Nexus Mutual is a blockchain-based, protocol-enabled mutual insurance fund operating on Ethereum.
Nexus Mutual is a blockchain-based, protocol-enabled mutual insurance fund operating on Ethereum. As a mutual insurance group, Nexus is owned entirely by its members, who buy into the fund by purchasing NXM tokens. Members collectively govern the ecosystem and adjudicate claims, for which the ETH or DAI used to purchase NXM tokens pay. Initially, the project will focus on insuring smart contracts, providing authors and users coverage in the event of a security breach or other form of technical malfunction. Notable Ethereum smart contracts which have been covered by Nexus Mutual policies include MakerDAO, Compound, Dharma and Uniswap. Nexus Mutual’s development and launch was led by Hugh Karp, former Chief Financial Officer at Munich Re, a German insurance provider.
Nexus Mutual intends to revive the community-based insurance models superseded by the corporate-based insurance of present day; it operates as a discretionary mutual, which merely arranges insurance policies between its members, rather than an insurance provider. As such, Nexus functions as a cooperative wherein participation from members is central to each of its core functions. To obtain membership, one purchases NXM tokens, which confer ownership in the fund as well as rights to participate in claims assessment, risk assessment and governance. NXM prices are dynamically adjusted according to a continuous token model in order to meet minimum capital requirements. At a high level, when the value of pooled funds falls below a predetermined minimum capital requirement ratio, the price of NXM falls to incentivize further investment, and vice versa. The minimum capital requirement level is determined by a capital model based on the European Insurance and Occupational Pensions Authority’s Solvency II standards.
With plans to insure additional entities, Nexus Mutual launched with coverage available only for Ethereum smart contracts. The project insures against “unintended code usage,” and coverage may be purchased by individual users of a contract and/or authors of a contract, who may then use claims payouts to refund users, for example. For instance, the first coverage product purchased by a smart contract user from Nexus Mutual was 1,000 DAI worth of cover on the Nuo contract for 90 days at a cost 6.41 DAI. Notably, coverage extends only to security exploits—i.e. hacks—and does not cover losses resulting from unfavorable market conditions or loss of private keys. To purchase coverage, one sends NXM to a Nexus smart contract, wherein 90% of the tokens are burned and the remaining 10% are held until 35 days after the coverage period, at which point they are returned to the purchaser. The price of coverage is determined using a decentralized risk assessment model, in which individual members estimate risk and an appropriate price thereof based on an exact formula considering factors including: monetary level of coverage required, duration of coverage, amount of time the contract has been live, complexity of contract code, and value held in contract over time. Estimates are aggregated and a final coverage price is determined and presented to the potential purchaser. Assessors stake NXM against a particular policy to participate and receive additional NXM for proper execution of duties, though dishonest actors may see their stakes slashed.
Claim assessment occurs in a similar manner to risk assessment: NXM stakers vote on the appropriate ruling on a claim, receiving rewards for voting in alignment with the consensus response and risking slashing for dishonest or negligent behavior. However, as smart contract coverage was chosen as the project’s initial product in part for the sake of simplicity, claim assessors are able to vote on these outcomes in a binary manner. Due to the immense potential profitability from corruption inherent in insurance matters, Nexus Mutual requires the total amount of NXM staked by claim assessors to be five times greater than the potential payout in the event the claim is approved and mandates a twelve hour waiting period between participation in claim assessments. If the former condition is not met, the claim proceeds to an all-member vote. In the event a claim is approved, the predetermined amount of ETH or DAI is sent to a prespecified address belonging to the policyholder. Unlike risk assessors, claim assessor stake NXM not only against their ability to perform duties, but the outcome of the policy as well. Stakers against a coverage policy resulting in a successful claim will see their stake burnt up to the amount of the claim, effectively incentivizing stakers to back only the policies they believe have an acceptable risk profile. As this method serves as a market-based measure of the legitimacy and risk of a given coverage request, the price of coverage may be reduced in accordance with the number of NXM staked against it.
Governance of the Nexus Mutual ecosystem occurs in a semi-decentralized manner. An advisory board, chosen by developers and consisting of five Nexus Mutual founders and members of varying expertise, oversees “interaction with the non-blockchain world, as well as govern some of the more extreme scenarios” that may occur. Standard governance proposals may be raised by any member and sent to the advisory board for approval. Once approved, the proposal is taken to a vote by all NXM holders and is instituted if the vote is affirmative. Members’ voting power is equal to one plus the number of NXM tokens they hold, capped at 5% per individual member. As a legally-designated discretionary mutual, Nexus fully KYC’s each member and utilizes an identity primitive to enforce voting procedures.
Legally, Nexus Mutual is a company limited by guarantee and registered in England and Wales. Members, whose liability is limited to £1, must register and abide by the company’s Articles of Association. As Nexus is a discretionary mutual, rather than an insurance provider, it is not subject to the same regulations as companies such as State Farm or Nationwide. Per UK law, a discretionary mutual can provide services to customers in any other country willing to permit it, including the United States.
NXM tokens are ERC-20-compliant assets existing on the Ethereum blockchain. However, unlike many ERC-20 tokens, NXM are not freely-tradable on any exchanges. NXM may only be bought and sold at specified prices using the Uniswap protocol, with prices being adjusted when the level of pooled capital deviates from minimum capital requirements. To discourage speculation, redemption prices are automatically set 2.5% lower than the current purchase price. Prices are set via a bonding curve based on both the current level of pooled ETH and DAI and the total potential capital required to pay for current covers written, with greater influence held by the former factor. The token confers risk assessment, claim assessment and governance rights. The project may begin to invest a portion of the ETH held in the pool in other ERC-20 tokens in the future, with the goal of generating capital gains it can then distribute pro rata to NXM token holders. An unspecified portion of the initial NXM supply was allocated to developers and founders, and inflation of NXM occurs through risk and claim assessment rewards.