Decentralized finance is still all the rage in crypto these days. With more customers onboarding from the old world of finance, it’s only reasonable they’d want to hedge some of their risks. This is when DeFi insurance comes into play. As such, this article takes a deeper look at specific solutions for decentralized insurance, such as Nexus Mutual.

Nonetheless, it may be worthwhile to preface this with Nexus Mutual’s underlying raison d’être. Smart contract failures are one of the most severe hazards that DeFi customers face. Whether due to bugs or hacking, smart contract failures are a quick way for your money to vanish. Isn’t it good if there was a method to mitigate that risk? There is today, courtesy of protocols like Nexus Mutual.

What exactly is Nexus Mutual?

The term “electronic commerce” refers to the sale of goods and services through the internet. With the power of the Ethereum blockchain, individuals may share the risk without going via an insurance provider. That’s correct. Nexus Mutual is not, in the classic sense, an insurance company. Its members decide whether or not a claim is valid. And every choice they make is publicly recorded and enforced on the blockchain.

Insurance is a dull issue for many of us at DeFi. This is because the DeFi environment inherently draws risk-takers. However, insurance is a market that has to be filled, and there is an enormous opportunity here. If someone loses money in DeFi, they can’t just pick up the phone and call their bank manager. And, if the objective is to attract mainstream consumers, there must be a means to reassure them that some of their concerns can be addressed.

Many smart contracts in the DeFi ecosystem still need to be audited. Therefore they may include security flaws. That implies there might be a plethora of ERC-20 tokens available for the taking.

Insurance Then and Now

Communities used to combine their resources to counter some of the standards and daily hazards that each individual faced. If something awful happened to someone in the community, the village elders might determine whether or not to dive into the pool to help.

This insurance approach was pleasant and communal but needed to scale better. This is especially true given the high level of trust necessary between so many people. So, as societies expanded, profit-motivated insurance firms began to take on some of the risks—so long as they could earn money in the long run. However, this system could only function with strict government control and a substantial bureaucratic legal structure.

So we’ve arrived in the DeFi era, and Nexus Mutual has come to disrupt the insurance sector. They intend to remove control away from massive insurers and return it to the individual. They are distinct from standard insurance firms in that they are member-driven. Nexus also incentivizes its members to participate in Governance, Claims Assessment, and Risk Assessment.

With Nexus Mutual, anybody may purchase coverage. They create a risk-sharing pool that gives members straightforward, transparent financial risk protection. So, their protocol is DeFi’s alternative to traditional insurance.

What Is the Distinction Between Nexus and Traditional Insurance?

In a typical insurance agency, the insurers determine what to do with the consumer’s money. How to invest it, which risks are covered, when to pay dividends, and so on. But you know how difficult it is if you’ve ever attempted to convince your insurance carrier to spend on a claim. They do extensive damage evaluations and rarely pay out the asset’s value.

This is because the interests of the insured and the insurer are more antagonistic than cooperative. Nexus Mutual and its usage of membership tokens allow for more aligned incentives to help foster community spirit. This is far superior to the current antagonistic interaction between the insurer and the insured.

How Nexus Mutual Works

Nexus Mutual may now cover any valid Ethereum smart contract. Purchasing a policy is comparable to wagering that a specific smart contract would fail.

This is how it functions. Regardless of whether they utilize the smart contract or not, anyone may purchase insurance on one. Payments are not made to make up for personal losses. Members with intelligent contract insurance can receive a different payout than what was lost or taken after a breach.

Users choose the smart contract, the duration, and the level of insurance they prefer. Nexus Mutual then decides the cost. And Nexus pays the claim if an exploit happens during that time. Members of Nexus Mutual must still concur that the smart contract is to blame and nothing else for the failure.

Buying Cover through Nexus Mutual

All the user has to do to buy a cover from the Nexus dashboard is:

1) Connect to a Metamask wallet first
2) Choose “Buy Cover.”
2) Choose how much coverage
3) List the address of the smart contract.
4) Choose the time frame
5) On Metamask, create the quotation and confirm the transaction.

The NXM token is not required for users to purchase coverage. Additionally, they can pay for it with ETH or DAI. It will subsequently be converted to NXM via the protocol. The user will be prompted to sign up as a member at this point. Paying a modest charge and submitting a KYC/AML check are required for this.

The predetermined cap on coverage for each treatment is $630k. The sum is determined by the value that has been bet and is readily available to satisfy the claims. Payments are independent of losses once again. To receive a reimbursement, users merely need to purchase insurance on a smart contract that malfunctions or is abused.

NXM Token

Members can participate in claims and risk analysis thanks to the NXM token, which stands for governance rights. NXM token holders run Nexus Mutual. Voting is not permitted until NXM tokens have been staked. Additionally, earning NXM tokens encourages people to take part. Once more, only those who vote for the successful candidate receive additional tokens, and incentives are distributed in proportion to the payout size. NXM tokens appreciate as soon as Nexus Mutual’s insurance obligations are fully met. However, costs decrease when customers buy more insurance. This encourages more investors to participate.

To go more specific, the price of NXM is determined by Nexus Mutual using a bonding curve. The capital requirements for future unpaid claim demands and the amount of cash locked in the protocol determine the price.

That is a fancy way of stating that the price of NXM will increase directly to the amount of cash locked into the Nexus Mutual protocol. Members may also split any extra funds. Direct exchange of NXM tokens for ETH is possible through the Nexus platform. Furthermore, there are no current intentions to float NXM on a stock market.

Actual Use Cases

Payouts have already been required for Nexus. This is because bZx, a company that offers fast loans, has been attacked. When a flaw in its smart contract was discovered, the bZx exploit occurred.

Fortunately, the money of those who purchased protection was secure. Nexus dispelled any skepticism in the DeFi community about whether their community would decide to award rewards in this “trial by fire.”

Even though it required two requests, Nexus paid on two claims totaling around $31,000. Initially, members rejected the accusations since it seemed that hackers had abused the pricing oracles. According to the Nexus agreement, they would not have been considered claims. Later, bZx disclosed a bug in their smart contract code. The two claims were presented again, and this time they were accepted.

Assessors of Nexus Risk and Staking

As long as there is adequate staking, any smart contracts on Ethereum can be covered. The amount bet on a specific contract determines the costs to purchase cover. Risk Assessors will only stake enough money against some smart contracts. The fund is established to draw in additional funding as needed.

Risk assessors frequently have auditing experience with smart contracts. If they think a specific smart contract is secure, they can stake NXM tokens. The insurance cost decreased with the amount of NXM staked on a smart contract.

Users need to stake NXM tokens against a safe smart contract to become Risk Assessors. The Risk Assessors receive 50% of the cover price as commissions whenever a user purchases cover using that smart contract. The process only burns the Risk Assessor’s stakes up to the amount of the claim when a claim is made.

Assessors of Nexus Claims

Members decide whether or not a claim is valid by acting as judges. Voting will be conducted on each claim. And the only members who may vote are those who have risked their tokens as claims assessors.

Members must be careful to refrain from paying on claims when dishonest individuals attempt to manipulate the system. Claims assessors are rewarded by casting a vote in favor of the chosen course of action. Therefore, they must release the majority of the votes. Any member casting a fake vote might have their stake burned by Governance.

Additionally, safeguards are in place to stop members from rejecting valid claims. New users would stop signing up to utilize the site if that started to happen. Successful claims reduce the pool’s value and, thus, the value of NXM tokens. However, stake rules encourage evaluators to have a macro perspective and consider the long term. As previously stated, Governance can burn stakes for illegitimate votes. This acts as a powerful deterrent.

Steps for Filing a Claim with Nexus Mutual

Users can submit claims up to 35 days after the end of the cover term. Since the reimbursement is a predetermined amount regardless of the loss, there is no need to submit damage assessment claims.

Claim assessors will evaluate the claim. And for the claim to be accepted, a majority of 70% must be reached. A total member vote will be held on the claim if insufficient votes are cast. For this vote to pass, there must be a majority of more than 50%. Whether or not to pay a claim is always decided by member votes.

Conclusion

Nevertheless, Nexus Mutual has developed a novel strategy to ensure that its DeFi ecosystem participants don’t lose anything due to a smart-contract failure. Once they get going, they’ll undoubtedly create more items outside smart contract coverage.

Crypto wallets or even pricing oracles may be the solution. Users may also experience other security problems, such as losing their private keys or even a centralized exchange (CEX) breach. Probably, DeFi Insurance may someday include coverage for these risks as well.