Hi Nexus Mutants. With the success of the first buyback, we would like to propose a continuation of the buyback program:
We would like to propose the transfer of an additional 8,000 ETH from the Capital Pool to the Community Fund. Transferring these funds will add value to the mutual and its members in a number of ways:
Taking tokens out of circulation
Providing liquidity for wNXM / ETH LP on Uniswap v3
Funding new grants, encouraging growth and development
Conducting other services that would benefit the community
In order to provide liquidity, we will have to exchange ETH for wNXM. We believe this should only be done up and until book value.
We propose the transfer of 8,000 ETH to the Community Fund multi-sig.
A direct effect will be the drop of the MCR(%) to ~90% ((162,425 - 16,000)/ 162,425).
Due to the multiple value-adds described above, we believe this proposal will result in both immediate and long-term benefits for the Nexus members and support continued sustainable growth.
This proposal is up for discussion and will go live on governance soon.
Strongly agree that it makes a ton of sense, especially given current big discount/gap to book value, and driving both intrinsic value, as well as making sure wnxm will trade above book value.
The opportunity to add so much value to the mutual via a buyback of wNXM tokens trading below book value was clearly underestimated in the first proposal… here is to an encore!
Reducing the MCR to 95% has also been clearly beneficial, as it has allowed value from cover buys and investments to accrue to the capital pool rather than being arbitraged out by bots.
My view on this is that it would be worth to continue the buyback as long as it doesn’t put the business at risk.
We’re currently operating at a leverage ratio of (212 264/155 182) = 1.37
Allocating an additionnal 8000ETH for the buyback would set us at (212 264/147 182)= 1.44
Which I think stays in the range of what’s reasonable.
Furthermore, given market conditions :
If market, and more specifically $ETH, goes back up moving towards The Merge, we will have great opportunities to buy back as wNXM price tends to lag behind $ETH price on exchanges. Our purchasing power in $ETH increases a lot on up moves.
If market continues to go down and we are in a bear phase, our Active Cover Amount will go down a lot, as well as our leverage.
However, given our current investments in stETH, maybe there is additional risk : are integrations completed ? Can the Capital Pool make swaps between stETH and ETH in the case of a black swan event?
Would be glad to hear more on that front.
this is a good point. My one concern with the first buyback was that we were faced with extreme market conditions that dampened the effect of our efforts.
I would like to think we’d be at book value already if not for the market sell-off.
This addresses all my concerns for “how can this go wrong?” Gauthier has a great point about our leverage going down if we confirm we’re in a bear market.
initial buyback underestimated the amount of ETH required
I want to be sure we’re not in the midst of this buyback well before v2 to gauge market reaction to v2
I would like to also know if we’re capable of swapping/withdrawing stETH to ETH in case of a black swan event
In my view we shouldn’t wait for the massive opportunity of discount to book value to pass… and act decisively to take advantage of it… its rare that you can buy 1$ for ~$0.6 (~60% upside to book right now)… while also increasing everyones stake in a profitable and growing protocol with it … in no rational market would a insurance sell below book with the fundamentals of nexus
stETH is fairly liquid, you could literally swap out 100.000 stETH into 99600 ETH on 1inch right now
OK here is why I think this buyback is very important.
The Mutual right now seems to be too focused on protecting a stagnant capital pool, as opposed to growing it. At the same time, the Mutual is sitting on investors money while refusing to let them leave at fair value. I think this is a bad approach and is going to lead to a continued downward spiral of confidence in the protocol.
A significant factor of the growth problem for Nexus Mutual is the bonding curve and WNXM price. In order for the capital pool to grow significantly, WNXM must trade in line with the bonding curve. This means that the price of WNXM needs to be a focus of the Mutual or else growth stagnates (Aside from staking revenue).
At the moment we have the opportunity to repurchase a significant amount of WNXM at a significant discount. This provides numerous benefits:
Reduce overall supply to match demand. When demand returns, supply will begin to increase again as people purchase on the bonding curve. (This will also refill the capital pool)
Generate pure, risk free profit for the Mutual. The profit per buyback increases exponentially if we are able to continue purchasing at .017 ETH/WNXM. (Although we obviously wont be able to forever) The last buyback increased book value by 1.6%, and the next could increase book by another 1.8% assuming .017 ETH/WNXM avg.
Reinforce investor confidence that their NXM is backed by ETH. If people consider NXM to be backed by ETH, they will see it as trading at ~11x P/E vs 50x+ if that confidence is lost (Numbers might be off but you get the idea).
Acquire a large amount of NXM that can be used by the Community Fund to stake for high demand projects or as incentives to promote the Mutual. The biggest limiter to cover acquisition right now is not the size of the capital pool, it is the limited staking for high demand projects and the (incorrect) perception that the Mutual does not pay out.
The only argument that seems to be presented against the buyback is regarding a “safe” MCR%. I don’t have any information regarding why the current MCR amount was chosen, nor do I have any idea of what is normal throughout the rest of the industry. But:
If V2/KYC removal are successful, repurchasing now will allow us to return to growth above 100% MCR faster than if we do not continue the buyback. It not only generates profit, but also accelerates capital pool growth. We are taking NXM off the market at a significantly lower price than it would be during normal market conditions.
Example: We paid 8000 ETH to buy 441771 NXM. It would have required 10,160 ETH of inflows to take that NXM off the market at book value, and obviously more above book. Now, that 10,160+ ETH of inflows will flow directly to the capital pool, for a cost of only 8000 ETH from the mutual.
The main risk is that the capital pool after buybacks is not sufficient to ensure backing of all cover in the short term (Since we have to assume growth in the long term, else the project has failed). This is exacerbated by the fact that the bonding curve price is so far above book, because it means successful claims pull more ETH from the capital pool than NXM is burnt. But we are currently trading at ~50% of the ATH capital efficiency ratio. We could buy back with 50% of the capital pool ETH and still be able to pay out if the Top ~8 projects by active cover exploded at the same time.
In conclusion, not continuing the buyback shows weakness and lack of confidence in the product. If we don’t believe the Mutual will return to growth with v2, then the Mutual should be dissolved. If we do believe the Mutual will return to growth, then it is a no brainer to continue the buyback up to an MCR% that is very likely to be able to cover all claims until v2 release.
I don’t think now is the time to drop the MCR% any lower, we’re already fielding questions on the current 95% level (rather than 100%) from large potential users that need confidence to purchase cover. The long game is building confidence and trust and while it’s unclear the exact level that starts really having an impact it’s much easier not to have these conversations.
re the current MCR level - it effectively sets the max capacity we can sell on any individual risk (20% of MCR) on the basis that the MCR% is around or above 100%. This logic starts to break down if MCR% sits materially below 100% for long periods of time. Worth noting that this topic is a regular point of discussion with larger players who want to see more capacity, so the pressure from future users is for higher MCR not lower.
Returning to the buyback - I see a decision to continue the buyback as one where we can “bank” some level of value easily now, for an uncertain trade-off on future trust/capacity. It’s very hard to compare these two as one is quite easy to calculate and the other isn’t at all.
My strong instinct is to drive traction as well as protect and build trust as much as possible, so for now, I’m against any further extension of the buyback.
We’re not technically able to do this very quickly right now. It requires adaptor work. Liquidity on markets is fine, but there is a technical barrier.
We made a decision upfront that if we need to do the work we’d drop everything to do a one-off enhancement and it might take two weeks, and that was an acceptable position.
Main point here is that we wouldn’t be able to quickly exit under a black swan scenario.
More broadly we plan to generalise the adaptor process so this isn’t required (which is why we didn’t do the adaptor work up front).
My argument is that we will be able to return to 100% + MCR faster if we continue the buyback since we are taking WNXM off the market at a lower price than it would have to be at book value or higher (Not to mention the increased confidence in NXM). WNXM needs to be = NXM before we can see reasonable gains in the MCR anyways.
I do see the short term risk of having a slightly smaller pool, but the buyback only improves the speed at which we can pass 100% MCR, which is a better goal than just protecting the current amount.
wNXM is taken off market so liquidity might be thinner, on that I agree. All else equal this would help up to the point where you get to 90% MCR%. However, you have to fill a bigger gap 90% - 100%, rather than 95% - 100%, with real cash.
You have to assume that there is a constant amount of WNXM available for sale between the current price and .038 (Which is the pre-buyback bonding curve price and the point where the capital pool begins to grow above 100% MCR)
Also keep in mind that the bonding curve price is moving down with these buybacks as well.
All else equal, the same inflow of ETH to WNXM goes farther towards getting us back to bonding curve price if there is less for sale. The ETH we expend will also be gained back as the price of WNXM (And subsequently the bonding curve price) moves towards .038.
But the target will be lower than .038 now, since we basically just added free ETH to the capital pool.
Agree! And great points raised by Hugh as well, although I disagree to the extent, I’d argue you are right if we’d go below 90% MCR…
Think there is almost no insurance in the world that has a similar amount of book value to outstanding cover, most are 10-30x+ more levered than nexus.
Also no rational investor or capital allocator in said insurance wouldn’t buyback with 66% upside to book value, when it should rationally trade decently above book value. If you think about what Warren Buffett would do (who well knew the value of float as well as book value in insurances) is buy as much as possible below book… especially with the growth and margins of a protocol like Nexus.
Think the argument that large cover buyers worry about lower MCR argument is not extremely convincing, given that nexus is extremely overcapitalised and safe, especially if you take into account how little claims on hacks and cases actually occurred… as well as most protocols underwritten have proven extremely lindy / safe over a span of multiple years.
Also some of wNXM bought could be used to underwrite cover, fund the foundation etc etc., all initiatives that should grow vs shrink adoption / cover availability.
Alternatively if the community would vote against this proposal, it could be re-submitted with a smaller amount as a compromise.
Imo one extremely important aspect that Muir and others raised is token holder confidence, where I can say from my own experience and talking to other major nexus holders that it dwindled with bonding curve stopping to work properly below mcr 100%, and confidence increased again with the buyback, i’d be more comfortable buying nexus in size again + underwriting if we’d trade above book value and cover prices would be more reasonable for the risk taken, right now I think nexus underwriters are not only underwriting underpriced risk, but also taking the risk on wnxm illiquidity/discount persisting.
I agree with the proposal and also think @Hugh’s cautious approach could actually create more risk long term, rather than less.
The insurance space will be a big sector in as the ecosystem matures, growth and margins are already attractive. Nexus is indisputably the market lead right now, but token wNXM discount is huge and token holder confidence remains very low.
Eventually another project will enter the insurance space with improved tokenomics, which will help them to raise capital attracted by the potential for growth and high margins.
Taking a conservative approach now isn’t doing so in favour of long term growth, but instead creating space for a competitor to enter the market (possibly overtaking the mutual as market leader; but at a minimum forcing us to cut prices and reducing margin).
… in no rational market would a insurance sell below book with the fundamentals of nexus