DeFi Insurance Spotlight: An Overview of Nexus Mutual

Contents

Last updated on November 17th, 2022 at 01:34 pm

Decentralized Finance can take many forms, such as decentralized lending, decentralized exchanges, decentralized insurance, etc.

DeFi insurance is the process of obtaining insurance coverage against losses in the decentralized finance space for oneself or a DeFi protocol. As a result of the enormous value that exists in the crypto space, it has become the target for hackers and fraudsters.

Scammers regularly devise methods to trick people into sending them their cryptocurrency holdings.

Market conditions can sometimes be negative, affecting crypto holdings and firms.

In other cases, a crypto firm such as an exchange may be the victim of an attack, leading to the loss of crypto assets.

The above scenarios are reasons why decentralized insurance exists. Users of some decentralized insurance platforms, such as Risk Harbor, benefit from a parametric insurance structure.

In other cases, a decentralized insurance platform may decide to offer discretionary mutual service, which is the underlying principle of Nexus Mutual.

This article comprehensively examines the Nexus Mutual protocol, its smart contract coverage, and the impressive dominance of its community members.

What is Nexus Mutual?

Nexus Mutual is a discretionary mutual platform that offers insurance options to individuals or organizations looking to protect themselves from smart contract risks through a type of coverage. This type of coverage is different from the conventional insurance scheme, which is why Nexus Mutual offers insurance alternative services to users.

The term “discretionary mutual service” implies that members of the community must vote to decide if a user benefits from the coverage if a smart contract code risk occurs. In contrast to traditional DeFi insurance platforms such as Risk Harbor, there is no guarantee that the user will be paid.

In the case of Risk Harbor, users are paid immediately after the event for which they purchased coverage occurs. No one is expected to vote on whether the user should be rewarded. This does not happen on Nexus Mutual because the decision-making process is entrusted to community members.

Nexus Mutual defines its discretionary cover below. “Smart Contract Cover is not a contract of insurance. Fellow members will decide on claims. Claims payments are enforced by token driven economic incentives rather than placing trust in an insurance company.”

Nexus Mutual differs from other decentralized insurance platforms because it offers coverage against smart contract code risks for Ethereum users. Some decentralized insurance platforms provide a diverse range of insurance options, including crypto wallet hacks.

Nexus Mutual coverage is only available to members, and to become a member, the crypto enthusiast has to purchase the platform’s native tokens.

Nexus Mutual’s Smart Contract Cover

Nexus Mutual offers smart contract coverage to its members. The insurance alternative service caters to smart contract risks. This covers the inherent risks linked to smart contract code, such as “The DAO hack or Parity multi-sig wallet issues.”

There are steps that individuals have to follow before they can purchase smart contract cover from Nexus Mutual.

Before purchasing a cover, the user must first select the smart contract address for which it is intended.

Secondly, the user should choose the specifications of their proposed cover, such as its amount, duration, and currency.

Thirdly, a quote is generated, which discloses the amount the user has to pay for the coverage.

Fourthly, users can initiate transactions through their wallets to pay for their cover. Payment can be made in multiple currencies.

Finally, users must pay a fee of 0.002 ETH to obtain membership.

Despite being a decentralized and community-focused platform, users must disclose their identity through Nexus Mutual’s Know Your Customer (KYC) process.

When an attack occurs on a smart contract with coverage in Nexus Mutual, affected members can file claims. Members analyze the attack to determine whether it is genuine or manipulated. The claims may be rejected if the attack is deemed to be manipulated by the smart contract development team.

Following the submission of a claim, a voting session is held to determine whether or not payment should be made to the victims of smart contract exploitation.

Because of the community-centric feature, the platform reserves the right to pay a claim regardless of whether it is genuine, which has raised concerns.

There are questions about whether members will vote to pay valid claims.

There have been instances where Nexus Mutual has paid valid claims. In 2020, for example, bZx’s Fulcrum smart contract was compromised. A bug in the code caused the exploitation, and some victims filed claims with Nexus Mutual.

During the first claim, community members voted against payment because it appeared “the attackers had manipulated the oracles Fulcrum looked at, which didn’t count as a failure of the smart contract itself, in Nexus Mutual’s documentation.”

The affected platform, bZx, subsequently investigated the exploitation and published a post-mortem report. Two new claims were submitted to the platform, and a poll was held. After community members voted in favour, the payout for the two claims was more than $31,000.

What Are The Benefits Of Being A Nexus Mutual Member?

Being a member of Nexus Mutual comes with some benefits, which will be disclosed below.

Staking on smart contracts

Members are expected to stake on smart contracts to demonstrate that they believe these contracts are secure.

Members can benefit from a reward pool by staking on smart contracts.

Governance process

Members can participate in the governance process of this insurance alternative platform. Holders of the native token, NXM, can submit governance proposals and vote during decision-making.

Holding the NXM token allows the user to vote on whether a claim should be accepted or not. Before this is done, token holders assess the situation and determine if claims by other members should be paid.

The advisory board evaluates the proposal after it is submitted.

They can then make suggestions on the proposal for the voting session.

Those participating in the voting session must be holders of the NXM Tokens.

The holder’s voting power is proportional to the number of NXM tokens owned.

Voters are rewarded for exercising their community rights.

Purchase smart contract cover

Only community members are permitted to purchase smart contract coverage from Nexus Mutual.

Who Are Risk Assessors?

Risk assessors are important members of the Nexus Mutual platform because they perform crucial roles. They determine the coverage price, and only those with knowledge of smart contract auditing can function effectively as risk assessors.

Typically, this set of members audits smart contracts on Ethereum and determines if they are safe or not. They are expected to stake their NXM tokens in the coverage pool if they believe the smart contract is secure.

The accepted claim is paid from the coverage pool if a smart contract attack occurs. Risk assessors’ staking period is ninety days, and they are compensated based on the fees earned.

How Does Nexus Mutual’s Governance System Operate?

Nexus Mutual is a community-centric platform that is governed by its members. According to its website, it is not an insurance company but “run entirely by its members.” This decentralized ecosystem is governed as a Decentralized Autonomous Organization and has an advisory board.

Typically, the advisory board comprises community members elected by other members.

Although advisory board members analyze various proposals and ensure that the DAO is functioning effectively, major decisions are made by community members through a voting session.

In Conclusion,

DeFi insurance is the process of obtaining insurance coverage against losses in the decentralized finance space for oneself or a DeFi protocol.
Nexus Mutual is not an insurance company.
It is a discretionary mutual company, meaning that the decision-making process of whether to pay claims or not falls in the hands of community members.
When an attack occurs on a smart contract with coverage in Nexus Mutual, affected members can submit claims.
A voting session is organized before a payout is made and community members can decide to pay or not.
Nexus Mutual is different from other decentralized insurance platforms because it offers coverage against smart contract code risks for Ethereum users.
Risk assessors determine the price of coverage, and only those with knowledge of smart contract auditing can function effectively as risk assessors.
Nexus Mutual is governed by an advisory board through a DAO.