There seems to be a lot of confusion among members of the Mutual regarding their staking returns. They see that a lot of cover is being purchased for a few contracts and start to stake for them in order to reap the cover premiums.
This won’t work of course, because the system is currently only distributing premiums to the stakers at the moment of purchase and therefore anyone staking into the pool after the covers have been purchased will only receive rewards going forward. In certain cases when the cover is maxed out (20% of capital pool is the maximum) these stakers will not be able to receive any rewards at all, because the Mutual cannot handle more risk.
In any case though, whenever you stake towards a contract, no matter if you are earning premiums or not, you will be subject to potential claims.
There is a reason though for rewarding only stakers at the moment of cover purchase and that is to incentivize early staking towards smart contracts with little stake.
I am suggesting the following to address these issues:
Collect all premiums per contract in a pool and pay them out proportionally over the duration of cover.
Staking returns will be easier to calculate this way and newcomers will not fall into a hype trap and stake towards certain smart contracts that are at their maximum already.
I would also argue that the incentive to stake early towards new smart contracts would still be high enough, as staking returns would quickly reach very high levels when there is barely any stake. Additionally, the 10x use of pooled staking capital makes this much easier from the user perspective.
Limit new staking towards smart contracts that have received too much stake already.
I am proposing 1% of all NXM per contract as the limit. This would correspond to 48,000 NXM per contract in maximum stake at the current supply level of NXM of 4.8m.
This is also to ensure that staking yields stay at a solid level and don’t reach <1% APY. A basic calculation of 1.3% premium at maxed cover for a year and maxed staking would result in an APY of 2.2% that way. Still not great for the amount of risk one is taking on, but at least we could establish a floor for the return there.
One effect would be that 1% of all NXM would not cover 20% of the capital pool, but I don’t see any other major downsides to this yet.
Appreciate any feedback.
Update: The new pricing formula going live tomorrow requires 200k NXM of stake to achieve the minimum price. Therefore instead of 1%, I’d propose to take 200k NXM as a maximum.