A 3-Minute Complete Guide to Nexus Mutual

Nexus Mutual is an open platform on Ethereum that lets members pool and share risk through a discretionary mutual (a community-owned insurance alternative).

Only members can participate in the network, buy a cover, and hold NXM (the platform’s native token).

But anyone can become a member by paying a nominal fee in ETH.

It is an alternative to insurance for Ethereum users and a discretionary mutual offering.

People who become a part of this mutual become members and they can buy a cover to protect themselves against hacks in smart contract code.

It is mutual, and each member can hold tokens that represent membership rights.

It runs on the Ethereum blockchain. 

Working of the members of Nexus Mutual

• Buy a smart contract cover.
• Stake on smart contracts to show they think that the contract is secure and to earn rewards.
• Stake to assess claims submitted by other members
• Put forward governance proposals.
• Vote on proposals put forward by the team or other members.
• Contribute funds to the mutual and hold NXM tokens.
• All members of the mutual are sharing risk with each other.

Items introduced by the Nexus Mutual team

Base Pricing: This has been calculated by insurance experts, actuaries, and advisors.

Investments: This feature will be used to maximize return on the pool of funds in the mutual.

Product development : Based on feedback from the community, progression of the Ethereum and DeFi ecosystem and the capacity/expertise of the team.

Responsibility performed by the members : 

Governance: Members are asked to vote on proposals or give their own proposals.

Capital Provision: Members pay the nominal fee for membership and purchase the smart contract cover.

They also buy nxm tokens to contribute directly to the pool. 

Risk assessment: Members can stake against the security of a smart contract and get rewarded for their staking.

Enough staking needs to happen before anyone can purchase cover on that smart contract. 

Claims Assessment: When Nexus Mutual is alerted to a claim, members will be asked to vote on whether to pay out on that claim or not.

Claims should be resolved within 12–48 hours.

Nexus Mutual Token

NXM tokens work differently than the other tokens.

It runs on a bonding curve which is a mathematical curve that defines the token price based on specific financial metrics.

It can only be bought and sold with the Nexus Mutual application.

Only members of Nexus Mutual can hold NXM tokens. 

Nexus Mutual members contribute liquidity (in ETH) into a shared pool of funds and receive NXM tokens in return.

This is very much like Uniswap where liquidity providers contribute ETH plus the other asset pair into a liquidity pool and receive a pool token in return. 

Nexus tokens adds several components on top of the basic approach : 

First, the surplus margin which is covered from the smart contract cover is 30% and as actual claims experience can be greater or less than expectations the actual surplus arising is variable.

All Members of the mutual are sharing risk with each other.

Secondly, the 30% surplus margin is effectively reduced due to dilution from new token minting.

On cover purchase, a member burns 90% of the cover price in NXM tokens and retains 10%.

The remaining 10% allows for deposits for claims assessment processes, to prevent frivolous claims submissions, and also ensures an ongoing stake in the mutual.

Additionally, new tokens are minted as rewards for Claims Assessment as well as participating in Governance activities.

In aggregate, rewards from Claims Assessment and Governance combined to be in the order of 3% of the cover price but they are variable and unknown at this stage.

In total, 13% of the cover price to be absorbed by dilution. 

Implications of the NXM

There are 3 main implications : 

• The price of the token is quite high, where funds are in excess of those required to back the covers written. This is due to the redemption because the mutual funds are in excess capital. Capital efficiency is critical in the world of insurance. 
• Restrictions to the redemption and it is because the funds of the mutual are lower than the minimum capital. This ensures the mutual has adequate resources to pay claims as and when they arise. 
• Earlier contributors receive proportionally more NXM tokens for their ETH. 

The legal framework

Nexus Mutual is a digital cooperative (a DAO with a legal wrapper around it) and operates as a discretionary mutual in the UK.

Nexus Mutual complies with the relevant laws and regulations in the countries from which it accepts members.

Some of the common misconceptions

• Nexus doesn’t provide any insurance because it is a discretionary mutual.

Smart Contract Cover is not a contract of insurance.

It is a discretionary cover provided by members of the mutual to each other.

Members have full discretion on which claims payments are made.

Members are putting trust in the economic incentive model rather than an insurance company.

• Using Nexus Mutual to stake on a smart contract system is a way of demonstrating that the contract is safe.

Any member can become a risk assessor by staking their NXM (Nexus native tokens) on a contract to earn rewards.

If there is an accepted claim on that contract, the risk assessor’s stake can be burned. 

• Demonstrating material loss for a chain, in order to make a claim, members do not have to demonstrate that they lost personal funds, only that some funds were lost from the smart contract.

(20% of the cover amount must be lost in order to make a valid claim.)

Members can stake their NXM on risk assessment (whether the contract is secure) and claims assessment (whether the claim should be paid). 

Conclusion

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Our goal is to assist corporations adopt new technologies and change difficult problems that arise throughout technology evolution.

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