Nexus Mutual

Nexus Mutual is that insurance provider, offering users a way to protect or “cover” some of their activities in the DeFi ecosystem. You would call it insurance, but the team doesn’t call it that, primarily for legal reasons. And it also has some key differences from what we typically think of as insurance.

In traditional insurance the providers have an incentive to make a profit above all else. Without profits the insurance company would go out of business. So the need to make a profit often supersedes the needs of the policy holders. Nexus Mutual hopes to use blockchain technology to change that for-profit focus and make insurance better for everyone.

Insurance has become a critical part of modern life, but it could stand for some improvement to make it more useful to its users rather than the huge corporations profiting from insurance products. Naturally as a very new project and product Nexus Mutual has some way to go before it can disrupt the insurance industry, but its blockchain-based offering is working to do just that.

The name of the project comes from the insurance industry, where a “mutual” company is one that is owned by the policyholders. That is also true for Nexus Mutual. The policyholders, or in this case those who hold the native NXM token, are the owners of the blockchain and the ones who make decisions regarding payouts and governance of the blockchain.

It’s probably worth noting that unlike traditional mutual firms, Nexus Mutual is limited in the insurance it offers. So, you can’t use Nexus Mutual to insure yourself or your property against natural disasters, car accidents, health issues, or death. The team has hinted that these could become possible in the future, but right now Nexus Mutual is used only to insure against smart contract failures.

This is a good use case, because we’ve seen over the years how vulnerable blockchain assets and smart contracts can be. Whether from active attacks stealing coins, malfunctioning code in a wallet or other dApp, or simple personal errors it is too easy to lose coins permanently. And with DeFi growing in popularity smart contract vulnerabilities have become increasingly concerning.

Nexus Mutual is taking on the issue of smart contract vulnerability. Its Smart Contract Cover provides users with a level of protection that would help to avoid the types of losses such as the DAO hack in 2016. Not only is the project quite clear about what they can cover, they are also quite clear in defining when a payout would be made.

This makes it very important for users of Nexus Mutual to closely review the terms and conditions of any coverage they purchase. Nexus Mutual coverage does not payout in the event of network congestion causing a problem. The insurance does not cover entities that are external to the contract such as miners and oracles. And it will not payout if funds are lost as the result of a phishing attack.

And even though the conditions for payouts are clearly defined, ultimately the final word on issuing a payout in response to a claim comes from the members of the mutual.

Nexus Mutual currently offers one product called Smart Contract Cover. According to the protocol’s FAQ document “Smart Contract Cover is intended to provide protection against material loss of value resulting from “unintended uses” of smart contact code.” This covers instances where any security vulnerability in code has been exploited and funds have become irretrievable. Unfortunately at this time that does not include exchange hacks, and it also doesn’t yet include the loss of personal keys through a users’ own negligence.

In the Nexus Mutual scheme each Smart Contract Cover purchased has a fixed amount that’s called the cover amount. In essence this is the payout amount should a claim be filed and approved through the claims assessment process. This means that the payout is not necessarily equal to the loss. Instead it is equal to the cover amount, which is determined at the time the coverage is purchased, and is based on the size of the stake.

Buying coverage can be done from the Nexus Mutual website and is a simple process.

1. Select “Get a Quote” from the website.
2. Select “Buy Cover” from the dashboard.
3. Input the smart contract address you want to purchase a cover for.
4. Enter the amount in Dai (USD) or Ether you would like as the fixed cover amount.
5. Input the length of time you wish the coverage to last.

After going through these steps, which only takes a few minutes, the system will generate a quote for you and you can choose to purchase coverage. If you do choose to purchase coverage you will also need to become a member of Nexus Mutual at this point, and the system will prompt you to do just that.

Members fulfill several roles within the Nexus Mutual ecosystem. One of the primary roles filled is that of assessing the risk level of each smart contract covered. And whenever a claim is filed they are also responsible for voting on the legitimacy of the claims and deciding if a payout is made or not.

It is possible for members to stake their tokens with various smart contracts based on how secure they believe that contract is. So, the more NXM that is staked on a smart contract, the cheaper it becomes to purchase cover for that contract since the large amount being staked indicates that the smart contract is considered to be quite safe by the mutual members. Conversely a smart contract with little staked indicates that the community thinks there’s a large risk in that contract, and purchasing cover in more expensive as a result.

In NXM staking the user is at risk of losing part of their stake if the smart contract is hacked and there is a claim made. This means users who stake in NXM need to have a good deal of knowledge about the smart contracts they are staking, because they are putting their funds at risk when staking. In this way NXM staking is very much active staking rather than passive staking because there is always a risk of the users losing a portion of their stake if a claim is made on the smart contract staked.

In addition, when a user is one of the first to stake a smart contract they also earn rewards for signaling to other members that the smart contract is safe.

Any time a claim is made on a smart contract all the NXM holders are asked to vote on whether the claim is valid and a payout should be made. When voting with the consensus users earn greater rewards, but when voting against the consensus the user has their tokens locked for a period of time. This is to discourage users from voting simply for their own benefit.

It is even possible to have tokens destroyed when attempting to fulfill a claim that is clearly outside the definition of coverage.

Those who attempt to fulfill claims that clearly fall outside of the definition of coverage may even have their tokens destroyed.

As we said at the start of this piece, Nexus Mutual is a unique project in what is a potentially huge market. For the time being it is tightly focused on cover for smart contracts, and the team seems to have found the traction needed to keep growing. The future is looking quite bright.

The first challenge to the project came and went without a hitch as they paid out roughly $31,000 in claims following the February 2020 hack on bZx. That was enough to create a feeling of legitimacy around the project, leading to significant growth in 2020, and a massive rise in the price of the NXM token.

And yet many obstacles remain for Nexus Mutual and its team. Naturally the first issue that needs to be addressed is how to expand coverage and in what direction. Covering smart contract vulnerabilities is an excellent niche, but it’s only the tip of the iceberg in the nascent cryptocurrency world.

And project founder Karp has already mentioned the possibility of including coverage for all the typical things like natural disasters and injuries. That’s obviously a large step in the future, but it is also encouraging for the long-term and highlights just how huge Nexus Mutual could grow to become.

The only potential change we might suggest now is doing away with the advisory board, or finding a way to decentralize it.

Otherwise Nexus Mutual seems to be a strong project in an uncrowded blockchain niche. The team has made good progress already, and there is a great deal of future potential as well, presuming that Nexus Mutual remains ahead of any potential competitors.