Nexus Mutual's first product was Smart Contract Cover. The product covered “unintended uses of code” where someone, not necessarily the cover purchaser, had suffered a financial loss on a smart contract. For example, the cover was intended to pay-out on events like The DAO hack, and the two Parity multi-signature wallet issues.
Smart Contract Cover was transitioned to Protocol Cover as of 26 April 20201 9:00:00 UTC. Protocol Cover offers more comprehensive protections, which include protection against material losses due to failures in either the protocol code, economic design, governance set-up or oracles. It also allows members to be covered for material loss events that occur on other chains.
Members who purchase Protocol Cover choose a fixed sum, called the Cover Amount, that will be paid out if the claim is approved by the Claims Assessment process. This means the payouts wouldn't necessarily be matched to the losses incurred by the smart contract bug or hack.
Compromised security due to a protocol’s code is a well-documented issue within the Ethereum ecosystem with many technical efforts focused on improving the situation. Unfortunately, there will always remain a risk that a particular protocol is not secure, even with formal verification. We believe that providing a further 'human' layer of protection against flaws within a protocol’s code, economic design, governance system and oracle system for users who are worried about the security of their funds would be a great benefit to the Ethereum ecosystem.
Longer term, the intention is to expand the product range into more day-to-day products and become a viable alternative to the traditional insurance industry.
Nexus Mutual passed Proposal #131 through governance, which transitions Smart Contract Cover to Protocol Cover—a more comprehensive cover policy that protects members against additional events that cause a material loss. This transition took effect on 26 April 2021 9:00 UTC. Covers written after 21 October 2020 9:00 UTC are automatically covered for events outlined in the Protocol Cover wording effective 26 April 9:00 UTC.
Protocol Cover widens coverage to include:
Economic design failure
Severe oracle failure
Protection for assets on Layer 2 solutions
Protection for non-Ethereum smart contracts
Protection for a protocol across multiple chains
After a loss event occurs, there is a 72-hour cool-down period that takes effect. If a claim is submitted during the cool-down period, it can be denied by Risk Assessors according to the Protocol Cover wording agreement. This cool-down period only applies to Protocol Cover.
For more detailed information, you can read the Protocol Cover wording in full.
Users of centralised exchanges and custodians—who are responsible for the safekeeping of their users’ private keys to cryptocurrency assets—will now be able to purchase custody cover from Nexus Mutual.
Custody Cover will protect users who put funds into an organisation which is responsible for the safekeeping of private keys to cryptocurrency assets on behalf of their users. Users will be covered in the event that either;
the custodian gets hacked and the user loses more than 10% of their funds, or
withdrawals from the custodian are halted for more than 90 days.
For more detailed information, you can read the Custody Cover wording in full.
Yield Token Cover —now live
Members who use Yearn Finance and Curve Fi now have the option to buy Yield Token Cover for the following Yearn Vaults/Curve Pools:
Purchase Cover in
Members who want protection across multiple protocols when depositing funds into a Yearn Vault or Curve Pool can get protection for yield-bearing tokens. This cover product protects against any loss that causes a yield-bearing token to de-peg from market value up to 90% of your loss when:
A member holds a Yield Cover Token policy (making them a Covered Member); and
The face value of the covered token and the market value of the covered token differ in price by more than 10% for a continuous period of four hours or more; and
The Covered Member exchanges the de-pegged yield-bearing token at face value for 0.90 units of the cover amount they wish to claim; and
The Covered Member redeems their claim payment during the cover period or within 14 days of the cover period ending.
For more detailed information, you can read the Yield Token Cover wording in full.
To buy cover, as a first time user, you follow these steps:
Select 'Buy Cover' in the dashboard.
Input the smart contract address you wish to buy cover for.
Enter the amount in DAI (USD) or ETH you would like as a fixed cover amount.
Enter the length of time you want the coverage to last.
A quote is then generated and cover can be purchased if there is enough capacity at a coverable price (below 50% of Cover Amount per annum). If you are not already a member of Nexus Mutual, you will be asked to join at this point. Membership involves paying a small membership fee (currently set at 0.002 ETH) and undergoing a KYC/AML check.
Cover can be purchased by paying the cover premium using either ETH, DAI (a USD stablecoin), or Nexus Mutual Tokens (NXM). If paying in DAI or ETH, the system effectively purchases NXM tokens on your behalf before purchasing cover. When cover is purchased, 90% of the NXM member tokens used to purchase cover are then used (“burned”); the other 10% remain with the member and are either used as a deposit when submitting claims or are returned to the cover purchaser if no claim is made.
Purchasing cover is the primary action performed by members of Nexus Mutual. The mutual was created to enable members to join together as a community, share risk, and buy cover to protect their assets. When cover is purchased, the members' contributions flow into the Capital Pool, which improves the funding position of the mutual.
Cover is priced so that it is expected to generate a long-term surplus that is then jointly shared between the membership base. This means the mutual grows as its capital resources are expected to steadily increase over time.
Cover holders can make a claim anytime during the Cover Period or up to 35 days after the Cover Period ends. The fixed Cover Amount means claims assessment is a simple 'yes' or 'no' rather than requiring an assessment of how much damage has occurred. Further details and the process for claims assessment are provided in the Claims Assessment section.
To submit a claim, the Cover Holder needs to stake 5% of the NXM tokens locked in at the time of buying cover, like a deposit. With 10% of NXM tokens locked in at cover purchase, the Cover Holder can submit the claim for assessment two times. The staked NXM serves as a deterrent against fraudulent claims. If a claim is successful, the stake is returned to the member. If it is denied, the stake is forfeited.
Once submitted, the claim proceeds to be assessed by Claims Assessors - this is explained in more detail in the Claims Assessment section. Claims Assessors are required to stake NXM when they vote on claims. The total staked NXM between all Claims Assessors participating in must be at least 5x larger than the Cover Amount being voted on. Additionally, a consensus of 70% is required for the claim to be successful. If successful, funds representing the cover amount are released to the Ethereum address of the Cover Holder. If there is no consensus or not enough voting weight the claim is automatically escalated to a full member vote, which requires a consensus of over 50%.
While other members do not benefit from a single successful claim in the short term, members are incentivised to have a long-term perspective when considering legitimate claim payouts. It is in the interests of the membership base that the mutual pays legitimate claims. If this were not the case, trust in the mutual would be eroded, no new members or capital providers would be willing to participate in future, and the NXM token would lose its value.
Nexus Mutual is a discretionary mutual; the mutual provides discretionary cover, which is an insurance-like product that involves only a discretion, not a legal obligation, to pay out on the occurrence of a material loss.
As a discretionary mutual, Nexus Mutual doesn't approve or reject claims according to conditions like a regular insurance company would. Instead, this is decided by members participating in the Claims Assessment process. Nexus Mutual provides a platform where members can act as Claims Assessors by voting on claims submitted by other members.
The member voting process has full discretion on whether to pay a claim or not and their opinion is final. While there is no opportunity to escalate a claim to any regulator or ombudsman, the benefit is increased flexibility.
Members can decide to pay claims as they wish, which includes members applying their discretion in a positive way. This might include paying claims that may be declined according to strict terms and conditions but where there is a genuine loss.
In order for this to work, incentives need to be aligned between members submitting claims and members acting as Claims Assessors. This is done through an economic incentive/punishment mechanism. Members who vote on claims have a strong incentive to vote honestly on submitted claims. Just the same, members who vote on claims are deterred from voting fraudulently. This is achieved by distributing NXM rewards to those who vote with the consensus outcome, locking up staked NXM for a longer period for those who vote against the consensus and potentially burning NXM staked by a Claims Assessor if fraudulent voting takes place.
Assessment of whether a claim is fully legitimate is often challenging, so automatically burning high values of staked tokens for genuine differences of opinion needs to be avoided. The general approach uses a basic incentive structure at its core and then overlays timing windows and human intervention to prevent more extreme scenarios. Full details of the incentives can be found in the more detailed Docs Page. In aggregate, the incentive structure encourages Claims Assessors to provide their true opinion when assessing a case.
Any Member can see all the live claims pending by using the 'Claims Assessment' interface. Existing members are able to become Claims Assessors by staking a portion of their NXM tokens for a specific period of time. Provided claims are assessed honestly, this stake is returned at the end of the staking period. If the Advisory Board deems a Claims Assessor to be acting dishonestly, it has the power to burn the Claims Assessor's stake.
Once your NXM tokens are staked, it is possible to vote on pending claims once every six hours, using a simple 'yes' or 'no' decision. It is entirely up to the Assessor how they determine if a claim is valid or not. They may check social media, review the transactions on a block explorer, like Etherscan, or use any other method they choose.
Voting with the consensus outcome entitles the Assessor to a share of the fee pool in proportion to their voting power. The fee pool consists of newly minted NXM member tokens valued at 20% of the price the Cover Holder paid for their cover. Voting against the consensus outcome results in locking of the stake for a longer period.
If the consensus thresholds (>70% consensus with a min 5x Cover Amount in staked NXM) aren't reached the Claims Assessors' fee pool is reduced and the claim is escalated to all Members for a vote where the majority outcome is final.
Nexus Mutual uses the UK discretionary mutual model. A discretionary mutual has members perform Claims Assessment, which differs from a traditional insurance company where claims assessment is performed by a centralised entity.
This empowers the members of the mutual to decide what claims should and shouldn't be paid out, given the basic product definition of each cover product. The approach also allows for a more principles-based case-by-case assessment of each individual claim rather than codifying an extensive list of terms and conditions for what is and isn't paid out.
Those with skills as smart contract auditors can participate in the mutual by becoming Risk Assessors and staking value against specific protocols and/or custodians they think are well-coded and secure. They are economically incentivised by earning a portion of cover premiums, in the form of extra NXM tokens, as cover is purchased on the protocol and/or custodian the Assessor is staked against.
It is also possible for Risk Assessors to ‘follow’ other Members who they think are skilled in assessing protocol and custodial security by staking NXM against protocols and/or custodians that others have already staked against.
Members can stake value against any protocol/custodian. The 'Risk Assessment' interface of the Nexus Mutual application allows Members to stake available NXM tokens against a chosen protocol/custodian. The stake is then locked and can be unstaked at any time subject to a 30-day withdrawal period.
When Risk Assessors stake against a protocol or custodian, they earn a portion of the Cover Price in the form of newly minted NXM tokens when other members purchase cover for that protocol or custodian. When other members buy cover, Risk Assessors earn 50% of the cCover Price proportional to the amount of NXM each Assessor has staked.
Risk Assessors can withdraw their earned NXM rewards, unstake their NXM, and withdraw NXM that has been unstaked and released on the Members' Dashboard. Only after the NXM has been withdrawn can it be used for other purposes.
If there is a claim, Risk Assessors may have their stakes burned on a proportional basis up to the claim amount.
It is entirely up to the Assessor to decide why they believe a protocol or custodian is secure. They may assess the code directly themselves, use automated tools, put faith in an audit firm which has independently assessed a protocol’s code, follow a different Risk Assessor that they trust, or use any other method they choose.
Risk Assessors stake NXM against protocols/custodians they believe are secure and unlikely to have faulty code or unlikely to be at risk of losing users’ deposits. As more Risk Assessors stake NXM against protocols/custodians, the mutual is then able to provide a certain amount of additional capacity on those protocols/custodians at a lower price, the full dynamics of which are described in the Pricing Model section of the Docs Pages. Risk Assessors allow other members to obtain more affordable cover policies by evaluating risk and staking their NXM against protocols/custodians they believe to be secure.
The mutual relies on crowd-sourced risk assessment by mutual members acting as Risk Assessors in order to offer cover on new protocols and custodians.
By using the UK’s discretionary mutual model, Nexus Mutual strives to be a decentralised alternative to insurance. As such, members are responsible for participating in governance to determine the future of the mutual, which allows the mutual model to adopt the ethos of a decentralised public blockchain.
All members of the mutual can vote on proposals. They can also submit new proposals to be voted on by the membership base.
All proposals put to a member vote are firstly put to the Advisory Board (described below), who will white-list the proposal and make a recommendation on the outcome. Members are then given a specified time-frame to vote on the proposal. If a specified quorum is met, then the majority outcome prevails. If a specified quorum is not met, then the vote proceeds as per the Advisory Board recommendation.
As a reward for participating in the governance process, all voting members will be awarded a share of additional NXM tokens that are generated for each proposal (chosen by the Advisory Board within limits). Additionally, any member may delegate their vote to any other member, allowing them to rely on a fellow member they believe has more expertise than themselves. In this case, the delegating member continues to earn all the voting rewards.
Voting on a governance proposal (including via the delegation process) prevents a member from redeeming their tokens from the mutual for the following seven days. This lock-in period was introduced to ensure that voting Members are affected by the decisions they make.
In an ideal world, all potential actions can be defined by the code. However, reality is much more complex and a fall-back option is required in several circumstances. As such, an Advisory Board will be set up to facilitate interaction with the real world, as well as act on behalf of the mutual in some of the more extreme scenarios.
The Advisory Board has no custodial rights over the fund pool and cannot release funds to any particular person. A member is able to submit a proposal to nominate themselves to replace any member of the existing Advisory Board; such a proposal will bypass the whitelisting process meaning it cannot be stopped by the Advisory Board.
As mentioned above, the Board will also whitelist member governance proposals in order to highlight important ones and reduce clutter. There are certain types of proposals which do not require Board whitelisting (e.g. replacing members of the Advisory Board).
Membership tokens represent membership rights in Nexus Mutual. Anyone can become a member, subject to KYC and country restrictions. Only members are able to hold NXM tokens.
If cover is purchased regularly using ETH or DAI (USD), and the claims performance of the mutual is within expectations, then the total value of the Capital Pool would be expected to increase. As more NXM are minted and if the capitalisation levels remain within the desired range, the token price will increase. More details can be found in our Token Model page.
While it is possible to simply hold NXM tokens, there are economic incentives to be an active member of the mutual. Membership actions (other than buying cover) result in rewards in the form of new NXM tokens—active participation within the system results in new tokens being minted. Therefore, by not participating in these activities, a member may have their membership diluted by simply holding their NXM tokens.
Purchasing NXM tokens can be performed directly on the Nexus Mutual platform. All you need is ETH to purchase NXM tokens. The token price is set according to the level of funding against the Minimum Capital Requirement (MCR) and the MCR itself. More detail can be found on the Token Model page.
Redeeming NXM tokens for ETH can also be performed directly on the Nexus Mutual platform, subject to the following restrictions:
The amount of ETH in the Capital Pool must be greater than the MCR in terms of ETH.
There must be enough liquidity in ETH in the Capital Pool.
Volume restrictions apply to prevent the funding levels dropping below 100% of the MCR
NXM are burned in exchange for ETH at the current token price less 2.5%.
These restrictions ensure the mutual always has enough capital to be confident of paying members' claims.
The buying and selling of NXM enables the mutual to manage its capitalisation levels. If the mutual is over-capitalised, the value of NXM goes up, which creates an incentive for some of the token holders to swap NXM for ETH. By contrast, if the capitalisation is low, the low NXM price incentivises potential capital providers to buy NXM, which adds ETH to the Capital Pool and recapitalises the mutual.
Another goal of the Token Model is to reward early contributors to the mutual for the risk they have taken in supporting potential claims without excluding new participants. The price of the token is linked to the capitalisation levels, as well as the number of tokens in circulation. Therefore, there is a direct link between the value that token holders obtain and the overall success of Nexus Mutual.