Nexus Mutual: Traditional finance, traditional metrics?
One of the biggest struggles for DeFi investors is token valuations. In rare cases, protocols have analogs in traditional finance and also produce cash flows accruing to tokenholders. Nexus Mutual is the DeFi equivalent of the age-old traditional discretionary cover mutual. Its governance token, NXM, is burned when clients purchase cover in an exercise akin to stock buybacks in traditional finance. At first glance, the DeFi mutual, like MakerDAO, appears to be the DeFi equivalent of a traditional financial business, and therefore traditional financial metrics should apply. Yet there are many nuances to the protocol cover business, NXM tokenomics, and the wider DeFi ecosystem that needs to be considered to assess Nexus Mutual’s value proposition.
Nexus Mutual provides cover on smart contract failure and custody default loss, with payouts decided through community voting. Without insurance, DeFi’s main risks – protocol or custody failure – are uncovered, and protocol hacks are likely to result in losses. In February Messari calculated that over $284 million in DeFi was lost to hacks since 2019.
Nexus Mutual and the decentralized insurance industry only cover a fraction of TVL in DeFi. Right now, the largest question for Nexus Mutual is whether or not it can grow to cover a larger percentage of DeFi’s TVL.
Nexus and the NXM Token
In order to provide cover against smart contract hacks, governance attacks, oracle failures, or custody failures, Nexus Mutual pools source from its “members” - the NXM tokenholders. It does so as follows:
- Capital Provision: members acquire NXM tokens by selling ETH to the Mutual, which remains in the treasury to cover claims.
