Nexus Mutual (NXM) Monthly Report November 2020
We have added Nexus Mutual as a project we are going to cover in the future in our monthly reports as our team believes in the long-term potential of the project’s use case.
Read more about Nexus Mutual in our DeFi Explained series here.
On the contrary to our long-term assessment for the use case of smart contract insurance, the wNXM token price dropped more than 40% in October, being traded at almost $38 at the beginning of October to being traded at just about $22 at the end of the month, the same price it is trading today (November 10, 2020).
We will go into the very specifics of the token price later in this article when we dive into certain parameters of the bonding curve.
Let’s take a look at recent news about the project first.
Recent News
Pause Daily 1% MCR Growth
Members have voted on a protocol change to pause the daily 1% MCR (Minimum Capital Required). The MCR growth had already been reverted from 1% per 4 hours to 1% per 24 hours (if the MCR% was above 130%) in September. The temporary pause went live on October 13 currently keeping the MCR Floor at 162,424.73 ETH.
Coincidentally and unrelated to the protocol change, MCR% went below 130% on October 15 and hasn’t retraced since then. Therefore the protocol change had technically only a negligible effect on the bonding curve for two days thus far as an MCR% above 130% would have been the condition for MCR growth in the first place.
New Cover Protocols Available for Cover Purchase
The following protocols are now available for cover purchase:
- PoolTogether v3, a protocol for no-loss prize games on the Ethereum blockchain.
- Yield Protocol, a decentralized lending protocol bringing fixed-term, fixed-rate lending to DeFi.
- Set Protocol v2, a non-custodial protocol that allows for the creation, management, and trading of so-called “Sets”, ERC20 tokens that represent a portfolio or basket of underlying assets.
Network Highlights & Token Metrics
MCR
As mentioned earlier in the article a protocol change for the MCR to remain at 162,424.73 ETH has been voted for.
MCR%
We want to spend a fair amount of this article dedicated to this metric. MCR% is the ratio of the Capital Pool to the Minimum Capital Requirement.
Due to pausing the growth rate of the MCR, it is in fact the only metric impacting the token price (in Ether). All other values remain constant.
TP= A + (MCR / C) × MCR%⁴
The size of the Capital Pool is depending on the amount of ETH being sold into the bonding curve.
If the MCR% hits 100%, which is equivalent to the Capital Pool reaching the MCR, members will be locked from redeeming their NXM from the bonding curve. To emphasize another time, this would mean the mutual is operating on a bare minimum of capital based on their risk model to “guarantee” to be able to pay out claims.
In the event of MCR% indeed hitting 100%, members would need to wrap their NXM into wNXM and sell in secondary markets without arbitraging opportunities.
This is important to understand since the MCR% has consistently been declining since the middle of September now reaching 108.5%.
If we look at the token price of NXM, we can see that mid-August to mid-September 2020 has seen its highs so far.
Unstaking NXM takes 90 days, today.
Members that were aiming to take profits in the mentioned period are now putting sell pressure on the token due to the MCR% decreasing on nearly a daily basis.
Active Cover Amount
We have seen a massive spike in cover purchases from September 14 to October 14, with a fall as rapid as its rise.
The Active Cover Amount skyrocketed above $245M just to drop almost 70% a month after.
What happened was that 1137 covers were purchased through the yInsure distributor contract totaling $1,623,094 in cover costs.
In brief, yInsure is or was a DeFi staking platform for yNFT tokens obtained from yInsure or Rarible, and Nexus Mutants (wNXM).
These two tokens were acting as liquidity provider (LP) tokens on the platform to farm the platform’s native SAFE tokens.
Providing liquidity into the Nexus Mutual pool had essentially forwarded the cover purchase cost from the user directly into the mutual, and then provided the user a yNFT which represented the cover. The yInsure contract was the actual holder of the cover. The end-user was able to choose the contract to purchase cover for.
The yInsure key players InsuranceChef (the anonymous lead developer of the protocol) and Azeem Ahmed (the lead investor) had a public dispute leading to yInsure splitting its chain into two separate projects Armor and COVER Protocol.
Since the minimum length for any cover is 30 days, the Active Cover Amount dropped back to $74M on October 14 with the split of yInsure.
Since October 14 more contract covers have been running out leaving the Active Cover Amount currently at around $61M.
Bull vs Bear
Bull
Nexus Mutual continues to be the only option for smart contract insurance and with the recent “DeFi recovery” the wNXM token can be an attractive option for many buyers.
The adoption of the Nexus Mutual protocol has not stopped increasing either with the recent “Harvest Finance” exploit insurance continuing to be at the center of discussion.
The maturing of the DeFi markets and continued market dominance for smart-contract insurance can cause the wNXM token to have a strong recovery this month.
Bear
With the MCR% moving closer every day to 100% and therefore the potential scenario of the Capital Pool reaching MCR, we might approach the event of members being unable to redeem their NXM from the bonding curve.
Negative price discovery would happen without a set price floor in secondary markets via the wNXM token.
The opinions expressed during the Bull vs Bear series are solely those of the individuals involved and do not necessarily represent those of Multi.io and its employees. The goal is to present a view from both sides of the market.
Upcoming News & Events
The team behind Nexus Mutual is currently focusing on the following three headlines: iterating on core mechanics, product enhancements, distribution.
Related posts from the Nexus Mutual Forum are linked to follow the latest discussions.
Iterating on Core Mechanics
Investment Earnings — Similar to regular insurance companies Nexus Mutual aims to invest its assets to earn yield. First estimates from the team stated to aim for “3m-5m in DAI based assets at a minimum now”. A table with criteria and an asset listing will be posted in the linked forum post.
Supply / Demand-Based Pricing — Essentially the idea of supply/demand-based pricing is to adapt to market conditions dynamically and reduce reliance on governance. Conceptually, the team is looking to implement a factor enabling stable rates within a range and then either loads or discounts those rates based on the ratio of staking to active cover.
MCR Automation — The team is aiming to move MCR calculations entirely on-chain to increase decentralization and not reliant on the daily postings anymore.
Product Enhancements
Stacked Risk Cover — Stacked risk cover is a specific product that allows protocols that are represented by a token to be covered not only for themselves but for all underlying protocols, and all types of risk in one go.
As of today, cover for each protocol has to be bought individually and coverage is limited to smart contract risks. In fact, Nexus Mutual smart contract cover wording document excludes “any events where inputs, that are external to the smart contract system, behave in an unintended way and the smart contract system continues to operate as intended, where inputs include but are not limited to; oracles, governance systems, incentive structures, miner behavior, and network congestion.”
The team is currently working on an option approach to provide stacked risk cover where the protocol is represented by a token.
Partial Claims — As of today, members can only vote if a claim is valid or not valid. Partial claims will additionally enable members to vote on the amount of the claim.
Distribution
Distribution is describing the concept of moving the cover purchase as close to the primary product purchase as possible.
So far, Armor was the first protocol to build an interface to allow anyone to mint cover for all Nexus-assured protocols.
The Nexus Mutual team is working on “softer integrations” with other projects/dApps to make it easier to buy coverage outside the Nexus app.
Information & Data Sources
Nexus Mutual Medium Blog — Follow Nexus Mutual on Medium.
Nexus Mutual Discord Server — Join Nexus Mutual on Discord.
Nexus Tracker — Live tracker for key metrics.
Nexus Mutual Whitepaper — Whitepaper v2.3
Nexus Mutual Gitbook — In-depth descriptions and technical documentation (work in progress).
Token Wrapper by Token Faucet — Wrap and unwrap NXM.
