[RFC] Building on Trust: The Future of Nexus Mutual and the Evolving Onchain Insurance Landscape
Since its inception, Nexus Mutual has firmly established itself as the original, leading decentralized insurance alternative protocol serving the crypto-native community. As we look toward the future, it’s essential to reflect on the foundation we’ve built, the impact we’ve had, and the bold steps ahead to scale and evolve.
Before diving into my proposals for the next wave of protocol enhancements, some context:
A Proven Track Record in Crypto-Native Risk Protection
Nexus Mutual was created to provide meaningful protection against risks inherent in decentralized systems. Over the years, we’ve successfully delivered cover against smart contract vulnerabilities, slashing events, depeg scenarios, and custodial failures. Our track record and transparent claims process have made us the go-to insurance alternative for top-tier participants in the space.
Trusted by DeFi’s Elite
Nexus Mutual has built deep trust within the industry. Some of the most respected and well-capitalized DeFi allocators rely on Nexus Mutual to protect their portfolios. Their ongoing support is a testament to our resilience, reputation, and the value proposition of a fully onchain mutual. This established trust places Nexus Mutual in a very advantageous strategic position, as the next wave of capital into DeFi is not only going to be much larger but it will be more risk averse. New entrants will be looking for assurances across all aspects of investing and coverage will be a key part of that. If we execute well, this will have a multiplier effect as larger waves of risk averse capital seek coverage.
Traditional Insurance Markets
Several regulated entities are slowly entering the crypto space, but the capacity available for larger players is still very difficult to access. As with any insurance markets where capital is in short supply, collaboration, rather than competition is going to be required. In general, traditional insurance markets are short on capital to provide capacity, while Nexus Mutual can actively deploy more capacity into the market and be more capital efficient. A big theme over the coming 1-2 years is going to be bridging Nexus Mutual’s capital into regulated insurance markets.
Capital Flows and the RAMM
The launch of the Ratcheting Automated Market Maker (RAMM) in November 2023 marked a major step forward. In just a short period, the RAMM has accrued over 5,350 ETH (approx. $16M) in value to long-term aligned members. This aligns incentives, rewards quality risk assessment, and opens new possibilities for scaling capital provision. However, while the RAMM has coordinated orderly capital outflows while increasing value for members it has not yet stimulated any material capital inflows for the mutual. Capital growth is also going to be required for the next phase and we must consider the best ways to attract capital to the Mutual.
Proposed Next Steps for the Protocol
To maintain momentum and amplify our impact, I suggest the following key next steps:
1. Reform the Claims Mechanism to Build Trust
Taking a critical view of the claims mechanism—we effectively have a model where a handful of expert members drive the majority of decisions, but potential users struggle to understand that’s actually how it works. This set-up leaves material doubts that “random DAO voters might impact my legitimate claim”, which is regularly cited as a concern.
This means the Mutual gets the worst of both worlds. We effectively operate with a small claims committee but cannot openly say that’s how it works as we can’t specifically identify the experts voting a potential users claim. This becomes a meaningful barrier to building trust as large users want to know who is voting on their claim and that they have the required expertise.
As per NMPIP-237 members have voted to pursue this model and as a result the Advisory Board (AB) has outlined the proposed details, as follows:
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Shift from open community voting to a specialized claims community of 3-to-5 members for crypto-native claims.
Rationale: Based on the user research we have conducted, cover buyers of all sizes want to know who is assessing their claims. Cover buyers want to know that the individuals and/or teams assessing claims are qualified and credible. All of the respondents we spoke with indicated this would improve trust in the Mutual’s claims model. -
Introduce a delegated claims model for new and existing products where warranted, especially those requiring specialist input. This would delegate claims assessment to an individual account controlled by a team who has the required knowledge.
- Existing Products: such as The Retail Mutual (TRM) cover where offchain information, some of which has privacy concerns. As well as cover sold through Native and other brokers.
- New Products: There are many cases of new products that a delegated claims model will allow such as:
- Kidnap & Ransom
- Property Coverage (e.g., Bitcoin Mining)
- Any product where offchain information, particularly with privacy concerns, are involved.
- Parametric Covers (delegate to an automated agent)
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This will build greater trust in the claims process while enabling new product and distribution innovations on the Nexus Mutual protocol.
2. Upgrade Governance to Formally Use an Optimistic Model
The current governance set-up is that all changes go to a full member vote where the Advisory Board (AB) sets the default outcome. If quorum isn’t met, the default outcome proceeds. If quorum is met, then the AB default is discarded and the member vote result applies.
Functionally this is equivalent to using an optimistic voting approach whereby the upgrade proceeds as per the AB recommendation unless it is voted down.
Since voting participation is low, as with nearly all DAOs, it makes sense to simplify the governance contracts, remove technical debt and move to formally adopt this model.
Importantly, members will still retain the power to replace AB members as they wish onchain, which remains a process that cannot be blocked by the AB members. This means members still retain full control.
I propose formalising this change with the following details:
- Transition governance to formally adopt an optimistic model where the AB proposes upgrades and enhancements that pass automatically unless members vote against them.
- Proposals will be placed on snapshot for gasless voting.
- A quorum of 15% of NXM supply will be set to match the current quorum parameters the Mutual currently uses.
- Voting rewards will be removed.
- AB members will be responsible for accurately implementing members’ decisions onchain.
- If AB members go rogue, they can be replaced by an onchain member vote, see below.
- AB members are legally responsible to implement members’ wishes as they are councilors of Terrapin International Foundation, the legal wrapper behind Nexus Mutual.
- This reflects the current practical governance process, but with updated, streamlined contracts to enhance protocol efficiency, performance, and security.
- Members will always retain the power to replace AB members via an onchain vote that cannot be blocked by existing AB members.
3. Bridge Nexus Mutual’s Capital to Traditional Markets
Traditional insurance markets are huge but at the moment Nexus operates in its own silo as we cannot participate due to regulatory barriers. The core barrier is that regulators won’t give any credit to traditional insurance companies for cover purchased on Nexus Mutual as it doesn’t have the same regulatory guarantees that other insurance companies have. This means it is very capital inefficient fore regulated insurance companies to offload risk onto Nexus Mutual and that means our access to traditional insurance markets is very limited. In addition, some customers simply prefer a regulated insurance contract instead of discretionary cover.
There are various ways to overcome the regulatory barriers and the Nexus Mutual core team has spent considerable effort developing a strong understanding of the pros and cons of each. Up until now, regulators have been unwilling to make meaningful concessions but recently there have been changes and different companies have been allowed to take credit for crypto assets in their regulatory capital calculations.
Now is the right time to seek regulatory approval for licensing that would allow staking pools the option to become regulated themselves, without regulating the entire Nexus Mutual protocol. This would also require protocol changes to support legally shifting some of the capital pool assets into an insurance entity, all the while still keeping them in the wider Nexus Mutual protocol (and remaining fully transparent onchain).
I propose proceeding to seek regulatory approval for such a structure as well as developing the protocol upgrades required to enable regulated staking pools.
Rationale: While it’s very hard to place numbers on the growth potential it could easily enable 10x growth over a few years and has the potential to set Nexus Mutual up as a global platform to launch insurance entities.
More detailed specifications will be made available once we have clear indications of the regulators requirements.
4. Redirect RAMM Value to Stakers to Increase NXM Staking and TVL
The RAMM has been very successful since its inception in November 2023. It has allowed orderly capital exits and through its buyback mechanism has added material value to those members than remain in the Mutual.
This value-add has been spread among all NXM holders. As is the case with other buyback programs in DeFi, it hasn’t really received the recognition it deserves. Somewhat related, the Mutual would benefit from having more of the NXM supply staked and fully backing risk. The staked NXM is what really adds value to the Mutual.
I’m proposing that we redirect the value accrued through the RAMM, potentially with some additional NXM minted, to NXM stakers directly. This would be a similar model to Ethena and EtherFi where the rewards are allocated to a smaller proportion of the token holders that are more active.
At current staking levels this would increase NXM staking yields by 20-24%, for a total ranging from 25-40% (staking yields by pool vary quite a lot).
This would not only materially change the number of NXM staked, but also attract more capital to the pool as these yields are ~90% ETH denominated and even though they contain material risk due to claims slashing 30%+ yields on ETH are very hard to come by.
- At current RAMM value add, this corresponds to roughly 108,000 NXM per year (before adding any additional NXM)
- Spread over the existing NXM staked of 452,000 this is a boost of 23.9%
- If the goal of doubling NXM staked to ~1 million NXM is reached then the boost on yields would decrease to ~10%.
- The goal is to double staked NXM to approximately 1 million and grow TVL to over $500 million. Members are encouraged to discuss optimal reward structures to achieve these targets.
Conclusion
DeFi is becoming much more acceptable throughout the world and is about to experience material inflows from traditional markets as the regulatory barriers come down. While Nexus Mutual is already very well positioned to take advantage of this, the proposed changes will make sure we capture as much growth as possible.
I’m looking forward to some initial feedback from members before formalising the process around these proposed changes and raising them as NMPIPs soon.