders. But the most criticized is the KYC identity verification. Some communities have proposed to use "wNXM" without KYC. How do you think about the future of decentralization? Our view is that projects are more effective than centralized ones, can act more quickly, and coordinate faster. But decentralization needs to be considered in the long run. The reason we want to work with you is because you have this vision. But after all, how is decentralization doing so far? What are your short-term plans?
There are three things we can do in terms of decentralization. First, the pricing model is completely on-chain. It is still in product iteration and needs to be debugged and so on. Off-chain will be easier. After the contract is confirmed and the model is satisfied, we will send it to the chain. I'm on my way to this goal.
Nick Tomaino: Can you talk about what's going on with the current off-chain pricing?
The basic principle is that it is necessary to call the off-chain API to obtain a quotation, and then provide signature information to connect with the on-chain transaction. There is no way to buy insurance without off-chain quotes from the quote engine.
In the future, it can be done simply by calling smart contracts on the chain. We are currently just adjusting the model, and it is convenient to operate off-chain. It's almost over.
The second is the funding model. Funding models are large and complex. Now the off-chain needs to run once a day to check how many insurance policies we have and how much financial support we need. All that needs to be done now is to go on-chain. That is, the insurance policy requires a certain percentage of funds. What we're trying to do is run the funding model independently, and let anyone run it independently.
If there is a deviation from the information on the chain, we will update it through the governance plan. We know how to do it, it's only a matter of time.
The third is the degree of decentralization. This is a bit of a challenge, but there are already some ideas. The most difficult thing is community governance. There are two aspects to address: one is the penalty for claim assessment. This is currently a centralized method, and it is hoped that more groups can join in a more decentralized way. The second is to control associated risks. If there are two risks that are highly correlated, we don't want to provide a criterion for the top 20% of the pool, because if one goes down, the other will go down as well. We want to connect the two, and we can only let some teams check the associated risks and insurance limits, and manage them in the long run.
Hugh Karp : We need to find good solutions. We already have some ideas. At that time, if you are willing to take more risks, you will not be restricted by the law. In that case, a completely decentralized DAO is required, and KYC is no longer required.
I personally don't like KYC either, but I think it's necessary. Interestingly, many of our users are institutions, and they like KYC because it gives them peace of mind to use the protocol. That is, I know who the opponent is, which means that they have passed the compliance review. This approach does not necessarily conform to the entire core philosophy of DeFi. I think we will achieve decentralization. But actually some of our clients love it, not everyone hates it like you might think.
Hugh Karp : Nick Tomaino: The institutional side is, but they are a minority. Currently 95% of policies are purchased by retail investors, right? Most of the time the user buys the insurance themselves, not the agency buying it on the user's behalf, right?
I'm talking about institutions buying insurance for themselves, they are more willing to participate.
Hugh Karp :Nick Tomaino: But whether institutions are buying for themselves or buying on behalf of users, their policies are only a small share of the total volume, right?
In fact, institutions currently hold a large number of insurance policies. Large-amount insurance policies are basically purchased by hedge funds and professional "income cultivators".
Hugh Karp : Nick Tomaino: About what percentage?
I haven't counted yet, but it's probably closer to 50% or 60%.
Nick Tomaino: Very good. Maybe we can talk about something other than the Nexus for a while. At present, the Ethereum fee is a hot spot. What do you think of Ethereum’s handling fee issue? How will this affect DeFi and the Nexus in the short or long term? Are you worried about this problem now?
Fees are definitely an issue. I think it will be an obstacle for us, but it is not a major problem at the moment because we have a high-value transaction in the agreement. But the high fees are not sustainable for us in the long run.
Hugh Karp : Our current strategy is to wait for easy migration to Layer 2. Let the other priority projects try first, and we will follow when there are no problems. That way we can focus on other aspects.
Fees affect transactions. Means you have to spend more money to deploy the application. It also favors more specialized users at the expense of smaller ones. Yearn pools This kind of thing is really helpful, because it will let everyone share the gas fee evenly, which is a cool idea. We are also researching now to find the best solution.
Nick Tomaino: Are you currently not considering other public chains?
Hugh Karp : It is too early to decide. We need pools of capital to come together. I don't know if there is a good cross-chain method, I'm not technical. We may turn to a Layer 2 solution, and I think the Optimistic Rollup solution may be used.
Other schemes are suitable for large number of small transactions. We don't have many transactions like this, we only need one transaction update on chain. This doesn't save us much money, so Optimistic Rollup is enough.
Nick Tomaino: What do you think about DeFi? I think the last few months have been crazy, and Nexus has only paid one claim at the moment, right?
Hugh Karp : We made a claim. It is multiple claims for one accident. That's the bZx hack. The Opyn hack may also be paid out, and users have yet to file a claim. I think we'll pay.
I also think it's important to review the claims mechanism. We have some ideas to make claims go more smoothly.
Hugh Karp : Nick Tomaino: If DeFi continues the current development trend, there must be many risks. For claims, are there any improvements? Some of the claims are not initiated yet, right?
yes. This is planned in our roadmap. This is critical for product development. Once it's in place, we can fine-tune the product more dexterously.
Nick Tomaino: What changes need to be made? Is a governance vote required? Does the product need to be changed?
Hugh Karp : Basically we have to develop smart contract processing. It is currently a yes or no vote.
What we need is not just a "yes" or "no" vote, but a proportional vote. Vote half, pay half, vote one-third, pay one-third, and so on. There must be a way to calculate the average payout based on the votes. That's what we do. Once in place, product development becomes flexible and more likely to continue to evolve. This is the key. Just like the penalty insurance of ETH 2.0, someone wants to insure 32 ETH, but we don't necessarily have to pay 32 ETH in full. In the event of punishment, only the part of the loss will be paid. This would result in a more sustainable product and a lower price, but it would take some important changes to make it happen.
