Foundation Funding

[Hugh]

Background

Nexus Mutual has a “Foundation”, Collective Risk Services CIC (CRS), which employs the core team and pays for other costs such as website, hosting, marketing, audits etc. CRS is a community interest company that operates on a non-profit basis.

To support the long term funding position of the Foundation it is proposed that the current 2.5% sell spread on any NXM redemptions is allocated to the Foundation instead of being burned as it is currently. This will give the Foundation some small base level of revenue, in the form of NXM tokens, which will provide more flexibility and options to support Nexus Mutual’s growth.

The Foundation

In addition to being a non-profit with no equity, the Foundation has an asset lock that ensures assets can only be used for its core objects which are specified in detail here. The primary object is “creating and implementing community risk sharing ecosystems”. The combination of clearly defined objects and an asset lock ensures there are significant legal restrictions on the use of the Foundations funds.

Funding for the Foundation has been sourced to date from the initial grant of 1,000,000 NXM tokens when Nexus Mutual was first launched. Since then, some of these NXM tokens have been sold and/or granted as incentives to attract capital into Nexus Mutual as well as raise operational funding for the Foundation.

The current funding position as at end of March 2020 and approximate burn rates of the Foundation are as follows:

Address: 0xFC64382c9Ce89bA1C21692A68000366a35fF0336

Assets	Burn Rate
598,893 USDC	$72,000 per month approx.
$328,500 USD equivalent (bank accounts)	Approx 6 FTE equivalent.
$927k Total USD Equivalent	1 Founder, 1 CTO, 3 Engineers, 1 Comms & Marketing
335,428 NXM

Before selling any further NXM this implies an existing runway of just over 1 year.

Encouraging adoption of the Nexus Mutual network is expected to lead to NXM price appreciation and significant extension of this runway. However, the current funding situation does imply that the core team can not expand materially and the adequacy of the Foundation funding over the next 3 years is strongly linked to NXM price appreciation.

This proposal aims to provide a small baseline of revenue that can be relied upon to provide more certainty and options for the Foundation to best support Nexus Mutual’s growth.

Historic NXM Burns from Redemptions

Currently NXM being burned due to the 2.5% sell spread is quite volatile but has averaged around 1,000 NXM per month since protocol launch.

At a current NXM price of $2.45 this amounts to approximately $2,500 per month.

Feedback is welcomed on the proposal. If it is positively received, then smart contract changes would need to be developed in advance of a formal governance vote.

[krytie]

The core objects link is dead.

[Hugh]

Thanks, I updated the link. If it still doesn’t work go here:

https://beta.companieshouse.gov.uk/company/11353187/filing-history

And look at the 6-June-2018 update.

[jer979]

Thanks for this thoughtful and transparent proposal.

I think of this as CRS asking the mutual members to do a follow-on investment beyond that of our initial token purchase.

It’s not an unreasonable request and we all clearly see the massive long-term potential.

Here’s my concern and it’s not a comment on you or the team today, but it’s a cultural choice that I think we should make.

In many crypto projects, founding teams and early active community members tend to get rubber stamp approval of their proposals based on reputation (as well as track record, to be fair).

However, to build a sustainable organization that is scalable and achieves the levels we all believe is ultimately possible, we need a culture of accountability.

You’re asking for $30k (assuming price stays constant, of course, and if I am doing my math correctly) in additional funding.

It’s not a huge amount in the grand scheme of things so, in some respects, we say “ok, who cares?”

But, I think the mutual members are entitled to an objective set of criteria to determine if that $30k investment was actually worth it.

A year from now, how will we be able to assess whether the trade off was a worthwhile decision for us?

If it isn’t, will we roll it back? I mean, once you deploy the smart contract to give CRS money, it’s a wee bit less incentive for CRS to change it to get less funding.

Also, there will be (hopefully) hundreds of thousands of proposals (dev, marketing, etc.) that come into the mutual in the years to come.

Leaving aside the need for a true DAO like daostack or aragon to manage these at decentralized scale, the accountability/reputation of each proposer needs to be immutable as well. Otherwise, we can’t assess the “best of the best.”

Once CRS gets all these NXM tokens on a regular basis, the odds of it going back to the previous model drop with each passing day. That may be fine if it’s leading to a strong turn in the growth cure, but without any type of objective criteria to measure the impact of the investment by the members of the mutual of CRS, we can’t drive collective intelligence about what projects and teams add the most value.

I also think the responsibility lies with the proposer to say “here’s how you will judge our impact in X months/years” and, at that point, the default will be “this funding wasn’t worth it and we’ll roll it back.”

Again, it’s not about you. When we’re small, who the hell cares?

It’s the principle and the recognition that, imho, great crypto-native businesses (like NXM can be) will be built not as much on awesome tech alone, but as a result of branding.

Branding is the sum of experiences that members have with the mutual. One element is “speed of claims resolution.” Another is “extent of coverage offered.” There are many brand KPIs and prioritizing is a challenge. But one of them is “does the mutual spend its growth resources wisely or it is just political?” That’s culture.

You’ve done a great job in building a culture of transparency/trust which helps establish the brand. I think hard metrics will serve us all.

Just my .00000002 NXM

[Hugh]

Thanks @jer979

Not opposed to objective criteria though I do think it will impossible to separate the impact of this “investment” from what we do anyway given the size/purpose of the “investment”. It would be different if the Foundation were asking for $X to do Y in addition to current service provision. This proposal is more about improving long term sustainability of the Foundation.

Regardless, would be interested in your general thoughts on what you would consider as objective criteria for the Foundation?

[jer979]

It’s a fair question and I don’t have the answer.

I guess I’d ask
“if your objective is improving long-term sustainability, what would be the indicators in 6, 12, 18 months from now that long-term sustainability of the foundation had, in fact, been improved?”

If you ask a human, it might be “lost 5 kg” or “lowered blood pressure by X”.

[Hugh]

Remaining runway including NXM is probably a good one. I’m sure there are others, but at least this one is relatively objective.

Runway = Assets / Burn Rate per Month

Where Assets = Cash + any other funds + NXM Tokens x Current NXM Price

That way it incentivises keeping burn rate under control as well as activities which positively influence the NXM Price.

I could imagine if this measure gets high enough then it would make sense to reduce the allocation or remove it. Not sure on what constitutes ‘high enough’ right now but it seems like a useful framework to start using.

Thanks for the input, regardless of this proposal I’ll probably start tracking this metric!

[jer979]

Assuming this comment thread is on chain, we’re good for now, I think. Otherwise, update the proposal

Maybe throw in some numbers behind that formula. Look, you still may not hit it, but I think mutual members will appreciate the following.

“If Covid has taught us nothing, it’s that cash runway/reserve is critical. given the instability of the world today, our lesson is that we should always have XX months of cash reserve on hand to sustain operations.”

That way, we know that any increase in burn rate must be accompanied by an increase in cash reserve.

I agree…this metric is pretty cool. Put it on NXM dashboard.

It’s like maintaining a collaterlization ratio on MKR or SNX, it seems.

[jer979]

We may also need to think about a growth target. By adding NXM to circulation, this proposal extends the date by which mutual members see sustained positive growth in the value of their assets.

It might be nice to have growth targets in terms of where we want the token price to be, but also others like “total covers written” “avg cover size,” etc.

I’ve seen a few mktg proposals in the TG and they are weak, tactical, and lacking focus. As we fund a bigger foundation, the product/engineering and market oriented activities need to be focused on measurable outcomes in terms of TAM.

[HeyChristopher]

Very much appreciate the transparency here.

I think this might be a slippery slope. Token networks main selling point is enabling non-profit projects to function sustainably. The prime example here is always the Ethereum foundation, which at its high had 90 years of runway with their remaining funds. Of course it’s impossible to follow in Ethereum’s footsteps and achieve that much runway, but protocol teams are called projects and not companies for a reason. They are supposed to only exist for a given time, to develop the protocol, to find enough early adoption and to make sure the economics of the protocol are inherently sustainable.

By creating a way to continuously fund an external entity to take care of protocol development we might be opening pandora’s box. Even if the entity delivers everything to the mutual member’s fullest satisfaction, it will just be a matter of time before it comes up with more things to spend money on and then 2.5% won’t be enough. Government taxes have started out with 1% and look where the incentives brought us to. Look at the massive problem a similar entitlement (perpetual funding) has created for the developers of ZCash (the Electric Coin Company) vs the ZCash foundation. A good reference are the extensive discussions around Ethereum’s EIP 2025 with a strong rejection from the community.

What I do believe the better path to be is to mint >500.000 new NXM tokens for the foundation, that can be sold to investors with lockups/vesting that last at least 1 year. There is still demand from investors that can’t be met through a bonding curve alone and given the competitive environment you are in, having $1.5m (assuming 3$ per NXM) worth of tokens in your pocket is still relatively low. But at least the incentives would remain aligned.

This should be enough to find incentive-aligned sustainable ways to pay for all external costs.

On another note:

$72,000 per month approx.

1 Founder, 1 CTO, 3 Engineers, 1 Comms & Marketing

This comes down to around $12k/month per person involved. While I do definitely think you guys are doing outstanding work, it should be noted that this is still a startup and not mid level management at Allianz. Your personal wealth generation should not be achieved by receiving over-proportionally high salaries but by owning enough NXM tokens to eventually become wealthy once the protocol reaches its maturity. Maybe consider sourcing some of your development to countries with cheaper costs of living.

[Hugh]

Thanks for the comments, really helpful.

We did consider putting forward a flat mint of new NXM for the Foundation, just thought the 2.5% proposal might be more palatable. So this is very helpful feedback.

re costs, it’s worth noting that the burn rate also includes all additional expenses such as marketing, audit costs, legal, bug bounty, accounting, rent, IT services etc not just salaries. I actually think we’re doing a very good job on cost management.

[lautumsuxen]

@HeyChristopher

to make sure the economics of the protocol are inherently sustainable.

Good perspective, thanks for sharing. Would you not agree though that having a dedicated/full time team working on the long term development of the network and sustainably funded by the success/growth of the protocol itself would achieve this sustainability? I agree this can be (and shoud be?) complemented in the short term with investors monies when and until network cannot stand on its own two feet, however those funds will run out.

[HeyChristopher]

@lautumsuxen

Would you not agree though that having a dedicated/full time team working on the long term development of the network and sustainably funded by the success/growth of the protocol itself would achieve this sustainability?

In theory yes, but it’s been shown again and again that organisational overhead is slowly being introduced which always leads to higher costs and continuous upward adjustments of the previously agreed upon fees. We are losing incentive alignment that way imo.

@lautumsuxen

I agree this can be (and shoud be?) complemented in the short term with investors monies when and until network cannot stand on its own two feet, however those funds will run out.

Correct, the question is when these funds will run out. If Nexus Mutual develops a protocol that meets a lot of demand and that is reflected in rising NXM token prices, the minted tokens will last for longer and longer periods. If on the other hand there is no demand for Nexus Mutual and NXM price stalls we should probably stop subsidising it.

[lautumsuxen]

Thanks for your response @HeyChristopher .

Would you not say that what you are suggesting creates an incentive to overly focus on price appreciation rather (or more) than adoption? The two should go hand in had of course, if the token economics are optimally designed, but without a sustainable funding mechanism members might be forced to take short term decisions purely to increase price that might not be optimal for longer term adoption.

Instead, a sustainable funding mechanism may take some pressure off the short term price, providing some resources to build the foundations of wider adoption (complemented by one-off top ups by investors). Ethereum was relatively very ‘lucky’ to have 1000x price appreciation in the short term, but can other projects rely on similar dynamics for long term funding?

[Hugh]

Trying to summarise the discussion here and aiming to put a signalling vote in the Discord for the following 3 options. Any feedback on the details in the table before doing so?

@HeyChristopher @lautumsuxen

[lautumsuxen]

Thanks @Hugh. The ticks and crosses are a bit confusing I find. I would just use some descriptive language like ‘high’ or ‘low’ instead. In the funding category I would perhaps quantify in $ terms as well (assuming constant NXM price). Repetition on ‘longer term’ in the bottom right cell.

Also would add a note that option 3 relies on investors appetitite, while 1 and 2 obviously don’t.

[Hugh]

Thanks, will adjust.

Also would add a note that option 3 relies on investors appetitite, while 1 and 2 obviously don’t.

2 does. The sell spread would be distributed in NXM terms.

[lautumsuxen]

Thanks. That’s not what I meant. I mean that in option 3 you will need to mint AND sell tokens to investors (if I understood the option correctly). So it relies on investors to buy them, which is another assumption (who knows if they will?). While option 2 is purely redirecting the burn to the Foundation.

EDIT: I realize I may have misunderstood option 3. You would simply mint tokens and those would be sellable by the Foundation to the bonding curve. My bad.

[Hugh]

Just to clarify, both 2 and 3 grant additional NXM to the Foundation.

2 because the burned NXM from the sell spread is redirected, 3 because new NXM is minted.

In both situations the NXM can then either be:
a) sold to others; or
b) burnt for ETH on the bonding curve

The choice would be at the discretion of the Foundation.

[lautumsuxen]

Yes, that’s a great way of framing it. Option 2 is gradual dilution vs option 3 being upfront dilution, but other than that they are both very similar conceptually. I would be interested in @HeyChristopher’s views of option 2 if framed under this light.