Shout out to Richard Chen from 1Confirmation for providing the data in this week’s analysis! Make sure to check out Nexus Tracker for live statistics surrounding Nexus Mutual.
Disclosure: The author is an active participant in the Nexus Mutual ecosystem and holds NXM.
A Look Into Nexus Mutual
Nexus Mutual – the decentralized insurance protocol – is beginning to see a fair amount of growth as insurance continues to have a growing importance within the DeFi ecosystem. With the mutual paying out its first claims this past week from the bZx exploit, Nexus Mutual is proving itself to be a viable option for investor protection.
The more value locked, the higher the incentive is to steal it. Therefore, the more important it is to have the underlying value insured to protect DeFi users in the instance of a DAO-like black swan event.
Over the past few months, the Nexus Mutual team has constantly been iterating on the insurance model, making the mutual’s insurance covers more accessible, composable, and streamlining the incentives to participate.
We’re now seeing multiple projects – like Outlet Finance – directly integrate Nexus Mutual by leveraging the mutual’s insurance capabilities to cover their passive income opportunities. By capitalizing on insurance covers, users can largely mitigate the risks associated with the nascency of DeFi. Users who take out covers on Maker can earn high-yielding passive income from the Dai Savings Rate while minimizing risks at a relatively low cost.
This combination is rather potent given the potential risks associated with many DeFi projects. Insured high-yielding DeFi opportunities offer one of the most attractive investments in the world today. As such, Nexus Mutual is beginning to see more and more active covers on the platform as the broader community realizes the opportunity at hand.
As of February 2020, Nexus Mutual has reached over $2.1M in active cover amounts across nearly a dozen DeFI projects. Active cover amount has surged by over 330% in ETH terms since August 2019.
As more and more users continue to purchase affordable insurance covers on their DeFi deposits, the premiums are added to the capital pool’s surplus following their expiration.
Since August 2019, Nexus Mutual’s capital pool in ETH terms has increased by +83%, reaching over 13,000 ETH as of writing. In USD terms, the capital pool has also seen a resurgence in value locked, increasing by 108% since August 2019 as the price of ETH nearly doubled early in 2020.
One of the more interesting developments in the pipeline for the capital pool is integrating investment returns. By having a portion of the capital pool locked in “low-risk” lending opportunities (i.e. the Dai Savings Rate), the pool can constantly be working for its members generating a passive return.
As it stands today – with over $3M in the capital pool, we can forecast potential returns from the Dai Savings Rate. If 33% of the capital pool is locked in the DSR or ~$1M, earning an 7.5% APR, the mutual would earn an additional $75,000 per year or $6,250 per month in passive income to the mutual’s members. Assuming the capital pool continues to grow over the next year, having $2.5M locked (20% of $10M total) in the DSR would generate $150,000 in annualized revenue for the mutual. Ultimately, the integration of the DSR and other passive income opportunities into the capital pool has the potential to generate a respectable amount of value for the mutual’s members day in and day out.
The other driving revenue mechanism for Nexus Mutual is through cover purchases. DeFi users can purchase premiums to receive protection from technical risks. Covers are redeemable for a set period time in the instance of an attack, where after the cover has expired the premiums are collected to the capital pool. With that in mind, Nexus Mutual is going to see a significant amount of contract covers expire over the next few months – assuming no claims are made.
By the end of March, over 3,000 ETH in covers will expire. Assuming DeFi doesn’t incur any technical risks (i.e. no contract hacks), the month of March should drive a large amount of surplus into the capital pool. Between then and June of 2020, an additional 2,000 ETH in covers will expire. Assuming there are no major contract hacks in the first half of the year, the surplus in the capital pull will increase by nearly 50%.
For those unfamiliar, Nexus Mutual features a native token (NXM) for governance, claims and risk assessment. Given the NXM tokens operate on a bonding curve where the curve sets the price, NXM tokens essentially represent a claim to the mutual’s capital pool. This creates two main drivers in the underlying price movement: (1) members purchasing NXM, (2) members purchasing covers.
We’ve seen these two factors drive the NXM token towards a sustainable path towards value appreciation as there’s little room for FOMO from open market operations. Instead, Nexus Mutual relies on tangible usage and interest for its products.
This can be seen in my article Bankless article “Are DeFi Tokens Worth Buying”. In essence, cover purchases represent the mutual’s revenue. The fact that NXM operates on a bonding curve allows the token to have one of the most fair-valued PE ratios out of any other DeFi token on the market. It’s important to note that while Synthetix has the lowest PE ratio, this is largely due to the high amount of frontrunners generating “fake” fees, allowing the synthetic asset issuance platform to boast a relatively low ratio.
Bankless “Are DeFi Tokens Worth Buying”
Since its inception in May 2019, the NXM token has appreciated from 0.01 ETH to 0.015 ETH – a 50% increase in ETH terms. While this seems fairly low in the lens of crypto assets, the ability to always maintain its price in ETH terms (since NXM represents a pro-rata claim to the ETH & DAI based capital pool) provides a rather attractive investment opportunity for prospective investors.
Assuming Nexus Mutual continues to garner more attention in the coming years, it is unlikely that NXM holders will lose value in ETH terms. In USD terms, NXM has performed extremely well YTD. Given NXM tokens represent a claim on ETH, NXM tokens will always benefit from price increases in ETH.
Nexus Mutual is starting to garner a fair amount of attention as insurance establishes itself as a vital piece of infrastructure for the long-term growth of open finance. Having its first payout to members from the bZx exploit legitimizes the mutual as a viable option for DeFi user protection.
With more and more improvements in the pipeline, like integrating passive income opportunities along with improved rewards mechanisms for NXM holders, it seems like the mutual is just getting warmed up.
It will be interesting to watch how the mutual grows in the coming months and whether or not the launch of Opyn – a new, alternative insurance platform – will hinder the mutual’s market share. Opyn covers more risks associated, like financial risks, however, is currently limited to Compound Deposits. With that in mind, Nexus Mutual has the opportunity to expand into other risks and sectors beyond DeFi.
In summary – Nexus Mutual has seen consistent, steady growth since its inception back in May. With the proliferation of DeFi, the mutual has a substantial niche carved out with plenty of opportunities to expand as the insurance platform becomes battle-hardened and continues to pay out on legitimate claims.
To keep up on all things Nexus Mutual, be sure to follow their official Twitter here.
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