An overview of what is happening in the crypto markets, summarised daily by Crypto Finance AG Senior Trader Patrick Heusser in the market commentary.
Market commentary
Good Morning!
Since there have been no new bitcoin developments or notable price actions, I will now turn my attention to trying to stay on top of DeFi developments.
A few weeks back, I mentioned some of the important aggregators and service providers in the DeFi space, e.g. zapper.fi, yearn.finance, aave.com, MetaMask and nexusmutual.io. I will do my best to update you about the big "lego" building blocks, and what other smaller "lego" blocks are being added to them. In between these updates, I will share my view on the sustainability and robustness of the DeFi space. By this I mean the leverage that is floating around in the system.
But let's now dive into today's topic:
Insurance
NexusMutual has established a growing user base and also built up a reputation of being the place to go if you want to purchase coverage for smart contract risk. With reputation, I mean that other larger "lego" blocks have started to integrate their service into their interfaces (e.g. yearn.finance).
So, what is NexusMutual doing?
In short, you can buy coverage for coding bugs in smart contracts for a certain period of time. For more details, check out the use cases here.
And who is on the other side of this?
The NexusMutual members who stake their NXM tokens to the various smart contracts. These funds are placed in the so-called "Capital Pool," which stands against their MCR (Minimum Capital Requirement). In short, the Capital Pool must be above the MCR. For a more detailed overview, check out their token model.
As in every financial service or product there is some embedded leverage. The NXM token holders who stake their tokens to provide coverage for certain smart contracts can leverage their token capital by a factor of 10. The maximum coverage per contract is your unleveraged token amount, and the maximum is that amount times 10. I.e., if you stake 10 NXM tokens, you can provide a maximum of 10 NXM per smart contract, but a total of 100 NXM to different smart contracts.
If I understand the model correctly, this leverage risk is (or should be) under control due to the above mentioned formula: Capital Pool > MCR (Minimum Capital Requirement).
Benefits
What are the benefits for the NXM token holders who put their capital on the line by staking their tokens to those smart contracts? It is pretty much the same concept as in the traditional insurance business. They get a share of the insurance premium paid by the user who seeks coverage for smart contract risk.
Now, who decides if a payout is to be granted when a claim is raised by an insurance purchaser? It looks like there are two levels of involvement on this platform. You can stake your NXM and provide coverage (Risk Assessor), or you can participate in the voting when a claim is raised (Claim Assessor). Obviously, to profit the most from your staked NXM, you should participate in both. But to be a Risk Assessor, you need some serious coding skills. You can find more details on this in the use case section.
I know, this does not sound that ground-breaking, but in my view it is a very important "lego" piece in terms of the sustainability of the DeFi space.
