Nexus Mutual: A Decentralized Alternative to Insurance
As a new paradigm for executing agreements, smart contracts must function without a hitch — so why not insure them? Nexus Mutual’s Smart Contract Cover is already becoming an important tool in DeFi.
Updated February 2, 2021 • 4 min read
Nexus Mutual is an Ethereum-based platform that creates insurance products with community-driven management and financials. Nexus Mutual’s first product is Smart Contract Cover, which protects against smart contract vulnerabilities for smart contracts used on various popular decentralized finance (DeFi) platforms. The company is structured as a decentralized autonomous organization (DAO) and is wholly owned by its members. The NXM token maintains membership, furnishes rewards, and holds governance voting rights on the Nexus Mutual network.
Nexus Mutual is a blockchain-based platform that offers decentralized insurance products. The $4.3 trillion dollar insurance industry is dominated by complex conglomerates with highly entrenched models and processes driven by premiums, profit margins, and reinvestment. The Nexus Mutual blockchain is disrupting the traditional insurance model, rewiring stakeholder incentives to proactively assess risk while collectivizing financials.
Nexus Mutual is registered in the United Kingdom as a limited by guarantee business, which is a designation usually used by nonprofits, and is structured and governed as an Ethereum-based decentralized autonomous organization (DAO) wholly owned by its members. The Nexus Mutual DAO holds members’ funds in a risk sharing pool, and uses those funds to pay out claims. Nexus Mutual calls on its community to assess and accept coverage proposals, and to fund the pools that ensure coverage — all with added rewards built in through the NXM token.
Nexus Mutual initially launched with one type of coverage: Smart Contract Cover, which provides protection against smart contract bugs and hacks. As smart contracts are an emerging technology written in Solidity, a new coding language, ensuring watertight code without any errors or risk vectors is already difficult enough. Add that millions and sometimes billions of dollars in value is executed through these smart contracts, and managing risk becomes an immense and urgent challenge. Nexus Mutual uses a system of democratized risk assessment and pooled claim staking to protect against financial loss.
Anyone can become a Nexus Mutual member, which allows them to purchase Nexus Mutual’s native token, NXM. NXM can then be used to purchase insurance coverage and to participate in Nexus Mutual’s governance process. NXM’s governance protocol includes the ability to assess the risks of covering particular smart contracts by voting on whether to accept claims, making NXM a multi-faceted utility token that fuels the NXM ecosystem.
NXM can only be purchased on the Nexus Mutual platform, and is not available on exchanges. Additionally, NXM tokens can only be transferred between Nexus Mutual members. The price of NXM changes in accordance with how much capital the mutual holds, compared to the amount of capital it needs to fulfill its existing liability across claims. The price of NXM increases when the mutual is sufficiently capitalized, and decreases when it requires more funds.
Purchasing Coverage on Nexus Mutual
To purchase Smart Contract Cover you must:
Specify the smart contract address for which you would like coverage
Specify the amount, time period, and currency (ETH or DAI) for your coverage
Generate a quote
Purchase coverage by authorizing a transaction via your Metamask wallet and pay with NXM, ETH, or DAI
Pay a new member fee of 0.002 ETH and undergo a know-your-customer (KYC) and anti-money laundering (AML) screening
The price of coverage is determined by Nexus Mutual members called Risk Assessors, who typically have expertise in smart contract auditing. If Risk Assessors judge a smart contract to be safe, coverage can be initiated. Risk Assessors stake NXM towards the coverage pool. These stakes are used to pay for claims in the case of a breach, so Risk Assessors are incentivized to only stake on contracts that they trust. Once staked, Risk Assessors’ tokens are locked up for 90 days. The final cost of the coverage is determined by a specific formula that uses inputs like the amount of coverage requested, the time period, and amount of NXM staked by Risk Assessors. Risk Assessors are then rewarded with a percentage of the fee paid by the entity requesting coverage.
All Ethereum smart contract addresses can be covered by Nexus Mutual provided that there is a sufficient amount of NXM staked to cover claim liability. Examples of smart contracts covered in 2020 include many leading decentralized finance platforms like Compound, Uniswap, Maker, Curve, and Aave. Coverage can last from a day to years, and the insurance staked can range from 1 ETH to 50000 DAI. The result is a dynamic marketplace of community stakeholders working towards both ensuring perfect code and mitigating losses in the face of a financial loss or breakdown.
Blockchain and Insurance: Governance on Nexus Mutual
Nexus Mutual is governed by its members and an advisory board through its DAO. The advisory board is a group of five members that includes company founders alongside industry experts in smart contract security, insurance and mutuals, as well as legal and regulatory matters. Any member can be voted into the advisory board to replace a board member.
As a member, you can suggest changes to the Nexus Mutual blockchain protocol by submitting a proposal through its governance platform. After you submit your proposal, the advisory board will verify your proposal, suggest an outcome for it, and determine the total NXM rewards to be shared by members who participate in voting. Voting itself is also exacted through NXM. The weight of your vote is proportional to the amount of NXM that you stake for voting. However, rewards are distributed between the number of members who vote, rather than proportional to the number of tokens which vote. This mechanism helps to ensure a more equitable reward structure regardless of NXM holdings.
While blockchain for insurance has been steadily emerging as a sector, Nexus Mutual is the first iteration of blockchain tech and decentralized models being applied in insurance to create a new product specifically for blockchain technology itself. Its Smart Contract Cover is already an essential tool in the decentralized finance (DeFi) ecosystem as the disruptive, risk-forward sector leaps from innovation to innovation. Future Nexus Mutual insurance products will include coverage for crypto wallets, as well as more familiar products like earthquake coverage.
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