Summary
The following is a proposal by the DAO R&D Team to launch a USDC-denominated yield bearing vault under the wider Nexus Mutual umbrella. The vault would source underlying returns from providing solvency capital and reserves off-chain to back regulated insurance policies.
The vault is set up to be an allocate-and-forget style deposit:
- rolling up at a fixed baseline yield (above typical blue-chip USDC yields available in the market), protected by Nexus Mutual cover,
- ability to increase returns through longer-term commitment options,
- available to verified Sophisticated Investors,
- targeting allocations of 18-24 months.
We’re aiming to have this product live and the initial vault limit filled in Q1 2026.
Rationale
Launching and operating this vault would provide several benefits to Nexus Mutual and the wider ecosystem.
Desirable Product
Insurance product returns provide a high, sustainable yield that is not correlated to wider crypto-market yields. We believe this product would fit the requirements of a variety of investors with large stablecoin reserves to deploy over medium-to-long timeframes.
The potential downsides of insurance, e.g. higher than expected claim payments, are not well understood in the blockchain ecosystem. To address this, Nexus Mutual would provide a cover that protects the baseline yield in case of insufficient returns from the underlying investments, in addition to other operational risks of the vault.
The ability to further increase returns, via locking the deposit tokens for longer durations, would result in an overall yield comparable to some of the highest unleveraged yields currently available in DeFi.
A New Growth Avenue for Nexus Mutual
Nexus Mutual would benefit two-fold from the RWA Insurance Vault:
- The baseline yield would be protected by a cover purchase from Nexus Mutual, with a corresponding cover cost paid.
- As the ultimate owner of the vault’s legal entity, the Mutual would benefit from the residual operating margin of the Vault Operator (VO) after meeting all fixed obligations.
Expertise
The Nexus Mutual Core Team remains unique in the ecosystem, being fully crypto-native and possessing a deep knowledge and experience of the TradFi insurance industry. This makes us perfectly positioned to launch, operate and make a success of this new product.
Partnership
We propose launching this product in partnership with Re as our first Insurance Partner.
Re operate a regulated reinsurance vehicle and are specialists in underwriting portfolios of:
- Property insurance for homeowners and small businesses
- Auto insurance
- Workers compensation
- Warranty
These lines of business are high-volume and low-volatility, ideally suited for generating a predictable return for capital providers.
Nexus Mutual’s Capital Pool has itself already made a 12m USDC investment in May 2024 to back Re’s reinsurance activities, which has to date yielded double-digit returns.
Economics
Based on canvassing of potential investors, we are targeting an initial vault cap of 10m USDC to launch the MVP.
The vault will take in USDC deposits and issue an LP token. The LP token will roll up programmatically at the fixed baseline yield. While direct interactions with the vault (minting, withdrawal requests, staking) will only be available to approved Sophisticated Investors, the LP tokens will be freely usable in DeFi.
The baseline yield is expected to be set 2-3% above US 2-5 year treasury yields. The spread above the average of the 2- and 5-year treasury yields (the main driver of low-risk insurance returns) will be used on an ongoing basis to benchmark the baseline yield. Currently this would put the baseline yield ~3% above blue-chip USDC DeFi yields.
Investors will have the ability to earn points by locking their tokens in the vault for a set amount of time, with a 2-year lock representing the maximum earning rate. Based on the points earned each season (proposed to be quarterly), a portion of the underlying returns in excess of the baseline yield and the cost of Nexus Mutual cover will be distributed to the lockers (in USDC), expected to push the overall yield for those with locked tokens into double digits.
The remainder of the returns will be split between a surplus share with the Nexus Mutual Capital Pool and the VO itself, which will have some frictional expenses.
The typical return emergence timeframe for the type of mass-market insurance business reinsured by Re is ~2 years. As a result:
- We will heavily encourage investors to have this timeframe in mind when investing into the vault, supported by the locking incentives.
- While some primary and secondary market liquidity will be available, significant redemptions of liquidity from the underlying insurance instruments will not be available for at least 18 months. Withdrawals of the underlying investments ultimately remain subject to the actuarial release of reserves backing the underlying policies.
- Some additional pre-funding will be required to pay for the layer of Nexus Mutual downside protection and early surplus distributions.
Withdrawals will be processed using a first-in, first-out queue system as liquidity becomes available. While LP tokens are placed in the withdrawal queue, they continue to accumulate the baseline yield.
The team is also expecting to create and provide liquidity to a secondary LP token/USDC market. We currently expect this to be a Uniswap v3 LP token / USDC pool with frequent rebalancing of the position to allow for accumulated yield.
Technical Set-up
The vault will be based on a modified version of the ERC-7540 standard, enabling users to deposit USDC into the vault and receive the LP tokens in return.
The LP tokens will programmatically roll up at the baseline yield.
The USDC will be routed to the Vault Operator multi-sig who will then pass the funds on to Insurance Partners. The VO will be responsible for tracking and reporting on the value of the insurance investments it makes.
The VO multi-sig is expected to be a high-threshold (6/n) Safe. This would be supported by a lower-threshold (e.g. 3/5), separate day-to-day operating Safe, given certain permissions to perform the regular Vault Operator actions by a Zodiac Roles Modifier. These actions include:
- approving addresses from new investor applications
- accepting/rejecting deposits above the Vault Cap (see below)
- changing the Vault Cap
- passing the funds onto whitelisted insurance partner addresses
- fulfilling withdrawal requests
- changing the baseline yield, with a smart-contract enforced delay
Both Multi-sigs will be managed in accordance with SEAL’s multi-sig Best Practices.
The Vault Operator will set the maximum total amount of USDC assets - the Vault Cap - that can be deposited into the vault automatically by approved addresses. Any additional deposits beyond the Cap are subject to approval by the Vault Operator.
Users can also lock any number of their LP tokens for a specific amount of time in the vault contract, with the UI expected to specify 3, 6, 12 and 24 months as options. The smart contract will only manage the locking itself (and the ability to edit the lock upwards either in amount or duration). The points calculation will happen offchain, with the script to perform the calculation expected to be subject to a separate independent audit. Once confirmed and available in the VO multi-sig, the surplus rewards will be distributed proportionally based on the points accumulated by lockers in each season.
To redeem their assets, users can make a withdrawal request by depositing their LP tokens into the withdrawal queue, where the LP tokens will continue to roll up at the baseline yield. The Vault Operator can fulfill these requests by sending USDC to the vault contract, upon which the appropriate amount of LP tokens are destroyed and the corresponding USDC value can be withdrawn by the depositor.
Legal Set-up
The Vault Operator will be incorporated as a separate legal entity that is fully owned by Nexus Mutual’s existing legal wrapper, the Terrapin International Foundation.
To maximise regulatory compliance, the Vault Operator entity will perform KYB, KYC, AML and Sophisticated Investor checks on the investors in the vault, and whitelist the addresses for interacting directly with the vault to mint, redeem and stake the LP tokens.
Due to the nature of the product and the separate entity set-up, there are different freedoms and restrictions compared to the existing Nexus Mutual membership. Therefore, a separate KYB/KYC process will be required to participate in the vault.
We have received the necessary legal advice and confirmed the viability and compliance of the structure.
Current Status and Next Steps
The Nexus Mutual DAO R&D team, as well as the Foundation engineering and legal teams have completed a sufficient analysis on the economics, smart contract and multi-sig architecture, and legal set-up to assess with confidence that the RWA Insurance Vaults would represent a viable, successful product.
If approved by an NMPIP, we can go ahead with implementing the technical, legal and operational set-up. We expect to be able to launch within the next few months.
Conclusion
With the launch of Insurance RWA vaults, crypto-native institutional and HNW investors will be able to access high yields from real-world insurance products in a seamless, familiar and secure way. We believe the proposed product is lucrative, desirable, and technically, legally and operationally sound.
There are also great benefits to Nexus Mutual itself:
- acting as the cover provider for the vault, protecting it against all forms of shortfall and being appropriately compensated for that protection, and
- a share in surplus returns.
While somewhat different from Nexus Mutual’s usual offering, our knowledge of crypto and traditional insurance, as well as our strong partnerships in the space, make us the perfect team to launch this product.
RFC Status
- Transitioned to NMPIP