Hey community,
I’m the director of Ease/Armor and believe Nexus Mutual stakers did not get fair treatment with the passing of a recent claim. This is not a proposal to refund full loss from stakers (the point of staking is to payout funds fairly), but a proposal to reimburse funds that were taken over the amount owed.
Background
After the Rari Capital Exploit, Claim 113 was submitted for a cover policy of 5MM DAI. The member who submitted the claim did experience a genuine loss of about $1.4MM USD worth of assets–about 28% of the cover value. With Protocol Cover, a 20% or greater loss is required, as defined by the term “Material” in the wording of the cover policy.
The claim was passed, resulting in an excess payout of ~3.6MM DAI. Given the massive overpayment to the claimant, Nexus Mutual risk underwriters suffered a large unjust loss. I ask for the community fund to be used to compensate affected Rari Capital underwriters for an amount equal to what was taken as overpayment: 43.94k wNXM.
Abstract
- Risk assessors lost millions of USD in NXM more than actual loss.
- A partial payout was possible.
- The policy terms state a partial payout should happen if possible.
- The policy was automatically accepted with a small % of quorum before discussion concluded.
- This event hits risk assessors extremely hard if more than the fair amount of funds are taken.
- Other protocols are currently working on ways to compensate their risk assessors for unfair loss from other events, resulting in very bad optics for Nexus when capacity is the biggest bottleneck in growth.
- The community fund has a history of compensating users for shortcomings of the technology.
- The community fund should compensate risk assessors for their undue loss.
Policy Wording: Supplementary Claims Amount Guidance
While the claim was being assessed there was active discussion in the Claims Discussion discord channel about the need for the Mutual to make good on this wording, as both policy holders and risk underwriters are making their decisions to provide cover and be covered based on the official documentation provided to its members by the mutual. Given policy wording, an underwriter would not expect to be liquidated 5x the amount necessary to make a claimant whole. The argument by some is that Nexus currently does not have an ability to pay partial claims, as they are programmatically designed with a binary “yes”, “no” system. Given the “Material” loss requirements were met, a “yes” was voted, and the claim passed, even though quorum was not even close to getting reached.
However, a workaround was identified that would have provided the ability for the mutual to make partial payment. The purchase of a new policy by the claimant equal to actual loss + policy cost. That policy could have then been immediately submitted for assessment. This would have allowed the Mutual to make a partial payment equal to the real loss of the original policy. There is no programmatic issue in place that prevents a new policy from being immediately submitted for a claim. Given this, the possibility of partial payouts is possible by the mutual at this time, and the steps should have been taken to do so. Since they were not, risk underwriters deserve to be compensated for the unjustified loss that was outside of the terms of the policy wording they agreed to underwrite.
Despite this, the claim was automatically accepted with ~6% of claim assessors quorum and ~0% of “all members” quorum and before a full discussion could be had. For consideration, affected stakers likely would have voted the other way with ~66% of quorum had the discussion had time to finish.
Precedence: Cream Hack Restitution
There is past precedence for the fund to take action to help mutual members when the programming of the system falls short, as seen with the unanimous passing of paying out 10 ETH to an affected member by the CREAM hack. The argument used for the community fund to pay this is that the code does not currently have an ability to pay partial claims.
On claim 113 the “Material” loss requirements were met, and a “yes” vote was passed. However, this caused a similar situation to the issue suffered with Claim 102, except with the roles reversed. Risk underwriters were liquidated for $5MM USD in NXM for what was equal to a $1.4MM USD loss, almost 5 times what was necessary. Given that the Mutual’s discretion in the past has directly sought to compensate its users for the failings of its programming, that same discretion should be used here, especially with V2 on the horizon.
Act of Good Faith Toward Underwriters
It is widely known in the DeFi coverage industry that one of the biggest hindrances to growth of the space is capacity. If underwriters are at risk to be liquidated for a maximum of 5x the amount necessary, it will cause a large lack of faith in the system. This loss largely impacted arNXM users, who currently provide ~40% of the staked capacity and now have a -10% return from staking with Nexus for the past 1.25 years. A lack of action to compensate them for unnecessary losses could have severe consequences on the mutual’s future ability to provide capacity.
This is especially important given that the mutual already acknowledges this shortcoming of the system through the planned implementation of v2 and with the community fund paying out to circumvent this shortcoming for policyholders in the past. Nexus Mutual risk underwriters are just as important as policy holders, and equal measures should be taken to look out for both parties, as all are members of the mutual.
Furthermore, the underwriters that bore the brunt of this payout are particularly useful to the protocol because the Armor/Ease core team works closely with the Nexus Mutual core team to stake funds in the most useful ways. When the Nexus team receives requests by large clients to purchase coverage, we’re often contacted and asked to add capacity to the protocol pool for these clients; this relationship gives Nexus Mutual a clear avenue to satisfy client needs.
Comparison to Other Protocols
Other DeFi coverage protocols, such as Risk Harbor and InsurAce, have announced plans to compensate underwriters that were liquidated more than anticipated in the recent UST de-peg event.
Risk Harbor: https://discord.com/channels/777661960388476979/777661960388476986/975052592302419978
InsurAce: https://www.insurace.io/blog/?p=2989
Because they feel that their underwriters were mistakenly over-exposed to risk, InsurAce is taking major steps to ensure stakers feel comfortable and remain in the system to the point where they may be securing capital specifically for this purpose. Nexus Mutual has a community fund that’s been used for similar purposes and can easily afford the compensation to achieve the same goals. If this is not done, the optics look very bad for underwriters thinking about staking with Nexus Mutual.
Potential Against Arguments
Programming working as intended:
Some users stated underwriters had an understanding of risk taken on when staking into the platform. I believe that the risk understood by underwriters is not equivalent to the loss incurred by underwriters in this event. As pointed out by the policy wording, an underwriter would expect the claim to be partially paid out if possible. This thought process can be see in some new users on discord even:
It’s important for the mutual to payout exactly according to the terms of the coverage, as should be expected by the terms agreed to by policyholders and underwriters alike.
Second, as shown with the precedence of the restitution provided to CREAM users, the mutual has previously stepped in to compensate affected members when the programming falls short of what is needed.
Precedent Set for Partial Payouts in the Past/Future:
I believe, if terms are adjusted for the time between now and V2, partial payout precedent will not affect future cases. If a similar extremely impactful case happens again, that can be looked at independently. Regarding the past, I’m not sure when the partial payout language was implemented, but there are no events where underwriters were hurt to the same extent. As seen here,
https://twitter.com/NexusMutual/status/1527017855308353536?s=20&t=n5BlC34PHCI6qvLkVsEO1A this payout was unprecedented, and accounted for $5MM of the $8.1MM Nexus has paid out to date. For any partial payout issues prior, the total amount of paid out events is limited and can be dealt with fairly easily if needed.
In Summary
Nexus Mutual was created to protect users from undue loss. This claim created undue loss multiple times larger than the initial loss. This occurred simply because of current limitations of the product, which are in the process of being fixed, but it will forever be looked back at by potential underwriters as an example of how the mutual functions and where its priorities lie.
It’s extremely important to be fair and follow the terms in this situation. Not just from a moral and legal point-of-view, but also for the future of the protocol. Institutional capacity will likely be much harder to bring into this industry than institutional clients, as institutional underwriters are wary of catastrophe coverage overall, much less catastrophe coverage with little historical data on its risks. We do not want to give future underwriters the impression that their funds matter less to the mutual than paying out claims.
It was possible for Nexus to do a partial payout for this claim. Nexus had a duty to partially payout according to its terms. I believe that claims assessors would have voted for a partial payout had there been adequate time. Not rectifying this situation will be very bad optics for Nexus. The community fund has all the means to compensate stakers. I believe stakers should be compensated for their undue loss.
