The Potential for Bonding Curves and Nexus Mutual – Fitzner Blockchain Consulting

Graph via Nexus Tracker

Implementing the dynamic minimum capital floor was a vital iteration for the long-term growth of the mutual at large. With the DMCF now in full effect, members can have peace of mind that the mutual is more efficient in capital allocation and has a mechanism to constantly grow. As such, the growth is beginning to take notice as Nexus Mutual has allegedly been approached by multiple projects asking for large volumes to cover (around $1–2M range). However, the mutual is currently not large enough to cover these large cover amounts and therefore in need of short-term capital growth to match outstanding demand.

Via Discord, the team estimated that these large cover demands would be possible once there’s around $8–10M locked in the mutual. As such, we’re currently waiting for either (1) the mutual to accumulate more ETH or (2) the price of ETH to rise. With the capital pool only sitting at around ~10,400 ETH, we would either need 53,000 ETH locked in the mutual at an ETH price of $150 or the price of ETH to rise to $769. Either of these seems to be relatively far-fetched in the immediate short term but given that there’s over 4.5M in ETH value locked in DeFi applications, capturing a mere 1.11% of current value locked is nothing out of the ordinary for one of the only decentralized insurance products on the market.

In order for Nexus Mutual to successfully bootstrap the mutual and reach the point where it can provably insure millions in cover, the team will have to continue to iterate and lower the barriers to entry for accessing insurance benefits.

In recent developments, the core team hosted their first community call last week outlining plenty of new future upgrades that we’ll summarize below. For official call notes, visit the official Nexus Mutual Discord server

Secondary Purchases

One of the biggest needs for Nexus Mutual is the ability to reach more prospective members who would benefit from insuring their assets locked in DeFi applications. With this, the team is currently exploring implementing secondary purchases into third-party applications. Imagine lending out Dai on Compound and upon signing the transaction, there was a call-to-action asking users if they would like to purchase insurance coverage on their assets being lent out. Implementing this feature in a handful of the prominent DeFi applications would widely increase the accessibility for the mutual at large.

In order to make third-party integrations possible, the mutual will have to enable the option to operate memberships via smart contracts. By doing so, this would drastically increase integration options from third-party applications and allow aggregator-like projects to programmatically buy covers on behalf of users.

Token Economics and Incentive Reworks

As it stands today, users looking to participate in risk assessment are subject to queues for receiving rewards based on cover purchases. With that, users must lock their NXM tokens for 250 days and will only receive rewards once they’re first in the queue. Rather than relying on a queue-based rewards system, the team is exploring a new distribution model through a pooled reward system. With this system, risk assessors will be rewarded on a more consistent basis with a pro-rata rate based on the amount staked. The hope with implementing this type of rewards system is to encourage more staking activity and significantly reduce the barriers to entry when it comes to knowledge on risk assessment.

Investment Earnings

One of the more interesting things that the team is currently exploring is leveraging the existing capital pool to earn investment returns on the float. As being discussed today, this is viable in two ways: (1) integrating the Dai Savings Rate (DSR) or (2) Staking in ETH 2.0. While third-party lending applications, like Compound, will likely offer higher returns, it’s too risky for a mutual whose purpose is to insure these applications in the first place.

With $1.5M currently locked in the mutual and growing, the potential for earning investment returns on the capital pool will increase over time. By integrating the Dai Savings Rate or staking in ETH 2.0 (or both), Nexus Mutual members can receive a passive income through price appreciation of the NXM token as the capital pool increases from investment returns over time. This could be vastly important in ensuring the long-term growth of the capital pool as this mechanism would empower the dynamic minimum capital floor to increase coverage capacity over time.

While the growth in Nexus Mutual has been a bit slower than expected, the team is constantly iterating and will eventually come to the right formula for decentralized insurance. Moreover, as total value locked continues to rise with the proliferation of DeFi, it becomes increasingly more apparent that insurance coverage on those funds will play an important role in the maturation of the ecosystem as a whole.

With a number of new token incentives and a constant stream of governance proposals, we expect the next few months to allow Nexus to experience significant growth. Based on the underlying bonding curve implementation, we expect mutual growth to correlate to an increased price for NXM tokens.

While it hurts us to say this, it’s also likely that we will need a catalyst for the community to realize the importance of insurance. While any smart contract hack would result in a short term decrease in the price of NXM due to the mutual paying out a claim, it’s likely that a successful resolution would serve as an incredibly strong signal that the mutual’s core narrative is in fact valuable.

Until then, we recommend joining the official Discord and keeping an eye on the governance dashboard. As new proposals are made mutual members stand to earn NXM from governance participation. In summary, we’re very bullish on the future of decentralized insurance and hope that this article could shine some light on why we see Nexus Mutual being the market leader at this point in time.

*DISCLOSURE: Directors of Fitzner Blockchain do not endorse or recommend any investment action in NXM. This document should not be regarded as investment advice, offering documents, or as a recommendation regarding a course of action. Directors of Fitzner Blockchain own NXM. These views are those solely of the Directors of Fitzner Blockchain Consulting and do not represent the views of the Nexus Mutual team.