Delphi Digital: In-depth analysis of the top player in DeFi insurance Nexus Mutual

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The rise in DeFi lock-up assets will stimulate demand for insurance products, and Nexus Mutual will play an important role as a leader in decentralized insurance.

Written by: Medio Demarco and Yan Liberman at Delphi Digital
This report was published in July 2020, and Lianwen was authorized to publish the Chinese version of the report

Nexus can be seen as a proxy game for DeFi growth, complementing the existing ecosystem, rather than a competitor. As the total lock-up value TVL in the industry soars, the demand for Nexus products (ie smart contract insurance) will only become more and more important. Nexus is in a leading position in this product field, leaving a handful of competitors far behind.

As a risk-sharing pool, the Nexus model has a strong inherent network effect. The method of accumulating assets is also beneficial to the liquidity pool, because it can reduce the slippage of traders, and the risk-sharing pool improves with the increase in capital size, so that more insurance can be underwritten at a lower cost.

NXM represents claims against the common asset pool, denominated in ETH. Therefore, holding NXM essentially provides the transfer risk of ETH. If Nexus remains stable but the price of ETH rises, the dollar-denominated price of NXM will also rise proportionally. Even if ETH depreciates, as long as the capital pool continues to grow, the joint curve can effectively act as a built-in price hedge. Nexus also provides a way for ETH holders to earn ETH while waiting for Ethereum to switch to the equity consensus PoS mechanism. They can maintain all ETH exposure while owning a token that gives them the right to earn more ETH. In the tide of liquid mining, because tokens are distributed, it is a competitive game that compares bad to each other. In Nexus, this is a competitive game, and “victory” depends on early entry and active participation.

NXM uses a joint curve to price, issue, and redeem. As the capital pool grows, the price of NXM moves upward on a predictable trajectory. This design directly links the basic value of NXM with the development of Nexus mutual. The higher the risk of Nexus mutual funds relative to its risk, the higher the price of NXM.

Recently, the demand for insurance has exceeded the underwriting capacity and needs to be changed. Due to the inability to meet market demand, under appropriate risk constraints, the minimum capital requirement (MCR) growth rate increased from 1% per day to 1% every 4 hours (provided that MCR %> 130%). Once the MCR reaches 100k ETH (currently about 26k ETH), the growth rate will return to 1% per day. This will increase the ability of Nexus mutual to underwrite more types of insurance, which will benefit Nexus in the long run, but the short-term sacrifice is that although the capital pool continues to grow, it will artificially suppress the price of NXM. This provides a unique opportunity for the price of NXM to rise immediately, provided other conditions remain the same. The nature of the joint curve and the rules surrounding MCR growth mean that we can predict the exact future value of NXM by switching a single variable-the growth rate of the capital pool.

The following scenario assumes that the price of ETH remains unchanged. In the past 4 days, the fund pool has grown by an average of 0.80% every 4 hours. If the capital pool continues to grow at this rate, the 100k ETH goal of MCR will be achieved on the evening of August 21, resulting in a price of 0.05927 ETH for NXM, which is worth about $18.1. If the capital pool grows by 1% every 4 hours to keep up with the growth of MCR, then the goal of MCR to reach 100k ETH will happen on the morning of August 18, when the price of NXM will be 0.08700 ETH, worth about 26.5 US dollars. If the capital pool only grows by 0.40% every 4 hours, then the MCR reaching the 100k ETH target will happen on the evening of September 17, when the price of NXM is 0.05899 ETH, valued at $18.

As long as the capital pool continues to grow, the only difference between each result is the final price of NXM and the length of time that MCR growth returns to its usual daily 1% growth (for example, when MCR = 100k ETH). If it is realistically assumed that the capital pool will continue to grow, rather than shrink, then based on the mathematical formula of the joint curve, in fact NXM is currently the floor price. Why is the floor price? Because once the MCR% reaches 130%, the MCR will stop growing, thereby stabilizing the price. Once MCR is finally restored to its original state, not only will the main repressive factor on the price of NXM be lifted, but Nexus mutual will also undertake more insurance to meet market demand and obtain more value from long-term development. In addition, NXM is beginning to approach the exponential growth phase of its joint curve. The pledge has also been upgraded recently. First, the pledger’s income per insurance has doubled from 20% to 50%. In addition, community members can now add 10 times leverage to the amount of NXM they have deposited in different contracts to increase revenue. In order to reduce friction, the lock-up time of pledge has been shortened to 90 days, but it still represents a large amount of NXM supply. These upgrades have greatly increased the number of pledges of NXM and further improved the protocol capacity.

In fact, insurance purchasers do not necessarily lose money because of smart contract errors, because their claims will be compensated (assuming that the error actually occurred). Therefore, Nexus provides a way for the market to speculate and directly bet on technical risks in this area (similar to contractual credit default swap CDS). This use case can further add value to the fund pool.
In addition to purchasing insurance, only mutual community members can buy and sell NXM in the joint curve. To become a member, you first need to complete a relatively simple KYC process. This KYC process can provide institutional users with greater regulatory comfort. However, there is now a non-KYC version of the token wNXM on the market. wNXM can increase the total number of currency holders, but it may also lead to a decrease in the number of members who become members and pledges to contracts. But in this case, members who have gone through the KYC process become the only people who can maintain price parity (for example, taking advantage of the arbitrage opportunities brought by the joint curve), which may benefit themselves.

DeFi’s growing proxy game

Due to the emergence and prevalence of incentive adoption programs (for example, income farming), decentralized financial DeFi has experienced explosive growth in recent months. In the past 90 days, the total lock-up value TVL has quadrupled and now reaches around US$3.8 billion. The recent prosperity has created many opportunities for people to pursue profit, or find new ways to contact this field. Although recent lending and liquidity agreements have attracted widespread attention in DeFi, there are many other more creative ways to bet on DeFi’s future. Overall, the rise in TVL is obviously good for the industry, but we also need to pay attention to the potential side effects that follow. That is: the more value locked in the smart contract, the greater the value lost due to the vulnerability of the smart contract. Although ordinary cryptocurrency investors will never hate risk, sophisticated institutional investors who want to participate in these markets may wish or may need a sense of security before investing large amounts of money in the field. With this in mind, let’s talk about insurance.

Risk sharing is one of the most important functions provided by financial markets. Insurance itself is a huge industry, and as risks and potential losses continue to increase, its services become more valuable. For many traditional applications, insurance is an indispensable prerequisite. Perhaps users in the current crypto market are usually looking for ways to increase leveraged investment rather than reduce risk. The user demand for insurance in this market is not so obvious, because, but the above principles still apply. Let’s not underestimate the size of the traditional insurance market and the opportunities for realizing decentralized products. Smart contract insurance is still a niche market, but it is a product that is urgently needed in the emerging field of encryption and is the cornerstone of growth. When we look at the current status of purchasing smart contract insurance products, there is a clear leader in this category, whether it is a centralized encryption insurance product or a decentralized insurance insurance product that holds a leading position, that is Nexus Mutual.

Nexus Mutual is the same as a co-insurance company owned by its policyholders. It is owned and operated by a decentralized community of members who share and bear risks with each other. As shown in the figure, the value locked in the Nexus fund pool accounts for only a small part of the TVL in the entire DeFi field. This not only shows that Nexus needs room to grow, but more importantly, it shows a huge, risky unprotected value, and DeFi assets of up to 3.8 billion US dollars may need its services. As we mentioned earlier, this type of product may be particularly attractive to institutional investors, and Nexus’s implementation of the KYC policy for verifying customer identities will further ease institutional investors’ minds. We should also emphasize the inherent network effects of this model. The method of accumulating assets is also beneficial to the liquidity pool, because it can reduce the slippage of traders, and the risk-sharing pool (such as Nexus) improves with the increase of capital scale, so that more insurance can be underwritten at a lower cost. Although Nexus is currently focused on meeting the needs of smart contract guarantees, it plans to expand its service scope beyond the encryption field to support any type of risk protection, so as to create a new market in a transparent and effective way. It is the leader in this high-value field with obvious network effects that make Nexus a project worthy of attention. In addition to the current very interesting products, it has also affected its token economy.

Market demand and safety signs

There was a time when cryptocurrency investors would stop and think before deciding to invest huge sums of money into new, unaudited smart contracts. But now, in addition to increased trust and complacency, coupled with the temptation of income farming, some people put these worries behind in the process of seeking greater rewards. As shown in the figure, the TVL of new projects such as Yearn.finance has suddenly increased exponentially, clearly showing this. But some people have taken precautions to hedge this risk. The insuring of the yearn.finance smart contract in the Nexus contract soared rapidly, and soon it was discovered that the ability to underwrite the risk had been exhausted. The inability to meet the market’s demand for its services has led to some important changes in Nexus, which we will discuss in the next slide. In the example of Yearn.finance, an insurance market with organic growth appears. In addition, we have also begun to see that some projects have used self-advertisement to insure in Nexus, sending signals to the market to inform their smart contracts that their smart contracts are safe. On the way forward, relying solely on auditing may not be enough.

Delphi Digital: In-depth analysis of the number one player in DeFi insurance Nexus Mutual

Delphi Digital: In-depth analysis of the number one player in DeFi insurance Nexus Mutual

Capital expansion

As a risk-sharing pool, everything starts with capital. Nexus’s capital pool (such as TVL) grows in three ways—1) surplus ETH generated by purchasing insurance transactions, 2) community members add ETH to the pool when purchasing NXM, and 3) income from investment pool assets . On the other hand, the capital pool can also shrink in three ways — 1) If insurance claims need to be paid; 2) If the holder burns his NXM to redeem the underlying asset ETH in the pool, and 3) Potential loss of investment pool assets . As of now, about 98% of the capital pool can be directly attributed to the purchase of NXM, but for the reasons we will discuss below, this composition may soon change.

To understand why the recent changes are being made, we need to first explain the existing protocol limits for risk management. There are two constraints, namely: for any given smart contract, the amount of risk that can be assumed has an appropriate limit, and there is also a limit to the amount of risk underwritten by mutual as a whole. Now, let us focus on the latter. The Global Capacity Limit is determined by the minimum capital requirement (MCR), which represents the level of funds required to be confident that it can pay the claim. In other words, this is the part of the Nexus pool that serves as a risk buffer. As shown in the figure below, MCR calculation factors include the cost of effective underwriting risk, currency fluctuations, and the interconnected risks between the smart contracts that triggered the “black swan” event.

Capital restrictions

  1. Specific risk limit: Limit the amount of insurance that can be provided for a specific smart contract. Specifically, it is equal to the number of NXM effectively pledged by the smart contract. This report will introduce pledges in more detail later in this report.
  2. Global capacity limit: Limit the amount of coverage that can be provided for the entire mutual. This is done to ensure that mutual does not overly bear any specific risks, no matter how many NXM underwrites. This value is equal to MCR * 20%.

Delphi Digital: In-depth analysis of the number one player in DeFi insurance Nexus Mutual

Recently, Nexus found itself in a special situation. MCR is exerting its effect, limiting the range of amounts that can be insured. However, due to the rapid increase in DeFi activities, although the mutual capital pool is also growing at the same time, they find that they cannot meet the market’s demand for insurance. In the past, Nexus will increase its MCR by 1% every day, as long as mutual has “excess capital” (we will discuss this in detail later) in order to gradually expand its capacity. It’s just that this has not been able to meet the demand growth rate. In order to expand the capacity faster, the adjustment rhythm of MCR has been increased from once a day to once every 4 hours. Now, MCR is no longer increasing by 1% every day, but it is possible to increase by 6% every day. Although this seems to be a natural decision to increase the adoption rate, it also made a certain sacrifice in the short term.

Impact on currency prices

Increasing MCR not only improves the underwriting capacity, but this variable will also seriously affect the price of Nexus token NXM. Why would risk constraints directly affect the price of tokens in this way? The reason is because Nexus has implemented a joint curve for the issuance and redemption of its tokens. Please refer to the right side for the formula of NXM joint curve price.

The most noticeable part of the NXM price formula is the MCR%, which has been raised to the fourth place in influence. In view of the fact that other elements have not changed much, this variable has become the main determinant of the price of NXM. See the formula used to calculate MCR%. It is simply the size of the Nexus capital pool divided by the MCR, and both are in ETH. Since NXM is essentially a claim on the excess ETH underlying assets in the capital pool, the joint curve measures the price of NXM in ETH. As a note, this also means that holding NXM essentially bears the risk of passing on ETH. If the terms of the Nexus contract remain the same, but the price of ETH doubles, the price of NXM will also double. What if the price of ETH falls? Assuming Nexus continues to grow, the joint curve will effectively act as a built-in price hedge. The value of ETH may decline, but as the price moves along the curve, each NXM can appreciate relatively.

MCR% is the ratio of the excess capital held by mutual to the expected value required to pay claims. The higher the ratio of Mutual’s capital limit to its risk, the higher the price of NXM. This is a wonderful way to design the economics of NXM tokens, fundamentally linking its risks to returns. If the growth rate of the capital pool exceeds the MCR, the price of NXM will rise. If the capital pool slows down or even shrinks relative to the growth of MCR, then the price of NXM will fall. With this in mind, you can begin to understand the side effects of multiplying the MCR growth rate by 6 times. MCR is the denominator in the MCR% calculation formula. An increase in MCR will result in a decrease in the value of MCR%, which ultimately depresses the price of NXM.

Delphi Digital: In-depth analysis of the number one player in DeFi insurance Nexus Mutual

Sacrifice short-term benefits

The idea of ​​temporarily upgrading the MCR to expand capacity was first proposed by the founder of the project, Hugh Karp, on the Nexus forum on July 9, 2000. After discussing with the community, Proposal No. 83 was introduced on the governance portal, “Reducing the pace of MCR promotion from once a day to once every 4 hours”. By July 18, the proposal had been approved, and a total of 23% of Mutual members participated in the vote, of which 99.97% of the members supported the decision. The fact that the community is willing to sacrifice the price of NXM in the short term to better achieve its long-term goals is refreshing, and this is one of the main reasons why we are interested in this project and conduct further research. As community member Aleks said on the forum: “As a long-term currency holder, I don’t mind sacrificing short-term profitability before the growth curve enters the exponential growth phase. The most important thing at the moment is to open up the territory—the Defi insurance field is There is no real competition yet, but in the end there will be an excellent opportunity for Nexus to turn its early leading advantage into a strong defensive moat. To achieve this, an important part is to reliably meet market demand.”

As can be seen in the figure below, the price of NXM has fluctuated during the implementation of the above policy, but what we should pay attention to is what is happening in it. Although the size of the capital pool continues to grow, the price of NXM is still suppressed due to more frequent MCR increases. This brings a unique opportunity to enter the market, and the price of NXM will rise immediately if other conditions remain the same. We mentioned earlier that if “Mutual’s capital surplus exceeds the MCR% upper limit”, MCR will only increase by 1% every four hours. This situation means that the MCR% must exceed 130% to increase the MCR. Also we should remember that the price trajectory of NXM is determined by the shape of its joint curve, which is derived from the formula we discussed in the previous slide. This means that we can predict the exact future value of NXM by switching a single variable (the growth rate of the capital pool).

Delphi Digital: In-depth analysis of the number one player in DeFi insurance Nexus Mutual

NXM recent track

  • In the past 4 days, the capital pool has grown by 0.80% every 4 hours on average. If the capital pool continues to grow at this rate, the goal of 100k ETH MCR will be achieved on the evening of August 21. At that time, the price of NXM calculated in ETH is 0.05927, based on the current ETH price of US$305, which is equivalent to ~18.1 US dollars.
  • If the capital pool grows by 1% every 4 hours and keeps pace with the growth of MCR, then the goal of 100k ETH MCR will be achieved on the morning of August 18. At that time, the price of NXM calculated in ETH is 0.08700, based on the current ETH price of US$305, which is equivalent to US$26.5.
  • If the capital pool only grows 0.40% every 4 hours, then the goal of 100k ETH MCR will be achieved on the evening of September 17. At that time, the price of NXM calculated by ETH is 0.05899, and the current ETH price is 305 dollars, which is worth about 18 dollars.

Evaluating these scenarios, it is clear that as long as the capital pool continues to grow, the only thing that changes between each result is the length of time that the final price of NXM and the growth of MCR return to the usual daily growth of 1% (for example, when MCR = 100k ETH Time). If it is realistically assumed that the capital pool will continue to grow, rather than shrink, then based on the mathematical formula of the joint curve, we will find that NXM is actually at the floor price now. Why is the floor price?

  • Because once MCR% reaches 130%, MCR will stop growing, and the price of NXM will stabilize. Once MCR is finally restored to its original state, not only will the main suppression factor on the price of NXM be lifted, but the project is also preparing to issue more insurance to meet market demand and obtain more value from long-term development.

Delphi Digital: In-depth analysis of the number one player in DeFi insurance Nexus Mutual

Long-term potential

We can also predict the long-term price trend of NXM only by modeling the shape of the joint curve. Although we show 4 different views below, each chart is based on the same input values ​​and pricing formula. These curves assume that the MCR% remains stable at 143%, which is consistent with the current level. In addition, for USD pricing, we assume that the ETH price remains unchanged at 305 USD. The blue arrows on each curve indicate the current price level of NXM. As you can see, we are approaching the exponential growth phase of the joint curve. If the adoption rate represented by the X-axis reaches the defined level, referring to the two input variables we mentioned earlier, the price of NXM will show the following trajectory over time. We should reiterate that this does not constitute any recommendation to purchase NXM, we just drew its pricing formula based on the situation. Whether NXM really follows this curve will depend on the market fit of Nexus products.

Delphi Digital: In-depth analysis of the number one player in DeFi insurance Nexus Mutual

Below we provide the corresponding data table in the previous slide for easy viewing.

Delphi Digital: In-depth analysis of the number one player in DeFi insurance Nexus Mutual

Risk cost

To understand the rate of return, we need to split the cost of insurance, also known as the underwriting price. Although insurance prices are composed of many factors, the main determinant is the cost of risk. We will introduce other influencing factors later. The calculation of risk cost can be seen in the following formula and chart.

This chart aims to illustrate the relationship between the risk cost on the Y axis and the NXM value pledged on a specific contract on the X axis. Mutual members (insurance providers) can pledge NXM tokens against specific smart contracts that they consider safe. This is done in the name of all members, and the X axis represents the total number of tokens pledged.

Delphi Digital: In-depth analysis of the number one player in DeFi insurance Nexus Mutual

The logic here is that when more users think that smart contracts are safe enough to guarantee their capital, the cost of purchasing insurance should be reduced. On the contrary, if the insured contract is considered to have a high risk, only a small amount of tokens will be pledged to the contract, so that the pledge of users under high risk levels can also well protect their own interests. The lower and upper limits of the risk cost are 1% and 100%, respectively. When the risk pledge of a single smart contract exceeds 200,000 NXM, it is considered low risk. This means that when the pledged contract is less than 200,000 tokens, the above chart is suitable for calculating the risk cost. When the total number exceeds 200,000 tokens, the low risk cost limit has been reached, and the risk cost is fixed at 1%.

Underwriting fee

Then this risk cost is inserted into the following formula, which includes the insurance period, the insurance amount, and 30% of the excess margin to arrive at the final policy price. The excess margin is used to meet reward requirements and create surplus within mutual.

Delphi Digital: In-depth analysis of the number one player in DeFi insurance Nexus Mutual

This can be attributed to the fact that the underwriting fee is linearly proportional to the length and scale of the contract, and the network pledge-based NXM has an inverse proportional relationship, showing an exponential expansion. Since time is not the deciding factor, we plot the expected value of the annual cost as a percentage of the insured amount.

Initially, insurance costs may seem very high, but the design structure of the mechanism is to use higher costs to incentivize capital injection into insurance contracts that most require insurance reserves.
The underwriting fees we demonstrate here are not just fees paid directly to insurance providers. When users purchase insurance, they can use ETH, Dai or NXM to pay. If you apply for insurance through ETH or Dai, the system will convert the purchase amount into NXM in your name and burn 90% of the NXM tokens. The remaining 10% is either reserved for the purpose of submitting a claim, or it is returned to the user without submitting a claim. At the receiving end, new NXM tokens will be issued, equivalent to 50% of the underwriting fee, and will be donated to the pledger of the guarantee contract. This means that the net reduction of NXM is equivalent to 40% of the underwriting price. In fact, this has a value-added effect for all NXM holders, because the ownership share of the underlying capital pool represented by their tokens has increased slightly. We temporarily put aside the 40% incineration mechanism and continue to pay attention to the benefits of pledged smart contracts.

Delphi Digital: In-depth analysis of the number one player in DeFi insurance Nexus Mutual

Joint pledge

As mentioned earlier, the income mainly depends on the amount of NXM pledged for a specific smart contract. As can be seen in the figure, we demonstrate the current pledge level of each smart contract and the income that someone will get from contributing insurance reserves in one year. The chart does not include contracts with each pledge of less than 30,000 NXM in order to show the scale impact more clearly. At one end, you can see contracts that provide higher returns with a relatively low deposit amount, while at the other end, contracts that are considered safer and more mature have almost negligible returns.

Part of the legitimate concern is that the rate of return provided by the safer contract is not enough to keep individuals interested, while the underwriting fee charged by the contract with the lower pledge amount on the right is prohibitively high for customers. In addition, these contracts may also be difficult to provide adequate insurance capabilities. In terms of capabilities, we need to quickly review the topics we mentioned in the previous slide on capital expansion. We mentioned how one of the two existing expansion limits limits the amount of insurance that a specific smart contract can provide (for example, specific risk limits). The risk limit is equal to the number of NXM pledged into the smart contract.

Delphi Digital: In-depth analysis of the number one player in DeFi insurance Nexus Mutual

The recently implemented joint pledge will increase the incentives for underwriting risks while enhancing underwriting capabilities. After the launch of the joint pledge, there have been some notable changes. Mutual members can now store the same amount of NXM in no more than 10 different contracts. Even if the member only wants to pledge the safest contract, this can substantially increase the member’s rate of return. It also really helps expand the platform’s ability to provide insurance. The blue vertical line above indicates the date when the fund pool implemented this strategy. Although the pledged supply has increased, it is because the existing supply has been reused in various contracts. In fact, the current 2.8 million pledged NXM numbers actually consist of only 358,000 NXM tokens. This shows that the platform can quickly expand its ability to provide insurance without substantially increasing its user base. In the final analysis, the main difference is that the pledger has increased from 20% of the underwriting premium to 50%. The chart above shows the earnings adjustment after incorporating the newly adjusted pledge.

Pledge income

There is a big gap between the importance of the Ethereum network to the DeFi ecosystem and the direct utility of ETH in the ecosystem, especially in terms of revenue. Nexus Mutual enables you to keep the bull market profit without missing ETH, and at the same time make money from the rise of NXM tokens, and can generate income from assets. This does not mean any guarantee, because of course it cannot be guaranteed, but the price of NXM is derived at the ratio of ETH according to the combined curve, and the dollar price of ETH determines the dollar price of NXM. Under other conditions being equal, an increase in the value of ETH USD will cause an increase in the value of NXM USD.

The ability to earn interest in this application is particularly interesting, especially after the implementation of joint pledges, because users can now put their NXM tokens into 10 contract pledges at once. We believe that it is helpful to give certain expectations on the expectations in different environments. There are many factors that affect income. Therefore, in order for the two variables in the following table to work, there must be several elements that need to be constant. The two variables used below are the number of pledged contracts on the Y axis and the number of NXM pledged in the contract on the X axis. We started with a minimum of 100,000 NXM, because once the project gains more adoption, we don’t see too many contracts with a low pledge amount, and 200,000 NXM is not capped, because the rate of return tends to flatten when the pledge amount reaches 200,000. . The following rates should be discounted, because we assume that member users provide pledges for contracts throughout the year, and the contracts are at full capacity (this is the case for many current contracts).

There are two important value drivers to keep in mind here. The first is that this kind of income is paid in NXM tokens. As the platform develops, NXM will continue to increase its value. The second is that the rate of return only represents 50% of the payments made by insurance purchasers. 40% of the remaining 50% were effectively deposited in mutual, but did not trigger the issuance of NXM, which means that value is generated for both active and passive pledgers.

Delphi Digital: In-depth analysis of the number one player in DeFi insurance Nexus Mutual

Membership and wNXM growth

In addition to purchasing insurance policies, only Mutual members can buy and sell NXM in the joint curve. To become a member, you first need to complete a relatively simple KYC process. This KYC process may bring greater regulatory comfort to institutional users, which is important because given their tendency to hedge risks, they may become very active participants. However, there is now a non-KYC version of the token wNXM on the market. wNXM can increase the total number of token holders, but it may also lead to fewer people becoming members and reduce the pledge of contracts. But in this case, KYC members can maintain price parity (for example, using the arbitrage opportunities created by the joint curve), which may be beneficial to them.

As shown in the chart below, although the number of unique addresses holding NXM has steadily increased year-to-date, this number has roughly doubled in the past month. However, this only shows the active holders of NXM, not the total number of registered and Mutual KYC co-members, which is currently 1,773. Moving forward, tracking the growth of Mutual members will be a key indicator of potential economic activity on Nexus, as they are the only people who can use its services

Delphi Digital: In-depth analysis of the number one player in DeFi insurance Nexus Mutual

Claim evaluation

We cannot talk about smart contract insurance without discussing how to evaluate and pay claims. As shown in the figure on the right, a total of 25 claims have been evaluated during the entire life cycle of mutual, of which 3 have been approved, and a total of 124.28 ETH has been paid. To submit a claim, members need to mortgage NXM. This deposit comes from 10% of the set price of the underwriting fee and has been escrow for this purpose. If the claim is approved, the member who submitted the claim will be refunded, otherwise it will be burned. Any member can vote to evaluate claims by locking NXM tokens. If their vote matches the consensus result, they will receive more NXM tokens as a reward. But if they vote against consensus, their NXM tokens will be locked for a longer period of time to prevent voting manipulation. If a fraudulent vote is detected, the advisory committee (which we will discuss in detail on the next slide) can step in and burn the locked NXM that is a bad actor. The details of this process are too rich to repeat here, but the following diagram helps illustrate this point. You can also read more about this topic here.

Delphi Digital: In-depth analysis of the number one player in DeFi insurance Nexus Mutual

Delphi Digital: In-depth analysis of the number one player in DeFi insurance Nexus Mutual

Mutual governance

Without a flexible governance structure, such an agreement cannot exist. Whether it is evaluating claims or voting on parameters that affect each other (such as increasing the MCR growth rate), qualitative analysis and human judgment are ultimately required. As we said before, Nexus is jointly owned and operated by its members, and these members share risks and rewards. Mutual is a decentralized organization DAO, and NXM holders own assets in the capital pool.

Naturally, a problem has surfaced-if the claim is not paid, it will have a negative impact on the value of NXM, what should be done? In this case, in virtually all cases involving insurance, the answer is very simple-no compensation is received, so no one will trust and buy the insurance product. This is why the matching of incentives is so important here. Each operation with capital risk will lock NXM for a different length of time. Active operations will be rewarded, and the opposite operation will be punished. As shown below, in some cases, the advisory committee may make or overturn important decisions. The advisory committee currently consists of 5 members, each with different technical expertise. Although this sacrifices decentralization to a certain extent, it may be necessary at least for now. In order to review this power, if necessary, mutual members can vote to overrule and replace certain people on the advisory committee.

Delphi Digital: In-depth analysis of the number one player in DeFi insurance Nexus Mutual