Dear Nexus Mutants,
Within days of yinsure.finance launch, 7 key protocols have reached max capacity (not staking bottleneck): yearn, aave, balancer, compound, curve, uniswap, synthetix (Figure 1). Some of them occupying 10% global max, while some are 20% global max. Clearly, the whole capital pool is almost exhausted (either horizontally or vertically).
At current capital pool size (~$70M), MCR increasing 1% every day can only open up ~$700k cover availability every day and is not enough to meet daily cover demands. When the mutual was very scalable back in August, we had ~$2M daily cover purchase (Figure 2). My twitter poll suggests that the mutual should meet ~$4M daily cover purchase (Figure 3).
Clearly MCR increasing 1% per day is the limiting factor right now. To open up $4M daily cover availability, MCR should increase 6x current rate, which mean 6% per day. That means the mutual should accelerate MCR increment to 4h to stay competitive.
Someone else will profit from this if we can only meet $700k daily cover availability when DeFi is asking for $2-4M (as of today) (Figure 4, 5). We are lucky that yinsure.finance is complementary to Nexus Mutual, rather than replacing us. But you’ll never know . In order to stay competitive, Nexus Mutual should offer enough cover availability to meet conservatively $2-4M daily cover demand. Our strategy should focus on meeting customer demand as our top 1 priority (Figure 6).
Over $50M of covers will expire in the next 30 days. $15M in the next 10, and the rest in the following 20 days. This will leave some room for renewals, plus the addition of an extra ~36% out of the MCR. May not be lightning speed, but it is solid.
And it wouldn’t (be sustainable) if MCR floor would remain as is. However…
1% daily means ~36% increase for the first month, 83.5% for the 2nd, 147% for the 3rd month, 233% for the 4th… That is over 500K ETH MCR floor in 4 months time and almost 1M ETH in a little over 6 months.
" And it wouldn’t (be sustainable) if MCR floor would remain as is. However…
1% daily means ~36% increase for the first month, 83.5% for the 2nd, 147% for the 3rd month, 233% for the 4th… That is over 500K ETH MCR floor in 4 months time and almost 1M ETH in a little over 6 months."
While this sounds like a lot, it’s not nearly enough.
DeFi TVL is growing about 100% a month, at least for the past 4-5 months. 35% a month is not enough for NXM capacity to grow.
Since NXM is (so far) the only coverage protocol around, it should grow FASTER than DeFi TVL as more people are exposed to the idea of coverage.
MCR should be allowed to grow >100% a month.
Not sure why NXM is hamstringing itself. What is the downside to a high MCR?
I fully endorse the proposal to increase MCR by 1% every 4 hours.
Let’s say DeFi as a whole is growing at 100% a month (which it has been for 4-5 months now, and can be reasonably expected to grow as such for a big longer. For all we know, it will grow even faster later in this cycle.).
Let’s say Nexus MCR increases 35% a month.
A month from now, NXM is only meeting ~1/3 (35/100) the new demand for cover.
Two months from now, only 1/9.
Three months from now, only 1/27.
Four months from now, only 1/81.
You see how exponential functions work?
Of course, there are a lot of assumptions built in here like DeFi will continue to grow 100% a month for 4 more months, but:
Even if DeFi only grows at 50% a month, NXM still falls way behind.
DeFi could conceivably grow at MORE THAN 100% a month. We are early in the cycle.
Customers are begging NXM, “Please take my money”, and NXM is saying, “No, sorry, we need to be cautious with our growth.”
A governance proposal has been submitted to increase MCR increment to 1% every 4 hours until MCR reaches 1 Million ETH. This is the same as last time when we went from 20K ETH to 100K, and will open up much needed cover capacity for big defi projects that are maxed out. This will solve our current bottleneck.
Also, I think this is the first time a member rather than the team or advisory board have made a proposal, so it is also a good test of how the DAO works.
I think all these arbitrary X% until X MCR numbers are unncessary.
Just make it 1% every 8 or 12 hours with no defined endpoint and be done with it.
The end goal sounds like implementing gearing factor and moving away from the MCR Floor as the primary mechanism for scaling as already proposed by Hugh a month ago - so efforts/discussions I think should be focused on tuning that rather than just constantly debating adjusting MCR% every time we run into a bottleneck.
Even the gearing factor will be a bit arbitrary and periodically adjusted based on what I’ve read and heard in Hugh’s interviews. It may start low like a gearing factor of 4, and over time, racheted up to say 6, then 8, then 10.
I don’t think the MCR adjustment should be changed frequently, but. I think it should at least be large enough to grow with DeFi growth.
Gearing factor won’t do anything to help open up capacity for the maxed out projects, because it only adds capacity for non-overlapping risk. There is no other way to increase capacity for those projects whose covers are already at 20% of MCR, other than to increase exposure to each project (increase the 20% of MCR limit, not advisable as this would overexpose the mutual to a large risk) or to increase the MCR, which is what we must do.
Please correct me if I’m wrong, and if there are other ways to increase capacity for these big defi projects, I’m all ears. Bear in mind these projects that buy more than 80% of the mutual’s total cover, and want to buy more - we have no capacity for them currently. But we could. And i believe the mutual is in a much stronger position to attract capital now than ever before. Why ignore your biggest customers, when they want to buy your product, and you are able to procure the product ? The wide growth strategy will have room to grow and time to catch up, and won’t have to deal with bottlenecks like these. Win-win.
We are actually in the exact same scenario as we were couple months back, and Hugh explained it much more clearly:
Agreed with @Drazav . As Hugh stated last time this was discussed, “I believe once we hit 100,000 ETH we should move to a more capital efficient approach and look to have cover amount drive MCR sooner rather than later.”, from here and continued in this thread.
Exactly what Hugh said, you can increase capacity for big projects by increasing the MCR with the second option, that relates to the function of overall cover. I will quote Hugh on this:
"Stepping back for a moment on the MCR mechanics. The MCR is actually the larger of two values:
MCR = max [ MCR Floor, f(cover amount) ]
At the moment the MCR Floor value is dominating and the more complex risk capital calculation, f(cover amount), is not being used. Without diving into the details of the risk capital calculation it can be approximated as 1/6 x Active Cover Amount, or a gearing factor of 6x."
If there will be more cover spread amoung many contracts, that will increase overall cover amount and lead to an increase in the f(cover amount), that will lead to MCR increase. And that will in turn increase capacity for the bottlenecked contracts.
I believe that what yEarn has just tweeted about today (see here), can increase overall cover amount by staking NXM on lesser sought after contracts.
The cover amount won’t drive MCR until over $300 Million (assuming gearing factor of 4, MCR increasing 1% everyday) of cover is written, we are at $80 M right now. Getting to 300M will take time, and probably a lot longer given the major customers that account for 80% of business are not being served. In the meantime, which will be months, our biggest customers (yearn, aave, curve, balancer, compound, uniswap, synthetix) will look elsewhere, and nexus mutual will lose the first mover advantage because we are not able to meet demand.
Even when f(cover) takes over, the cover amount driven MCR increase will not be large enough to meet demand. When investors are okay to invest their capital into the mutual, which obviously they are given MCR% keeps rising, and we do not expand - it would be a lost opportunity which we will come to regret.
wNXM zapper: Boost capital inflow by allowing non-KYC to zap into bonding curve/capital pool directly)
We need to translate all these into $2-4M daily cover availability (to meet demands) instead of 200% MCR% (suggesting overcollateralized which is clearly NOT).
Staking and capital pool will no longer be the bottlenecks very soon. MCR will be the bottleneck in meeting $2-4M daily cover availability. Are there any other ways to address MCR bottleneck besides accelerating MCR increment?
Regarding the proposed 4hr increment change in Governance vote right now:
Just remember that everything requires balance - I’m not opposed to 4hr MCR change but it’s fairly aggressive IMO and it will require a lot of capital inflow to sustain it.
Let’s just pretend that we turn on 4hr increments later this week and we manage to sustain capital inflow to keep MCR% above 130. Then we’d hit 1M ETH MCR some point late October.
That would put the token price at 130% MCR at $200 per NXM (assuming ETH price around $400)
That means in October we’d be at 1.5 billion marketcap, higher than Yearn and 2nd out of all defi projects.
Is this achievable? Sure
Is it realistic this quickly? I’m not so sure
Don’t ignore selling pressure/market dynamics/profit taking etc - imagine what happens if we are sitting at 130% MCR and there is a mass sell off across markets, 130% isn’t a magical in-penetrable floor - we can go lower. If we’ve gone too aggressive and have no room to breathe then that 130% can become under 100% very quickly and we all know what happens when we go under 100% MCR
Anyway, I’m as bullish as the next guy but I don’t think many weigh up the the different options when proposing changes - you can’t just throw up 4m cover daily requirement, attach some iceberg memes and expect it to be that simple - there is always a balancing act on sustaining these changes.
So that’s why 8-12hr increments feel a bit steadier to me and 4hr is tad too aggressive for the time being (imo).
Besides, this is really just to keep things ticking until a new model of capital scaling can be introduced anyway which is the real goal.
. In order to stay competitive, Nexus Mutual should offer enough cover availability to meet conservatively $2-4M daily cover demand. Our strategy should focus on meeting customer demand as our top 1 priority (Figure 6).
