This week our members voted to implement a new dynamic feature to the capital floor, so that we incrementally step up the Minimum Capital Floor of 7000 ETH when the mutual has excess capital.
The Minimum Capital is a key value for the mutual as it influences how much cover can be written on any particular smart contract system, and is also the level at which redemptions are restricted. It is basically the level of funds the mutual needs to operate.
In short, the mutual will start growing and more cover will be able to purchased.
Specifically, Minimum Capital is the greater of the Minimum Capital Floor and a complex actuarial calculation that determines how much capital is needed to be very confident all claims can be paid.
Why did we propose this change?
Current demand for Smart Contract Cover is concentrated on a smaller group of systems and at the moment Nexus Mutual can’t meet this demand with the existing capital resources.
There is relatively strong demand for providing capital, evidenced by the MCR% steadily increasing but this capital is not being used as effectively as it could be. At present it is not being used directly to increase capacity. The mutual currently has excess capital, as the MCR% is at roughly 145%, and it could be deploying the capital more effectively.
The mutual restricts total cover purchases on specific smart contracts to 20% of the MCR (currently 7,000 ETH). The limit exists to ensure the mutual has a very high likelihood of paying all claims but it also restricts future cover growth on specific systems.
What does the change mean?
If the MCR% value is greater than 130% as per the full once-per-day calculation then the Minimum Capital Floor can be increased by a small amount, currently set at 1%.
The primary benefit is that capacity on each smart contract system will slowly increase overtime as long as the mutual has substantial excess funds. This only happens when the mutual is very well funded as it doesn’t make sense to use all excess funds to increase capacity as this would restrict all redemptions. The recent changes have set that level to 130%.
The downside is if no future funds are added to the mutual and no further cover is purchased this will have a negative impact on the NXM token price and funding position. With no further contributions the MCR% will slowly reduce down to 130% and then stop.
Increasing the Minimum Capital Floor opens up greater potential for a higher token price as the bonding curve is steeper the higher the Minimum Capital Floor.