- INVESTMENT IDEAS
Nexus Mutual: 21st Century Insurance
- Nexus Mutual is the largest player in decentralized insurance, with a total value locked of ~$500m.
- Nexus Mutual has a strong foothold in crypto-adjacent insurance products and could become a player in more traditional insurance verticals.
- However, regulation could become unfavorable in the longer-term.
- NXM token has significant growth potential.
Nexus Mutual is a decentralized insurance platform built on Ethereum. Users can lock their capital in Nexus Mutual to underwrite insurance and earn a share of insurance premiums. Others can acquire insurance by paying premiums to Nexus Mutual directly on the Ethereum blockchain. Insurance claims are validated through a voting mechanism and paid out on-chain.
Currently, Nexus offers 102 insurance products. They fall primarily into two categories:
- Defi Protocol Insurance: protection against smart contract bugs, economic attacks (including oracle attacks), and governance attacks. ex. Curve, Uniswap, Aave
- Crypto Custodian Insurance: protection against hacks and halted withdrawals. ex. BlockFi, Coinbase, Binance
The NXM token is at the center of this whole system, and can be thought of as a bet on Nexus Mutual’s growth. NXM is up 4x over the last year, but still has significant upside potential.
Nexus launched in 2019 as one of the first decentralized insurance projects. It quickly became a leader in Defi protocol insurance and crypto custodian insurance, although competitors have emerged like Unslashed, Insurace, and Risk Harbor.
Nexus Mutual has a lot of room to grow within crypto insurance. Both because the entire space is growing rapidly, and because Nexus currently insures just 0.6% of Defi’s TVL.
Down the line, Nexus can expand to verticals like cybersecurity insurance or crop insurance. They can capture market share by offering cheaper and more transparent insurance with faster payouts. A fully electronic and less-regulated platform is fundamentally more efficient than traditional insurers. The Nexus team estimates their premiums could be 20% lower than traditional players due to greater efficiency.
Nexus is better positioned than any other decentralized insurance protocol to target non-crypto users because they are the largest player with the most validation that their incentive structure works.
Competition: Unslashed and Insurace offer somewhat comparable products. They are also decentralized insurance protocols with a voting-based claims system. Both are much smaller but they could become serious competitors:
Risk Harbor is interesting, but their architecture limits them to a smaller market segment.
Overall, competition will probably not be the reason why NXM is an unsuccessful investment in the short-to-medium term.
Token Model: The biggest risk is the token model. It is not easy to align incentives with this type of project. If Nexus Mutual fails to payout claims for whatever reason, it would severely undermine trust in the system. But after a successful one and a half years paying claims on Ethereum Mainnet, we have some evidence the model works.
Regulation: If governments impose excessive regulation on decentralized insurance, it could hurt the user experience and Nexus’s growth. But this will probably not be an issue in the medium term.
Nothing in this article constitutes professional and/or financial advice. The content is provided exclusively for informational and/or educational purposes. Nothing is to be construed as an offer or a recommendation to buy or sell any type of asset. Seek independent professional advice in regards to financial, tax, legal and other matters.