Pause Daily 1% MCR Growth

The purpose of programmatically growing MCR was to increase Cover Capacity. This was done early on to satisfy the overwhelming mismatch between demand for cover and existing capacity. Individual covers are limited to 20% of MCR to limit concentration risk to any individual cover.

MCR currently sits at 157,648 ETH, meaning individual cover capacity is 31.5k ETH (over $11m USD). Scrolling through the cover purchase menu will show you that none of the individual contracts are currently capped by MCR. On top of that, there’s about $180m in cover expiring over the two weeks (out of a total $230m) which will significantly open up capacity. The reason we’re seeing so much capacity expiring is because a lot of it was purchased to farm SAFE about a month ago. The shortest time period one can purchase cover for is 30 days, so we’re starting to see all of those purchases expire.

I’m sure there will be some cover purchased as capacity opens up, but it’s unlikely that all expiring covers will be immediately offset with new purchases. Since the purpose of growing MCR was to increase capacity, it’s also logical to stop growing MCR when we have this much excess capacity. At this point, we have the necessary capacity and the priority should be on expanding the types of cover we offer rather than purely expanding the depth of each cover.

Growing MCR by 1% per day also means it’s accelerating. At 50k MCR it goes up 500 eth, at 100k it’s 1k eth, and now it’s growing at 1.5k eth. This acceleration suppresses the desire for individuals to add to the capital pool. You’d effectively need ~$700k in daily inflows (1.5k eth*130%*price of Eth) to match MCR growth. That’s why we will continue to see MCR flatline around 130%.

I believe we’re now at a point where growing MCR this way is no longer necessary, and we can instead switch to a gearing factor approach. The plan was always to switch to a gearing factor approach once MCR was at an acceptable level, the difficult/impossible aspect was knowing that level in advance. It’s a function of several factors like cover demand relative to capacity, cover breadth, capital pool growth, and overall market conditions.

Then: Low MCR had to be accelerated to expand cover specific depth to match demand for cover. Cover breadth was nowhere close to where it needed to be for a gearing factor approach to be practical. The amount by which MCR grew was small enough to still encourage speculation driven capital pool growth.

Now: Individual cover depth is high enough to service current demand. Cover is also currently available on 45 contracts and that number will continue to grow, meaning MCR growth via gearing factor is a feasible approach. MCR is large enough that growing it at the same rate in current market conditions actually discourages capital pool growth.

If we get to the point where individual cover demand really begins to outpace capacity and we’re unable to grow MCR through the gearing factor approach, then we can always turn programmatic MCR growth back on.

Edit: the ‘gearing factor approach’ was supposed to hyperlink to this tweet thread where it’s explained (https://twitter.com/YanLiberman/status/1300875154722086912?s=20)

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We are also in the depths of a micro-bear market in DeFi so we would expect demand to be lower. If/when it picks up again, my guess, and it’s only a guess, is that many of the contracts will be capped again.

I am onboard with this suggestion

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Overall I am supportive of this proposal.

It’s very difficult to know when the right moment is to switch off the programmatic increase (it needs to happen at some point) but now seems appropriate on balance.

For switching off:

  • removes price suppression when MCR% is above 130%, which is arguably no longer necessary
  • helps shift focus to diversification which is where the mutual is best strategically
  • encourages the efficient use of capital
  • vertical scaling challenges can be helped (somewhat) by the “reinsurance layer” currently being discussed

Against switching off:

  • if demand picks up heavily we could get capped out on covers if demand isn’t diversified enough
  • the increment only applies above 130% which arguably puts “excess” capital to better use
  • switching off and then potentially on again doesn’t help with protocol stability
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Happy with proposal outlined

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Fully support. Let’s create a proposal and vote on it.

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Fully on board w this proposal. As Yan alluded to the programmatic increase of the MCReth floor when the mutual has already scaled / is well capitalized just pegs the MCR % given the $ notional value of ETH needed to offset the 1% increment.

Its true that DeFi is cooling off (#analysis), but given the updates / composability integrations of some major protocols like AAVE v2, SNX + Optimism, Marqet w SNX and AAVE the demand for cover should be there

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Agree and as Hugh said, will help with shift to focus scaling horizontally.

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Disclosure: I am a large holder of NXM with experience in the “traditional” tech startup space.

I disagree with this proposal. It’s too early for this kind of measure. NXM will get blindsided in the next phase of the bull market when demand goes up, and no cover is available to buy, giving an opening to competitors. Yes, demand can grow based on existing cover growth, but that is:

  1. Based on an assumption that horizontal “structure” is what the market will bear (as opposed to long tail).
  2. A poor user experience. “Come back tomorrow, there MIGHT be cover available.”
  3. Throttling of word-of-mouth. People who can successfully buy cover are much more likely to spread the word about NXM cover than people who show up and can’t buy.

NXM barely a $170 million entity in a space which quite likely will be $100-$200 billion before all is said and done in this bull market.

This is premature optimization.

This is the time to prepare for the next wave of growth, not act like a long established player in a highly competitive industry focused on stability. It’s time to prepare to take the entire market for insurance, not put the brakes on growth.

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It’s actually not too early for this measure, it’s the ideal time because otherwise we don’t get capital pool growth which is what drives longer term capacity. There’s an insane amount of capacity (80%) opening up in the next 2 weeks, capacity that was likely only filled because of SAFE mining.

This method is actually prioritizing long term optimization which is why you see Hugh agree with it above. It also doesn’t have to be permanent if horizontal scaling doesn’t increase vertical capacity (which is also Hugh’s LT goal). What this does allow for is capital pool growth without infringing on demand because there’s an abundance of excess capacity.

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Thanks Yan, really nice write-up. I’m onboard and fully supportive, let’s get it done!

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Thanks Yan, this is a good discussion to have. I don’t think pausing the MCR growth will have the intended effect.

NXM buyers generally understand that buying at a high MCR% is unideal, so by pausing MCR increments, we are effectively allowing the MCR% to grow more per unit of additional investment. In my view, it’s better to mute MCR% growth to an extent, by scaling MCR along with the capital pool. This also maximizes the mutual’s ability to underwrite cover and absorb demand shocks. In other words, my sense is that if we let MCR% scale fast, we would have the short-term effect of inviting new capital in – but that would come at the longer-term effect of discouraging incremental contribution beyond a certain MCR%. So because people don’t trade the dollar price, generally choosing to trade the MCR%, we should make sure MCR% growth is healthy and sustainable to maximize growth (both of the cap pool and of the cover amount).

For that reason, I would support a continuation of the MCR increment when MCR% is above 130%. @Hugh or anyone else, please chime in here if any of the assumptions I laid out are not valid.

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Can you explain why we won’t get capital pool growth without this measure?

Yes, I agree that most people buying cover recently were only doing it due to SAFE mining, but even before that NXM had 6-7 contracts maxed out at the MCRcap. My guess is we’re in a short term lull in demand due to this downturn in the whole DeFi space which is why there are no contracts maxed out any more. I hope we’re not reacting to short term market conditions with this measure.

Hey @alekslarsen, really appreciate the feedback here. Price volatility from MCR% spikes isn’t nearly as much of a concern right now relative to what it was before because of the larger base values we’re working with, and to a lessor extent, the current market environment. Right now the goal is encourage cover growth and capital pool inflows. Cover growth will happen through demand for existing cover and access to new types of cover. Current MCR doesn’t restrict cover growth as there’s an insane amount of capacity about to open up. Continuing to grow MCR at 1% does however constrict capital pool growth, which reduces long term capacity. Programmatic growth of MCR was never the LT plan, it was just necessary to expand capacity to a functional level. The LT plan is for the gearing factor to drive MCR growth, allowing capacity to be controlled by demand for cover in a risk-controlled manner.

MCR incrementing up at this level of MCReth is actually causing the capital pool to decline. The speculative nature of that mechanism is necessary to the grow capital pool, which is necessary to expand total $ cover capacity.

The goal is to expand overall cover capacity while transitioning to MCR=f(cover). With the excess capacity that we have we can wait to see if we’re in a situation where a few contracts dominate or we see a bit more broad based coverage (+ addition of new coverage) and MCR=f(cover) takes over. If it proves to be the former then we can vote to grow MCR again. In the meantime we need depositing to the capital pool to regain some a few of its previously appealing characteristics otherwise we won’t really have a decision to make.

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Let’s just vote on this.

FYI - We’re just making sure we understand the implementation details before opening it up for a governance vote.

Appreciate the response. Can you (or anyone else reading this) explain like I’m a 5-year old?:

“MCR incrementing up at this level of MCReth is actually causing the capital pool to decline,”

and

“Continuing to grow MCR at 1% does however constrict capital pool growth, which reduces long term capacity.”

How is the capital pool declining when the MCR grows?

Because it is unattractive for new capital if there is a constant downward pressure on price. Would you invest knowing most likely your share value will decrease in the short to midterm future? Also, capital that is already in the pool will flow out, anticipating further price drops, even if the MCR would stay stagnant with MCR% < 130, the outlook on price would still be bearish given that any positive effect on price of new inflow of capital (lifting MCR% briefly above 130) will be eliminated by the following MCR increase the very next day. TLDR The opportunity cost of parking the capital in NXM would be too high.

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I would and I made my investment last time MCR was this low (early August). In fact, it was the very thing that made buying attractive to me. The bonding curve makes clear that the best time to buy is when MCR% is low.

If the argument is that price (and MCR%) is currently low because potential buyers of NXM believe that the price is unlikely to climb the MCR% bonding curve in the short term, I find that very hard to believe because:

  1. Most sophisticated investors know you should buy in the horizontal part of the bonding curve and sell in the vertical part.
  2. That every time a new chunk of the capital pool enters the MCR, the eventual vertical part of the bonding curve will be higher in absolute price numbers.
  3. All DeFi tokens are down 50-80%. NXM is simply caught in a cyclical tide at the moment.

I would add that if anyone is going to vote “yes” on this proposal, they should think about what criteria might prompt them to turn on the regular MCR increment once more in the future?

  • Despite shield mining, the top 5-6 smart contracts are MCR capped.
  • Competitors which have simpler business models appear and start to grow.
  • The “skyline” of bought coverage has a “long tail” appearance rather than a “long table with 30 legs”, more like downtown Brooklyn rather than the Brooklyn brownstone neighborhoods, despite all efforts at horizontal scaling.

I would add that:

  • If, after pausing MCR growth, NXM gets into a scenario where demand for MCRcapped projects is very high and MCR needs to increase quickly, it can, provided the frequency of increase is high enough. At every 4 hours a 1% increase (like a month ago) results in about a 6x increase in a month (provided MCR% stays above 130).

  • If the goal is horizontal scaling, I hope there is room in the budget for business development. I’m not sure what bizdev in DeFi looks like but it’s probably not someone in a suit flying to meet founders of other projects.

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