Proposal: Operation TM21

[Hugh]

Re-opened this topic as it warrants further discussion.

Suggested next steps:

1. Continue discussion
2. Wait until decisions on what to do with the previous buyback have been resolved

[Melvin]

@0xSpicySoup

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.

I strongly agree with this as being a huge risk.

Let’s be honest, many of us got into NXM because we liked the idea of the bonding curve. Some of us (including me) did not read the whitepaper fully and did not realise that we would be locked into NXM if MCR% dropped below 100. Many who did read it, possibly did not think this could happen for a prolonged period of time.

Locking investors in for an unknown period of time is not a good way of attracting capital: ideally a solution can be found whereby new investors can come in and focus on being long-term holders in an asset with limited downside (capital pool floor), rather than speculators in a token with high left-tail risk (MCR% below 100 equals 50% haircut to exit via wNXM).

The risk of being locked-in simply incentivises exiting early when the MCR% nears 100.

There is a huge psychological factor to this: when the investor knows he is locked in, he will want to get out. Whereas the same investor, at the same price, will probably chose to stay if he knows he is free to chose as he wants.
(similar to the psychology behind bank runs)

The tokenomics are not working in our favour and I strongly believe they need to be fixed before another project comes along with a more attractive model.
It was not difficult to attract capital during Defi summer, I think it would be a mistake to keep those investors locked in for the fear of not being able to attract further investors later on. If that was the case it would simply show weakness in the project at its core which I do not think is the issue.

I rate investor confidence higher than most other initiatives that are currently being worked on, because without capital from investors NexusMutual simply cannot grow rapidly enough.

I am strongly in favour of establishing a permanent floor for NXM/wNXM at book value. This will instantly improve NXM tokenomics.

[vincentj]

@Melvin

It was not difficult to attract capital during Defi summer, I think it would be a mistake to keep those investors locked in for the fear of not being able to attract further investors later on. If that was the case it would simply show weakness in the project at its core which I do not think is the issue.

100% agree, having followed the project since a while… ultimately think getting nexus back to a working tokenomics model is key, and in the meantime buying as the dao with 60-70% upside to book value mandatory for any rational token holder.

[Melvin]

@vincentj

getting nexus back to a working tokenomics model is key

…and of course the other side of the tokenomics is broken also:

► stakers are being compensated ~50% less for the same risk they are taking. (I am referring to those stakers who bought on the bonding curve and are being compensated in NXM only redeemable as wNXM at market)

► cover buyers are purchasing cover at ~50% below actual cost via wNXM. Some view this as an advantage but I don’t. Presumably the cost of cover has been calculated by actuarial models… so why are we selling cover for 50% less than what has been suggested by the models? If I understood correctly from one of the Mutant calls, the mutual is modelling for a 85% loss ratio. Howevever if the premium is purchased at a 50% discount via wNXM, is the actual loss ratio 170%?!
If so, it makes absolutely no sense to be selling cover purchased in this way as the mutual is taking on more liability than it is being compensated for.

Everybody wants to see the mutual growing and the amount of cover sold increasing, but I do not believe that selling cover at a loss is the way to do this!

@Hugh

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

“banking some value” is the cherry on the cake, I do not think it is the biggest benefit of the buyback. You talk of driving traction, protecting and building trust: I think the buyback / setting a floor at book value does all of these, (1) geared towards investors and stakers in the project and (2) by protecting the capital pool from cover sold too cheap vs liability.

[vincentj]

100% agree… main reason why I stopped staking! Think it would be incredible high value to have a workshop with tokenomics engineers to rethink Nexus tokenomics, some initial ideas for me would definitely center around: dynamic pricing based on wnxm price, more dynamic bonding curve, where one could also sell to the DAO for example at MCR 80-90 but with highest burns/fees, and for example at 110 with lowest, so its more dynamic and not cutoff from being possible at 100.01 but impossible at 100

[Gauthier]

@Melvin

► stakers are being compensated ~50% less for the same risk they are taking. (I am referring to those stakers who bought on the bonding curve and are being compensated in NXM only redeemable as wNXM at market)

That’s wrong. NXM market price = wNXM market price. People who bought on bonding curve made a loss but are still getting the same yield as someone buying today.

@Melvin

Locking investors in for an unknown period of time is not a good way of attracting capital

Trapped investors have had > 1 year to exit… I’m not sure this is still a valid argument. Those that want to exit and didn’t yet are probably (very) small holders.

@Melvin

The tokenomics are not working in our favour and I strongly believe they need to be fixed

I agree that the bonding curve should be re-assessed. However this is independant from this buyback proposal.

Overall I’m still in favor of this buyback for the reasons mentionned earlier :

@Gauthier

• 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.

[Hugh]

Signaling vote put into Snapshot: Snapshot

Process from here:

1. Signaling vote
2. Smart contract development and audit
3. Full on-chain governance for approval and execution

(Once we have the results here will do another snapshot for the use of funds from buyback #1, quite a few members have indicated their votes would change if a second buyback was conducted)

[danoctavian]

Exactly.

But that may happen again, predicting the crypto market is next to impossible, and extreme market conditions may occur again.

[BowTiedIguana]

I had assumed that the buyback would be conducted in much the same way as the last one which would allow us to move quickly to capture the discount.

But Hugh has referred to a smart contract and audit. What would be done differently, and what would be the time and cost of this?

[Hugh]

Nothing different, we had to do the same smart contract and audit work last time.

I just wanted to specifically highlight the opportunity cost involved here.

[vincentj]

Yes, helpful to know! But shouldnt it potentially be easier this time around given same or very similar work as as last time?

[DeFi_Dad]

Thanks for explaining Hugh. I definitely have concerns about lowering MCR level. I trust founder instincts above all else. There is no greater combo of expertise / skin in the game than yours in Nexus. I was originally in favor of this vote but now I’ll be voting against it. But I am not against future buybacks. Just now is clearly not the right time.

[0xSpicySoup]

Definitely disagree and think it would be a huge mistake not continuing the buyback at this stage. But I respect @DeFi_Dad 's opinion and have been following your takes well before getting into the weeds on Nexus.

How do you see the mutual raising capital in the future without addressing the significant token discount via buybacks?

And if you’re opposed to buybacks at this stage, are you personally (or through 4RCapital) accumulating more NXM? If not, why not?

[vincentj]

Ultimately I think its a no-brainer to buy $1 for $0.5 and there are little arguments against it in my view. With a 155k eth (+community fund) capital pool, and roughly ~176k in eth outstanding cover there is little to no reason for me to be against it purely from risk… given we’d still be able to cover almost every protocol failing at the same time, every normal insurance is over-leveraged by like 5-20x… while we are more conservatively not really levered (outstanding cover/capital pool)

I think it could make sense to limit the size of the buyback proposal this time around to win over some holders that are more conservative, and have stronger conditions for discount percentage… so it could be using 2-3% of capital pool, and only buying at 30-40%+ or higher discount over a longer time-frame. thoughts? @Hugh @lasse @rchen8 @DeFi_Dad

[Muir]

I would be interested to hear if you think the marginal returns from these new cover buys would outweigh the profits from a buyback. The last buyback generated profit equal to almost half of our annualized premiums in force, with 0 risk.

I would also like a comment regarding the risk profile of the cover we are currently selling. Since we are selling cover 60-70% below our modeled risk pricing, who is picking up the additional risk?

[Muir]

I would support this, but I just don’t see a better use of capital than buybacks if we are trading at more than a 5-10% discount to book.

I agree there is significant room to leverage up, but even if we lose some potential cover purchases, they simply cannot provide the same returns as a buyback.

[vincentj]

absolutely agree!

due to the downward spiralling wnxm price and no cover price adjustment, we are selling risk increasingly low… i think there should be a mechanism in future upgrades to ensure cover prices are linked to wnxm price. it also doesnt make sense to me that cover pricing becomes exceedingly high when nxm is above 100% mcr…

even more so agree that there simply is no better way to return profit to the mutual than buying with 50-100%+ to book value, every rational investor would hand over fist vote for a buyback if the upside to book would be anywhere close.

[Hugh]

Adding some extra flavour from my perspective here:

I’m personally against the buyback, at this point. With V2 coming out and the many conversation I’m having with potential large cover buyers I don’t believe now is the time to be handing back capital. We will need it for growth and we’re already fielding questions on why 95% MCR% is ok. I would have preferred ~97% for the first buyback rather than 95%, so quite strongly believe pushing it to 90% is not where we want to be. We’re building a fundamental product to support the mass adoption of crypto. Mass adoption is starting but the real volumes that require insurance like solutions haven’t entered yet. Giving up capital on the precipice of this adoption wave is strategically a very weak move imo.

This is not about a few extra covers here and there, it’s about giving confidence to big strategic buyers and potential distribution partners we can scale up and meet their demand. Their major question right now is on future scale, we don’t want to bring any further doubt to that.