31 - Nexus Mutual to Billions | Hugh Karp

Episode: #31 September 21, 2020 ----- Tools from our sponsors to go bankless: 🌐 UNSTOPPABLE DOMAINS https://bankless.cc/unstoppable - GET A HUMAN READABLE CRYPTO DOMAIN https://bankless.cc/unstoppable 🌈 ZAPPER - ULTIMATE HUB FOR DEFI http://bankless.cc/zapper - ZAP INTO DEFI 💳 MONOLITH - GET THE HOLY GRAIL OF BANKLESS VISA CARDS https://bankless.cc/monolith 💸 AAVE - LEND AND BORROW DEFI ASSETS https://aave.com/ ---- Nexus Mutual to Billions | Hugh Karp Hugh Karp is the founder of Nexus Mutual, a DeFi insurance protocol Nexus Mutual has $80M ETH covering over $240 worth of DeFi insurance, up from $8M last July. Nexus has paid out millions in insurance claims to previous DeFi hacks, and is one of the fastest-growing protocols in DeFi. Hugh comes from the world of insurance and worked as an actuary before moving into crypto. He brings his real-world insurance knowledge to the DeFi universe through Nexus Mutual, a reconstruction of real-world insurance mechanisms, but built on Ethereum. Nexus Mutual has over $80M in assets deposited into the Nexus contracts, up from just $8M in July 2020. This $80M is the backstop for $240M of cover purchased by Nexus customers. Join us as we go through the history of Nexus Mutual, the NXM token, and the future road map with founder Hugh Karp! WE COVER: 1) Current state of DeFi insurance / safety 2) Benefits of smart-contract based insurance 3) Quick history of insurance 4) Building Nexus 5) Integrating NXM 6) NXM Bonding Curve 7) Future vision of Nexus ------ Resources: Read: How to assess the risks of a lending protocol? https://bankless.substack.com/p/how-to-assess-the-risk-of-lending Read: how to protect against hacks with Nexus https://bankless.substack.com/p/how-to-protect-against-hacks-with Nexus Metrics Tracker: https://nexustracker.io/ DeFi Dad Explainer Video: https://www.youtube.com/watch?v=rnzInsKPLR0 Rate the Podcast 5 Stars ----- Subscribe to podcast on iTunes https://podcasts.apple.com/us/podcast/bankless/id1499409058 | Spotify https://open.spotify.com/show/41TNnXSv5ExcQSzEGLlGhy | YouTube https://www.youtube.com/c/bankless | RSS Feed http://podcast.banklesshq.com/ Leave a review on iTunes https://podcasts.apple.com/us/podcast/bankless/id1499409058 Share the episode with someone you know! ----- Don't stop at the podcast! Subscribe to the Bankless newsletter program http://bankless.substack.com/ Watch Bankless shows and tutorials on YouTube https://www.youtube.com/c/bankless Visit official Bankless website http://banklesshq.com/ for resources Follow Bankless on Twitter https://twitter.com/BanklessHQ Follow Ryan on Twitter https://twitter.com/ryansadams Follow David on Twitter https://twitter.com/TrustlessState ----- Not financial or tax advice. This podcast is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Do your own research.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:13Ryan Sean Adams?

  Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, and how to front-run the opportunity. This is Ryan Sean Adams. I'm your David Hoffmann, and we're here to help you become more bankless. David, how are you doing after this epic episode?

• 0:34David Hoffman?

  Just fantastic, Ryan. We brought on Hugh Karp from the Nexus Mutual project. Nexus Mutual and insurance on DeFi, insurance on Ethereum is one of those things that when I first saw it, I was like, you know what, that's never gonna work. In my bear market mind, I was like, that's never gonna work. Like, you can't do insurance on DeFi. And, you know, shame on me for being a bear market pessimist. But now that the bull market is here and looking deeper into Nexus Mutual, it just makes so much sense. Like, if you wanted to just like take the institution of insurance and make a DeFi version of it, what you get is Nexus, right? And so, tip of the hat for Hugh for building something throughout the bear market,

• 1:18David Hoffman?

  blood, sweat, and tears to build something that he's passionate about, that he really understands, and then have it come to absolute success over the last few months as the need for insurance on DeFi has absolutely exploded.

• 1:31Ryan Sean Adams?

  You know, this has become basically a trilogy with our DeFi builders, right? These are the bear market builders. So at one point during our conversation with Hugh, he said something that like surprised me. I didn't know, but they almost shut down in 2019. Like Hugh almost stopped working on Nexus Mutual because he and his team, he had to do layoffs, and it didn't seem like it was going to work out.

• 2:01Ryan Sean Adams?

  I'm glad he didn't because now here we are in 2020, and we have a protocol with 230 million in insurance coverage in the DeFi market. So necessary. Glad he was, I guess, he persevered through that with his team and kept on building. And I think that's a hallmark of the last three guests that we've had on the show, these DeFi builders.

• 2:30Ryan Sean Adams?

  Didn't quit, you know, they kept going. They had the vision even when no one believed in Ethereum, no one believed in DeFi. And I think that's what makes these projects really special. Um, I think nowadays with the DeFi bull market and the crypto bull market starting to heat up again, we're, we're starting to see a lot of, uh, fair, fair weather builders coming to the space, you know, maybe more of the tourist crowd. And we'll, we'll have to see how many of them stick around and stay, how many of them have the quality of these, uh, bear market builders and who are able to stick it out and, and build something lasting, or are they just here for the gains? So really enjoyed the last, uh, three episodes in, in this series. It's been a lot of fun.

• 3:13Ryan Sean Adams?

  And, um, you know, these are, these are the protocols to pay attention to.

• 3:18David Hoffman?

  There's also something unique here with Nexus Mutual that's different from our previous episodes with Synthetix and with Ave, right? So, you know, uh, Nexus and insurance needs DeFi or something like it to exist in order to have product market fit, right? And, you know, while Kane expressed, you know, his apprehensions and his tests of faith during the 2018 bear market and Stani from Ave said the same thing. They didn't, it didn't really hit me as hard as when Hugh said some of the things that he said in this podcast, right? Like Hugh said, e- even went so far to pull out a personal loan to make sure that, that Nexus Mutual would survive.

• 4:00David Hoffman?

  And the thing is like Nexus Mutual could have done exactly what it had needed to have done, like gone down the exact same phases of the roadmap, built the same exact things. But if it wasn't for other products like Synthetix, like Ave, like Chainlink, like MakerDAO, like Compound, then Synthetix wouldn't have anything to have insured, right? And so part of this, uh, this ecosystem is composability. And not only did Nexus need to make it through the bear market, but other projects also needed to have made it through the bear market too, in order for Nexus to be able to ensure them and grow into success later. And that's one of my favorite takeaways, I think, from this.

• 4:39David Hoffman?

  Podcast is specifically the construction of Nexus and how its token model is linked to upside in the Nexus system in ways that tokens like the lend token is not so incredibly codified to upside in AVE and how the SNX token isn't so explicitly linked to upside in Synthetix. The NXM token has this one-to-one relationship with usage of Nexus and therefore Nexus needs other applications to ensure. So Nexus can almost like say, like tip of the hat to Hugh, but Nexus can also say thank you to Synthetix and AVE and all these other projects for also making it through the bear market so that it has other protocols to ensure.

• 5:24Ryan Sean Adams?

  Absolutely. The ecosystem grows together and it also dies together if that's the case. But right now it is growing. It is growing fast. And this is a new money Lego added to the stack, the insurance money Lego. Hey David, one other thing. So listeners, you guys are hearing this on a Monday. So this episode is being published on that day, but we're also putting together a special bonus episode for you guys this week. So that will be published on the podcast. David, what's our bonus episode? You want to tease that a little bit?

• 6:00David Hoffman?

  Yam speaks. Yam speaks.

• 6:04Ryan Sean Adams?

  The original vegetable, the original vegetable farm is finally coming out and talking. Okay.

• 6:10David Hoffman?

  The media embargo is over. I didn't know everyone who put the Yam farm together, but I did know Will and I did know Dan. And so as soon as the Yam farm came together, I messaged them and say, hey, like, we want you on the podcast. We got to get you guys on the podcast. And, you know, in an abundance of caution and not wanting to appear as like the figureheads of the of the protocol, which totally fair take, they said that there is a media embargo. But that embargo ends on the podcast, on the Bankless YouTube, Yam speaks.

• 6:43Ryan Sean Adams?

  Wow, I want to hear, I want to hear what they say because this week is the replanting week where EMV3 is coming out. And I'm pretty shocked that they put it together so quickly after all of the issues that that it had in the in the first version. Pretty phenomenal. I'm really looking forward to hearing what they have to say, hearing the original vegetable token actually speak for itself.

• 7:09David Hoffman?

  Yeah, really looking forward to this one, so stay tuned. Alright, so we're gonna go ahead and get right into the interview with Hu of Nexus Mutual, but first we're gonna talk about some of the fantastic sponsors that make the Bankless Nation possible. One of the tools I've started to use recently is Zapper. For those of you that were a part of the 2017 bull market, it was characterized by just opening up Blockfolio and refreshing it over and over and over again. And also, anytime you ever made a trade, you would have to go into Blockfolio and manually input that trade information to make sure that your portfolio that you think that you have matches what you actually have. With Zapper, you don't have to do any of that anymore, because all you have to do with Zapper is input your Ethereum addresses, and then Zapper will give you a really elegant

• 7:52David Hoffman?

  report as to where all your money is. So there will never, ever be any disconnect between the money that you think that you have and the money that Zapper reports to you. Zapper looks directly on-chain and gives you a nice portfolio summary of all your assets, and how many assets, and all of your debt, and all of your lending positions, all of your positions, all at once. So there's no more editing your portfolio, because Zapper just does it for you. One thing that I thought was really useful about Zapper was when I plugged my wallets in, I found that I had submitted liquidity to Uniswap forever ago, and without Zapper, I would have probably lost that forever, because Zapper knows where your money is better than you do. It's also the gateway to investing your money into this ever-expanding list of available

• 8:36David Hoffman?

  DeFi platforms like Curve, Balancer, Uniswap, Urn. In the Bankless Nation, there is this growing number of money Legos, and keeping track of them all is just super overwhelming, which is why you could just go to Zapper, and Zapper will solve the problem of there just being too many money Legos to choose from. So check them out at zapper.fi, enter your Ethereum addresses, and check out your portfolio, and see if there's anything that you missed.

• 9:02Ryan Sean Adams?

  Bankless Nation, do you want to go fully bankless, but in the real world? Monolith is the DeFi account that you need. It wraps your ETH address in a bankless Visa card and it does so much more. It closes the loop from fiat to DeFi. So you can onboard fiat to DAI on Monolith with zero fees. Then you can convert that DAI to ADI, which is an interest-bearing savings account. Again, zero fees. And then you can spend that interest in the real world on a Visa card. So you can finally buy your cup of coffee with interest earned in DeFi. Guys, this is magic. This is the closest thing to the Holy Grail crypto card and Monolith gives you all of it.

• 9:43Ryan Sean Adams?

  You need to download the app at monolith.xyz to get your bankless Visa card. It's optimized for European listeners. They'll be coming to the US soon. And when you get that Visa card, the Monolith card, tweet about it when you do. I love seeing people unpackaging their beautiful bankless Visa cards. It makes me realize that the revolution is here. Search Monolith in the App Store.

• 10:07David Hoffman?

  All right, guys, let's go ahead and get right into the episode with Hugh Karp of Nexus Mutual.

• 10:20Ryan Sean Adams?

  Bankless Nation, we are so excited to have Hugh Karp. He is the founder of Nexus Mutual. He is the father of smart contract insurance. He's an actuary with over two decades of experience. Nexus Mutual, the protocol, has brought over 230 million in contract cover to the space. Hugh, how are you doing? Welcome to the nation.

• 10:41Speaker 02

  Thank you. Yeah, great to be here, guys.

• 10:43Ryan Sean Adams?

  All right, hey, first question, is DeFi safe yet?

• 10:47Speaker 02

  No, I don't think so. I think we're at the early days. We're getting there in the right direction, but definitely a long way to go, in my opinion.

• 10:55Ryan Sean Adams?

  So like, what percentage are we like, are we 1%? Are we 10%? Are we 30%?

• 11:00Speaker 02

  Yeah, maybe five. Um, I think, I think we're starting to focus on the right stuff like, um, but we definitely have a long way to go. Education, uh, you know, stuff that we're doing, stuff that other people are doing, more open information, um, that people can easily access. Um, that's more readily available, that type of stuff. Um, we, we get there, we'll get there.

• 11:19Ryan Sean Adams?

  We want to understand a bit more about Nexus and how you are helping DeFi get there. But could we start with some background? Because I think you have a, you know, fascinating background. We've had some other crypto native DeFi founders on the podcast lately. This has been sort of a trilogy for us and, and you're the conclusion here. But you're the only one that we've met and that we've had on that has a, a ton of real world, I guess, almost like traditional experience. Like you were, uh, in the insurance industry, the traditional insurance industry as an actuary for almost two decades. Can you tell us about that and how you stumbled upon this whole DeFi crypto thing and decided to start something here?

• 12:04Speaker 02

  Yeah. So, yeah, I've been working in traditional insurance for a while, um, 10 years in Australia and then, um, quite a bit of time in, in London and the UK. Um, so, yeah, I think, um, I've always been fascinated by ways of like doing things a bit differently and stuff. Um, I guess, um, I stumbled, I stumbled across Bitcoin like many other people did, um, uh, quite, uh, quite a while ago. Um, and, uh, oh, it really fascinated me that you could do something where like I could send money to you. And there was no one else in the middle and like, I just could just do, do that. Um, I didn't really know how it worked from a tech point of view, but I found it really fascinating. Um, and then, and then after, um, I put it down, I investigated for a while, but I put it down.

• 12:47Speaker 02

  Um, but then I heard about Ethereum a bit after it launched, um, and that's kind of, I guess that's what really triggered it for me. Because if you can, you know, write an if then statement, then you can kind of write an insurance contract. And that was my area of expertise and I was really fascinated by this way of, um, coordinating people or a community together. Um, like directly, um, because actually that's, that's really what, um, insurance is all about. Um, like if you go, if you go back like millennia, like, um, it's, it's just about a group of people, um. Coming together and sharing risk, like, you know, you had like people, um, like one of the, um, the big example, I guess, is Chinese river merchants like way back.

• 13:33Speaker 02

  Um, they used to like share the load of, um, of their goods bef- um, in different boats. And so if one of them, um, capsized or whatever, they've lost their load, then they don't even lose part of their own, um, cargo. And so they were all kind of more resilient as a whole. And so that's kind of like how insurance started, like a group of community coming together and sharing risk. And it's evolved from there and went through many iterations and things, but, um, but it's, and it's now transformed into a shareholder company predominantly. Um, rather than the kind of mutual community, um, aspect. And, and I guess our real, um, uh, goal or vision here is that you can really do it better. Um, if you can use that community approach, but now we can have this new tech

• 14:15Speaker 02

  that could really scale that direct community peer-to-peer approach. Um, so that's kind of like at a very high level, um, what we're trying to do.

• 14:24Ryan Sean Adams?

  Want to get into some of the, just the history of insurance as, as you were, you going down that path here, but like just one more, I guess, question on this. It, it's a curiosity point for me. So what about crypto first drew you in? Was it some sort of a, you know, a hobby or an interest or a, you know, a way that you were brought up? We talked to Kane from Synthetics and he has sort of a, a crypto anarchist type of background. We talked to Stani from Ave and he was a tinkerer, uh, you know, his brother, uh, dabbled in, in Linux, uh, when they were younger and, and growing up. So he came from a tech background. What about your background drew you immediately to Bitcoin, that first spark of interest and then later Ethereum?

• 15:06Speaker 02

  I guess I've always been interested in tech stuff, though I haven't done, like I have done coding in the past, but I've not a, I'm not like a coder or a, um, a techie heavily. Um, I'm, yeah, I'm more kind of on the actuarial side of things, um, which is more like stats and economics type stuff. Um, I guess, I guess a couple of things. I've always been interested in tech kind of off to the side, but yeah, not a massive kind of tinkerer, I guess. That, I guess, the aspect to me that perhaps sparked it more was The kind of philosophy and principles behind it. My um my dad actually, well, he he's retired now, but he used to be um he worked in the insurance industry for a long time as well. Um but he used to be a uh one of the regulators of the Australian um insurance industry.

• 15:49Speaker 02

  And um that perhaps sounds a bit odd, but um but the point is that it's always they've always got the the customer focus here and the the individual focus, um making sure that it's done right. By um the the people are protecting them. And and so it's kind of like, I kind of got a bit jaded by the insurance industry as such, because um it felt like you were just shifting big money around balance sheets. Rather than actually focusing on the end customer. And and here was a technology that you could actually like really just put in the people's hands. Um and so I guess that's kind of where it's come from. So it's more from a um philosophical point of view, rather than a kind of really tech driven.

• 16:29Ryan Sean Adams?

  So when did Ethereum come into the picture?

• 16:31Speaker 02

  Yeah, so um I guess basically um it was a pretty much a year after they launched, I guess, early twenty sixteen. Um I guess the light bulb moment, I mean, I was kind of, I was interested in space, kind of dive back into the stuff there. But the light bulb moment for me was seeing the Dow be drained live. Um and and I thought, oh, here we go. Um this this this needs, we need to do something here. We can't, we can't just let that stuff happen. Um I mean, you know, hard fork or no hard fork, whatever, you know, that's a different discussion. But like, but if if if people are going to adopt this thing, we needed to address those types of issues.

• 17:09Ryan Sean Adams?

  A lot of people couldn't see past the Dow at the time, though. They thought that would be the fall of Ethereum and that it would never work. I guess you were able to see past to a uh world where we can have lower risk smart contracts.

• 17:21Speaker 02

  Yeah, I mean, I I guess I guess so. I mean, there was definitely a stage there when everyone thought, oh, it's, you know, it's not, I'm not going too far from here. But I mean, I I still fundamentally thought that the tech was like doing something. Incredibly new that no one else had done before. And so to me, that had to um evolve and and and progress from there.

• 17:41David Hoffman?

  So when you grew to understand Ethereum and the concept of a smart contract, did the light bulb immediately go off as with the marriage between smart contracts and insurance? Or how long did that take to make that connection?

• 17:55Speaker 02

  Well, not too long because a lot of people were just always talking about insurance as like a very natural use case for blockchain, like from the really early days. It's, you know, it's a financial product. It's about bringing a bunch of people together. It's effectively a DAO. So like all of the stuff people were talking about, it's kind of, it fits very naturally. So it didn't take me long and I, and to kind of work out that, you know, there is something here. I need to dive in and work out how to do it. And so, yeah, I guess I started that process.

• 18:30David Hoffman?

  So Hugh, let's go into that a little bit more. Why is it so obvious for people that insurance and smart contracts are just like this match made in heaven?

• 18:40Speaker 02

  Well, in my mind, it's basically this fact that insurance is all about risk sharing between people and creating a community that is more resilient as a whole because it can more able to take on risk or downside as a group than you can as an individual. And, and so if you have this technology that can coordinate people, then, then you kind of like can supercharge this whole thing. And so to kind of make that work, what you need to do is have essentially, you know, a pool of funds and a, and an incentive mechanism to kind of make sure that people do the right thing with that pool of funds. And, and so it started very early, like you can coordinate a group of people and a pool of funds really easy.

• 19:24Speaker 02

  Like, you know, the kind of the DAO is like a good example of that potentially working really well. And, and then if you can put that right incentive mechanism on the top with, you know, tokens or whatever it is, then that, that forms the genesis of the whole, of the whole thing. Obviously there's a whole bunch of details to work through and how do you make those mechanics work? And the incentives aligned and all the rest of it. But fundamentally, if you can get those two things to work, then that's really what insurance is.

• 19:52David Hoffman?

  So it seems to be that with Nexus and building insurance on, quote unquote, on the blockchain, that you're not disrupting anything in the same way that MakerDAO is perhaps disrupting central banks, or Uniswap is disrupting centralized exchanges. It really seems to be that when you build something like insurance using smart contracts, that you're just building this age-old primitive on this new substrate. Does that resonate with you?

• 20:21Speaker 02

  I mean, it does to a certain extent, but you can also do a whole lot more. And I kind of think that puts it in the disruptive category, really. I mean, you can strip out massive layers of cost. I mean, one of the key things here is that you can actually get a better outcome for the customers, because you no longer need that shareholder-based entity that has a potential conflict of interest, and you have a much reduced level of conflict between the members of the mutual, because they're all the members and they can all be working together. There will always be some level of conflict, but you don't have that natural, just, are we going to pay this claim or not? Because it's a shareholder profit versus paying claim.

• 21:06Speaker 02

  You know, that's largely handled by regulation right now, obviously, but we just think that there's a much better way, and if you can coordinate this on a community basis, you're going to have much more flexibility.

• 21:18David Hoffman?

  So we definitely want to dive into Nexus and how it does some of the things you just mentioned, but I think it would be helpful, both for our listeners and for me, is if we could get a quick history lesson of insurance and mutual funds. And I've listened to a few of your talks, and you kind of give a nice account of how insurance came to be. So to the best of your ability, can you kind of give us the early instances of how insurance came to be in this world?

• 21:46Speaker 02

  Yeah, sure. I'll just pick a few like different points and then we can, you know, that kind of tells a bit the wider story, but. Um. Yeah. So you kind of have these really like small community stuff to start with, you know, like ancient history type stuff. Where, you know, that those Chinese river merchants or um a different community over here that would pull together and, you know, if someone um. One of the like workers died, then the the rest of the family would get looked after because the elders had some um funds or whatever to look after things. And, you know, it didn't necessarily start as monetary based, but um but, you know, you you get food for them or whatever. Um. And so that's kind of like, it really started in that local community side of things. Then then you kind of move into like, I guess, a bit more advanced when you had, um, a lot of it comes from shipping.

• 22:30Speaker 02

  Um. And so first kind of like insurance contracts that are closer to modern day stuff. Um. Is when you had like um loan contracts or something where you go, um. Here's a merchant that's going to deliver a whole bunch of goods to the other side of the world. Um. And you've got some backers who will give them a loan um to do that and they would share in the profits. Um. Assuming it went well, but if it didn't, um, and the ship was lost at sea or whatever, then they'd write off the loan. And so that's kind of an early form of insurance. And that kind of started with like, um, here here are the shipping people, here are a few merchants that are. Um. Got some more money and, you know, it kind of started at a very small community level. And then what tends to happen, it gets it gets institutionalized.

• 23:14Speaker 02

  Um. And so you put like standard structures in place, um, there's a, there's a bigger group of financial backers that come in. Um. Rules start getting set up and it becomes more standardized and you can, um, and a big market type happens. And that's kind of how like the shipping industry started. And, you know, that's kind of a lot of where insurance has really um come from. Um. So I guess the other thread going through all of this is that they generally have started. Um. New um markets or new industries um where insurance like is kind of needed generally starts with the community first. Um. And so you you like the the regular industry is not there or doesn't exist. So the people. That need the cover to spend to give themselves to do it.

• 23:59Speaker 02

  Um. And so then, and then it progresses into a more regular industry stuff. Um. And so that's kind of, I I see a lot of strong parallels with what we're doing now. Um. But the the interesting part is that how that shifts from the community-based approach where it's all done. By the community for the community. And if there's, you know, bigger losses than the community, whereas if there are. If there are not as many losses, then the community benefits, because, you know, they get to share and um what's left over. Um. And so then what's happened over time and and even if we kind of fast forward to. Um. Earlier this this century, um, the. You you end up with these mutuals that start as communities, but then what happens is they get to a point.

• 24:44Speaker 02

  And they get to a scaling point where they struggle to grow because they can't necessarily grow outside their community base. Because often you will need capital to come in to make it grow further. Um. And so usually the community is not like deep pocketed, um, and so they they kind of have, they're limited in their growth. And also, you know, conceptually, if you've got one community over here and the. They want to like share coverage and scale with a different community, they have to actually. Trust each other to pay on the claims, which can be a bit of a um an issue. And so so what tends to happen is these mutuals turn into um shareholder-based companies. Um. Doesn't happen all the time, but it's happened a lot.

• 25:26Speaker 02

  And um and what that means is they de-mutualize, they get shareholder equity-based capital. And the shareholders then go to capital markets and raise bigger capital for equity and then they grow and conserve more people. But they've now introduced a people into it that are kind of not necessarily there as part of the community there um. Help, um, you know, with the lined interests that they're they're the shareholders. Um. And so. That's generally how things have worked. And so I guess our premise here is that um because we can coordinate people using token um incentives, that's much more scalable.

• 26:06Speaker 02

  And so you can coordinate people on a global basis to do this stuff um really efficiently. And therefore, you don't actually need to inject equity capital at any point. You can scale a mutual really, really large. And the members will be the ones that benefit. And so it's really the community owned cooperative type of approach to to insurance. And so that that's kind of the history and the um I guess our our view on um how we think the blockchain can really kind of disrupt the insurance world.

• 26:38David Hoffman?

  Yeah, talk a little bit more about that friction between like a shareholder based model and the average individual who's trying to get a payout from, you know, their their house burning down. Talk about talk about that discrepancy.

• 26:49Speaker 02

  Yeah, I mean, by and large, it works fine. If you're if you're in if you're in a developed nation with a reliable legal system and a good regulator, then this all works fine. All of the kind of bat, there's always going to be quirks and stories around the edges, and that's always happens. But by and large, it works fine. The but it only works fine because you have legal and regulatory barriers and um in in place. And that's costly and and inefficient. So there's definitely that conflict of interest, but but by and large, the customer is looked after because there are protections in place. Um and so and so I think that that's important. But what we're saying is we can do the same thing in a different way, in a much cheaper way without that risk.

• 27:30Speaker 02

  Um. And so um if we get those token um incentives right, that um that means we can achieve the same kind of um protections, but on a global basis and also for people that don't necessarily live in a um jurisdiction where you have that reliable legal and regulatory framework.

• 27:49Ryan Sean Adams?

  Hugh, you mentioned earlier that there's just a lot of inefficiencies in the current state of the insurance and mutual markets. Can you kind of elaborate on that as well?

• 27:57Speaker 02

  Yeah, sure. So I think probably the easiest way to explain this is if you pay $100 in premium, then you expect to get basically 60, 65, maybe 70% back in claims and the rest gets lost in expenses and profit and all the other costs in there. And so that's kind of the

• 28:21Speaker 02

  the kind of tax in the system.

• 28:23Ryan Sean Adams?

  So we're talking like 20 to 30% overhead-ish for the industry?

• 28:28Speaker 02

  It's more like 30 to 40, but yeah.

• 28:30Ryan Sean Adams?

  Wow.

• 28:31Speaker 02

  So it's big chunky numbers. I mean, you know, some of that, it's hard to get away from, but that's a big, that's a big target to aim at. And, you know, there are obviously a whole bunch of reasons for it, but that's, it's not very efficient and lots of paper based and stuff like that.

• 28:50Ryan Sean Adams?

  So I just want to, you know, maybe zoom out for a minute and talk about risk and insurance, right? So I just started reading, have you read this book here? It's called Against the Gods by Peter Bernstein?

• 29:05Speaker 02

  No, I haven't actually. It's been on my list for a while.

• 29:09Ryan Sean Adams?

  It is fascinating. So it is the story of some of those ship merchants who basically created some mathematical models and kind of early probability and statistics and actuarial, you know, kind of tables to, to, you know, kind of science the risk out of, out of markets, right? So out of, you know, the first, the shipping market and then others. And it, it talks about how getting risk, quantifying risk and actually creating markets around risk essentially is a scalability technology. And I was thinking about that with the context of DeFi, right? So DeFi can only grow so large, you know, before it's like essentially

• 29:54Ryan Sean Adams?

  hindered by lack of insurance because there's Plenty of people who just are going to be unwilling, institutions, for example, other, you know, traditional banks, they're going to be unwilling to get into DeFi. If it doesn't have a, an insurance, if, if the risks cannot be assessed. Can you talk about that from a macro perspective? I mean, do you see basically insurance and the ability to measure risk and to quantify that with some market price? As a scalability limiter to DeFi?

• 30:25Speaker 02

  Yeah, definitely. The simple one is there are a whole bunch of institutions that have a checklist about what they need, what needs to happen before they get involved and insurance is just one of them. At really high level, like, insurance is actually just fundamental financial infrastructure for economies. And you, the economies with the highest GDP growth and stuff like that tend to be the ones with a meaningful or well-developed insurance industry. It's just, that's just how things work. Like, if, if you want to develop anything or do anything new or take risks. Then that happens much more often when there's a reliable risk management tools in place and reliable insurance in place.

• 31:10Speaker 02

  You know, if you want to build a railway, launch a rocket, whatever, like, no, no one's going to let you launch a rocket unless you've got insurance in place, like, you know, things will go wrong. So, you know, this, this stuff, you know, it may be boring and sitting all in the background, but it's just has, has to be there to enable growth of an economy. And so, you know, so our view is that Ethereum is creating this new parallel financial economy to start, but, you know, obviously, hopefully much, much more than that. And insurance should be a key part of it.

• 31:42Ryan Sean Adams?

  Well, and just to kind of quantify that, it, it feels like the value locked in DeFi can't get beyond a certain amount without insurance. Like, insurance is a necessary part of scaling the system. It's a necessary part of, of DeFi essentially growing up. So, right now, I don't know how much we have locked in DeFi, like, something like, is it eight billion or so?

• 32:04Speaker 02

  Yeah, eight or nine.

• 32:05Ryan Sean Adams?

  Eight or nine billion. And Nexus now. Has about 230 million in cover, right? Uh, and a year ago at this time, there was like no insurance for smart contracts, maybe a little bit. I don't know what you guys were working on, but it felt like there was almost nothing. But in order to get to a hundred, like we, we talked to Vance from Framework a couple of episodes ago. And, you know, he predicted possibly 500 billion locked in DeFi, um, close to the end of this cycle. Uh, and we're just not going to get there unless we have insurance in the billions of dollars. It's, it's just not going to come. So this is, this is all DeFi growing up.

• 32:48Ryan Sean Adams?

  And we've kind of seen a little bit on the crypto bank side. And we, we tend to refer to exchanges as kind of crypto banks because they're, they're expanding their functionality beyond trading to other banking type features. But some of the crypto banks have started to get some pretty robust traditional insurance for their multi-sig custodial wallets and solutions. And it seems like that is the crypto banks growing up. Can you talk about that for, for just a minute? Like, so how, uh, where are the crypto banks going to get their insurance? You know, Gemini rolled something out Coinbase has had insurance for a number of years. Are they going to just the traditional brokers?

• 33:30Ryan Sean Adams?

  And, and how are the traditional brokers kind of assessing the risk for, um, you know, multi-sigs and, and custodial wallets and vaults in crypto banks today?

• 33:41Speaker 02

  Yeah, they're mostly going to the, I mean, they're going to the traditional brokers through Lloyd's or, um, through, through other providers, et cetera. Um, the, the, the traditional insurers are, you know, stepping their toes in in various places, mainly with it's a kind of like standard crime policies that are actually just applied to, um, essentially private keys or custodial assets. Um, and so, and so really that's not too much of a stretch for them from a product point of view. Um, they obviously have to do, um, a bit more analysis and understand it a bit better, but, um, but that's kind of where they're going. Um, in terms of the capacity that's currently offered, um, I haven't caught up with the brokers I know.

• 34:18Speaker 02

  Recently, but um it's always been a bit of a challenge. And for example, Lloyd's put the put a crackdown on things recently saying, you know, no more crypto currency risk in any of the syndicates. Um but um so there is some capacity, but it's not at the billions of scale.

• 34:34Ryan Sean Adams?

  Why why did they do that, by the way? Why does a Lloyd's make a decision? Uh you know, no more cover. We're not providing anymore. Is that just a risk management thing?

• 34:42Speaker 02

  Yeah, it's a risk. It's a risk management thing. Um I also know that some there are some like, you know, if you if you wanted a hundred million line of custody cover, which is a relatively small line in itself in the insurance world. Um then it's actually been broken like between ten different um providers. And that's like just unheard of. Cause usually people, any decent provider would go, oh yeah, happy hundred million. So so you know, that that to just that's just to give you a bit of a flavor for how and where they are thinking. But that they will come and eventually, but they need to understand better. And there's a long um there's a long kind of education gap there. And the market's not quite big enough for them to be interested right now. But you know, that that will change over time.

• 35:25Ryan Sean Adams?

  So they are, it it sounds like, would you say, like, they are miles away from doing anything with DeFi and smart contract insurance? If they're just like barely comfortable insuring exchanges, right?

• 35:37Speaker 02

  Yeah, exactly. I mean, that's my view. I mean, they will they get there eventually, but um but that probably five years, maybe. Um and and actually, I think they're more likely to enter um with us. Um like what what you tend to do as a um as a bigger capital provider in the insurance world is like you find an expert in that particular thing. And then you back them. They take the first levels of risk and you can help um back it up um and give them more capital to really scale. And so that that's a potential option for us in the future.

• 36:07Ryan Sean Adams?

  So do you think they're maybe a couple of years away from starting to do that? Or um is it close to you think this cycle? Does it happen this cycle?

• 36:14Speaker 02

  Um yeah, I'm I'm not too sure. Like it it has, it's gonna have to be the right partner and all the rest of it. But you know, and they're gonna want a few years of claims experience to before they start backing stuff. So you know, we've probably got a little bit yet.

• 36:26David Hoffman?

  So Hugh, you you said that, you know, one of the prerequisites for any like significant investment getting into an industry is is if it has insurance or not. And do you think that people that that think in that way, when they look at Nexus, do you think that Nexus counts? Like, because it's kind of inside of the industry that perhaps they were looking for somebody outside of the industry to ensure. Do you think do you think Nexus would check that box in their mind?

• 36:52Speaker 02

  I know it checks the box for some people. I know it doesn't check the box for other people. So yeah, it it depends on the the point of view. We actually, I was talking to a few people recently, like, there's obviously, there's a couple of Swiss foundations around that manage crypto assets for projects. And they have some criteria about like investing and taking not taking risk with the funds. And so, but a couple of them have got advice that if you put money in, say, Compound or whatever, and you also get cover with Nexus, that puts it at an okay level from a risk point of view. But if without the Nexus coverage, it wouldn't be. So you know, that's just one specific example about how we can help

• 37:35Speaker 02

  get over some regulatory restrictions and stuff.

• 37:39Ryan Sean Adams?

  Well, just to make that super tangible, right? So when you put your money, and when any of us put our money in a bank, let's say, a bank in the US, for example, under $250,000, there's something called FDIC insurance, which means the government is essentially backing up your savings account, right? So if the bank goes insolvent, for whatever reason, if there's a run on the the bank, they run out of money, again, fractional reserve system, of course, then the government will ensure that you get your money up to a certain amount. DeFi, if you inject funds into Compound, which is essentially a DeFi, a bankless savings account, if you will, you don't have FDIC insurance natively, right? So if something

• 38:24Ryan Sean Adams?

  happens to you, the Compound smart contract, say, there's a hack, you are out of luck. The government is not going to reach in and refund you. And that's why something like Insurance helps DeFi scale because when you wrap Nexus as part of a compound savings account, essentially, then you do have some insurance that it is protected against a smart contract hack that we've seen, you know, many times in this space. So like that just kind of makes it real. What you're adding is not just a savings account, but this Nexus primitive adds insurance, almost like an FDIC type insurance to the protocols as well. Is that, is that kind of how you see it?

• 39:06Speaker 02

  Yeah, it's definitely how I see it. On a conceptual basis, here's where I get my legal stuff on. But legally, we aren't insurance. We provide discretionary cover, which means like the cover payouts are kind of at the discretion of the other members of the mutual, the voting, etc. But conceptually, that's, that's the idea. That's what we're trying to do. You know, compounds a lot of bank. They act like a bank. We're not insurance company. We act kind of like an insurance company, I guess. And so that's, but that's conceptually what we're trying to do. You know, ideally, you know, you hopefully have, we get to the point where you get like a badge or a token that kind of, yeah, represents, oh, here's your, here's your argument.

• 39:48Speaker 02

  Well, and it's, it's kind of, it's covered by Nexus. And that's kind of like, here's your bank account with an FDIC insurance, you know, that type of thing.

• 39:55Ryan Sean Adams?

  And so just to talk about, you, you wrote an article for Bankless, I think almost a year ago now, where you talked about kind of three categories of risk, right? And it, it's important to, I guess, remind folks that something like Nexus doesn't cover all three categories of risk. Can you talk about those categories of risk and what Nexus would cover and what it doesn't cover?

• 40:19Speaker 02

  Yeah, so, so I can't, yeah, put them in three categories. Basically, technical risk of the smart contracts failing. That's what Nexus covers. So that's basically the solidity code. If there's a bug in it, you know, the code was designed to do something. It clearly does something different. Someone could drain the funds or freeze them or whatever. That's, that's basically what we cover. The, I guess the other two broader categories are.

• 40:42Speaker 02

  Basically, anything outside the smart contracts. Um, so things like like a governance attack or like an oracle failure, um, stuff like that. Um, that's, that's not covered right now. Um, and I guess the third category is like an economic incentive failure. So, you know, there might be a system that's relying on economic incentives to work so that, um, the whole system works like it. Maker Dow could be an example, like the die peg may fail, not because the smart contracts fail, but because the economic incentive system around that doesn't quite hold it. Right, um, and so we don't cover, um, stuff outside the smart contracts or those economic incentive failures. Um, right now, that's we, we, we basically launched something simple. So that, um, we could get it out there, test it out and all the rest of it.

• 41:25Speaker 02

  But we definitely have plans to kind of broaden the coverage and provide more complete cover.

• 41:29David Hoffman?

  And the bulk of D five failures so far, have they been more in the smart in, in terms of total value lost amount? Have they been more in the, the, you know, smart contract technical hack camp? Or have they been in the, the other categories as well?

• 41:42Speaker 02

  Um, I think the probably the one bigger one that was in the other category. They've mostly been in this my contract technical failure in my mind. Um, so, but the other one that hasn't been has been a bit outside was the Maker Dow, like Black Thursday stuff, where the, the keepers didn't keep up with the, um, auctioning process and, and vaults got liquidated below market value and stuff. So, um, that, that, that one, um, was a key example, but we haven't, um, I guess the, I guess there's always a few times when someone just drains the funds or exit scams and stuff. Um, like I, I guess that's kind of classified as a governance failure. Um, so, yeah, I, I think majority has been my contract technical risks, but there are other things to consider.

• 42:25David Hoffman?

  All right, so we've been teasing the listeners with a bunch of things circling around the topic of Nexus Mutual itself and the NXM token. So let's go ahead and dive right in. Hugh, what was the first step towards building Nexus?

• 42:41Speaker 02

  Ironically, um, legal and regulatory research.

• 42:48David Hoffman?

  We'll forgive you for that one.

• 42:49Ryan Sean Adams?

  Is it basically, how do we do this in a way that just, you know, doesn't piss off the regulators?

• 42:55Speaker 02

  How do we do this without getting shut down day one?

• 42:56Ryan Sean Adams?

  Okay.

• 42:58Speaker 02

  Basically, you know, um, I, I, I guess I was coming out from one point of view, like you, you kind of have two options. You either kind of, um, do okay from a, do it fine from a regulatory point of view, or you go full dark mode and just release it, right? And go full decentralized from day one.

• 43:15Ryan Sean Adams?

  Yeah, anonymous founder, you are Satoshi, right?

• 43:18Speaker 02

  Yeah, yeah, exactly. And I just, I just knew from like immediately that this thing would require iteration and updating, and you could never get it anywhere near perfect from day one. Um, and that just wasn't going to be a possibility. So to me, I went the other direction. Um, and so once we kind of sorted out a, um, a route to market, then it was all a kind of economic design and, and stuff like that, um, before we started coding.

• 43:42David Hoffman?

  And then, and where did this, uh, when did Nexus start to become, uh, built? When did, when did, uh, work actually start to, to happen?

• 43:50Speaker 02

  Um, we started, we started like putting together proof of concept, um, late 2017. Um, then we kind of raised the seed around early 2018 and, um, and then launched the protocol, May, end of May, 2019. So, um, so it's basically the, the roadmap.

• 44:07Ryan Sean Adams?

  Were you affected by like the, the doldrums of the bear market, the brutal bear market in 2018, 2019, where everyone thought, you know, Ethereum is dead, DeFi is nothing going, is not going to be much. And there was kind of just rampant Bitcoin maximalism. Did you, uh, fall prey to some of that?

• 44:23Speaker 02

  Uh, definitely. So, yeah, we went through some very tough times. Um, uh, we, I had to let go of half the team, um, cut down the runway. Um, we'll cut down the cost space a lot till we had more runway. Um, and then basically crawl over the line. We, we, we were very, very close to shutting down. Um, you know, going back to all of our initial, um, seed investors saying, you know, can you provide a little bit extra? Didn't quite go anywhere. Um, then, then a, um, a friend or a, I guess a Ethereum OG decided to help us out and give us a little bit of extra money and combined with a. Chunky loan for myself, um, we managed to kind of get it over the line and get it to launch.

• 45:07Speaker 02

  Um, and then, and then, you know, I guess cockroach our way out of it. Um, and, um, I guess, you know, things are looking pretty, um, pretty good now. We've got a protocol with lots of people using it and stuff, but, um, I guess early 2019, um, there, there was pretty tough times going on.

• 45:25Ryan Sean Adams?

  Oh, my God. So what, what kept you going?

• 45:27Speaker 02

  Well, I think I found out that I'm just super stubborn.

• 45:34Ryan Sean Adams?

  It's a good time to find that out. The cockroach.

• 45:36Speaker 02

  Yeah, yeah, I think, uh, I, I got to the point that I felt, I just felt we were so close. And I'd just be really disappointed if we didn't get to launch. Like if we got to launch and it just didn't work, I'd be like, okay, I have given it a shot. Nobody wanted to use it, didn't work, product, whatever. But I'd just be so disappointed that we just didn't quite get there to give it a shot. And so, um, yeah, just managed to get over the line just really. And, um, and, and we're here, we're here today still, so that's, that's great.

• 46:07Ryan Sean Adams?

  Well, you are here. So like, can you tell us about the 2020 experience? Cause that's been a little bit different than 2019, hasn't it?

• 46:13Speaker 02

  Yeah, 2020 is like, um, I don't know, like five years condensed into five, five weeks or something. I, I don't know. Um, like we were.

• 46:23Ryan Sean Adams?

  Just give us some metrics. So in terms of contract cover, where, where'd you start the year? Actually, I have it up nexustracker.io if folks want to see it. I've got the tracker. I don't know who built this, but okay. So end of 2019, you had, uh, 1.15 million in cover. Right? So that's the, the amount that, um, essentially smart contracts that you're able to ensure through the nexus, nexus protocol. And now here we are, I'm looking at it and as of right now, there is 233 million. Dollars. That is, you have more ETH locked in Nexus than the Ethereum Foundation, I think, or it's pretty close. Has eaten. And all of that has happened this year. That's like, you know, my God, that's.

• 47:08Speaker 02

  All of it, all of it's happened since July, basically.

• 47:11Ryan Sean Adams?

  Wow.

• 47:13Speaker 02

  So yeah, it's it's been a massive three months for us. Um, like, yeah, we we had like, um, in in terms of our capital pool, we were sitting around five million for quite a while. Um, we're now up at roughly eighty, I think, seventy, seventy, eighty, depends what Ether's doing right now. Um, and and so, yeah, it's, um. Yeah, we've had massive growth over the past little while. Basically, um, the big kickoff has been yield farming. Um, it makes a lot of sense when you're earning ridiculous returns to just take a, take out some cover on Nexus and reduce that return a bit. But be in a much better position from a risk reward point of view. Um, and so that that's kind of really kicked things off.

• 47:52Speaker 02

  Um, and and lately, the last few days have been, um, the safe mining, which is a, a, just another level of, um, craziness. But, um, but that's, um, that's what's been going on recently.

• 48:06David Hoffman?

  We're, you're definitely going to get there, uh, but let's actually talk about how Nexus is constructed. So what are the, what are the core primitives that power the Nexus mutual system?

• 48:16Speaker 02

  Yeah, so, I mean, if you think about it, yeah, really high level, you've got one capital pool. It's basically a pool of ETH right now. Um, and then you have the token, um, NXM that kind of sits over the top as an incentive layer to make sure that people do the right things. We we pay out the claims that are genuine, we decline the claims that are not. Um, we we do the right things from a, um, a governance point of view. We back the right risks with the right pricing, et cetera, et cetera. And so, so essentially, what what we have is this one, one pool that all of the cover prices go into and all the claims go out of. Um, and then, um, and people can actually contribute ether to the pool and get the token in return and do the refers as well.

• 49:00Speaker 02

  Because you can then burn the token to take ETH out. So it's basically like only a few like money in, money out type inputs here into the one capital pool. But then you've got the token, which kind of allows you to do the different actions. Um, and so the the first one, I guess, um, most obvious one is actually buying cover. So, um, you actually kind of burn the token to buy cover. Um. You actually don't see that in the background. You can just purchase directly if it's with diary, then it just does the conversion in the background for you. Um. So that's kind of use case one. And then um there are there are three more main functions. Um. The next major one is what we call risk assessment, where you kind of stake.

• 49:42Speaker 02

  And X M tokens against risks that you think are good. So like, um, you might want to back Uniswap or Compound or Ave or whatever. Um. And then you earn a share of the the cover price that that um gets purchased on that um protocol. And um so that's that's that's a key incentive mechanism there. And then there's the uh claims assessment, which you you stake some N X M again for voting power. Um. In the claims assessment to um approve what's on our claims. And then there's usual governance, um update parameters, upgrade the system, et cetera, stuff as well. So those are kind of the the four things that you can do.

• 50:19David Hoffman?

  So the N X M token and how it comes into existence is is interesting because it's very much unlike any of the other DeFi protocols and and their token, right? And so, you know, S N X is the collateral for synthetics, and you know, uh the lend token is the future governance token over over Ave. With potential cash flows that we all kind of assume baked is baked in. But the N X M token is different because it has its much this much more codified relationship between the growth of Nexus Mutual. And the demand for insurance and the value of the N X M token. And that comes from the bonding curve. And and so talk about the bonding curve and how that incentivizes Ether deposits and N X M creation.

• 51:02David Hoffman?

  And and also how the shape of the bonding curve has changed over time.

• 51:07Speaker 02

  Yeah, sure. So um I guess what the whole purpose of the the bonding curve is um is it's a way to manage capital in mutual. So so what we want um and what you kind of need is you you basically need enough capital in the pool so that you've got enough money to pay claims. But you don't want too much because that's inefficient. Um. And so you kind of want to get capital in there to back the covers that you've got. And then when you run more and more business, you want more capital so that you can grow. But you don't want to be sitting on hundreds of millions of capital that you're not using because that doesn't make any sense. And so the whole bonding curve is specifically designed around capital efficiency and making sure that you've got the right level of capital to back the covers that you've got.

• 51:52Speaker 02

  So one of the main, there's just kind of two main elements to the, to the bonding curve. The first is kind of, is what we call the MCR percentage or minimum capital ratio percentage. It's basically like a solvency margin. So it's, it's more or less the funds that the mutual has divided by the funds that it needs to back the policies that it's got. And so when we've got excess funds, the price starts going quite high, quite quickly. It's got an exponential factor on, on that. And when we need more funds, then the, the price comes down. So, you know, if we have a few large claims, for example, our funds level will, will reduce, our MCR percentage will reduce and that will lower the token price. And so therefore encourage more people to recapitalize mutual.

• 52:35Speaker 02

  And correspondingly, you know, if we end up writing lots of business and, and that kind of, you know, leaves surplus in the pool. And we've got too much surplus and too much capital, then the token price will rise until people cash out and exempt for, for each. So, so it kind of balances things.

• 52:56Speaker 02

  That's kind of like the, the, the one, one metric. The, the longer term metric, which is the second metric, is really just the amount of capital we need. And, and so basically this means that over time, as the mutual grows, like assume the funding level position is flat over time. The solvency ratio is flat, then the, the token price is basically driven by how much cover the mutual writes. And, and therefore it's really strongly linked to adoption. And, and the point here was really to link the, the token price and use it as a core function. For a core, I'm sorry, it's something that the mutual needs to operate and that's, it needs the right capital at the right point in time.

• 53:40Speaker 02

  And that's entirely what, what the, the token is for.

• 53:44David Hoffman?

  Okay, so it's issued along a bonding curve, but there's actually two curves to be paying attention to, right? There is the the the curve of the amount of capital that is needed to fulfill all outstanding covers. If everything in DeFi blows up like all at once. And Nexus Mutual has this curve that establishes like the minimum amount of capital that is required so that it can pay out every single claim ever. And then there is another curve that I believe is 30% like tracks that tracks that same first initial curve, but it's 30% higher, that is that 30% buffer that and is A, is that correct? And then B also, is that is it correct to call that the premium?

• 54:28Speaker 02

  So I guess no one a few counts, but so the the minimum capital requirement, but the whole point of insurance actually is to heavily under collateralize, like fractional reserve banking, to be honest. Because so as you can see, at the moment, we've written 230 million of cover, but we have 73 million of capital. So if everything claimed at once, we wouldn't be able to pay. And the whole that's that's actually the whole point of insurance because you can't cover extreme events with relatively low cover costs or premiums efficiently with with a fully collateralized model, so one for one, right? So so we have this model, which is basically how insurance companies work in the real world.

• 55:11Speaker 02

  And kind of goes, you've got these risks, they're diversified, they're not all going to blow up at once, but we've got to make sure that we've got enough that if you quite a few of them blow up, you've got it, you've got it covered. And so that's, that's, that's the model that we're operating under. So the bonding curve is actually, I mean, it's three dimensional, if you want to call it that way. There are, you know, there's the dissolvency ratio, and then there's the other demand to it. So the other element to it, the longer term. So but it's really just one curve. I don't know if you want to call it three dimensional curve, one curve, one curve or a lot, but that's kind of how it works.

• 55:48David Hoffman?

  So the reason why I think this is so elegant is because, well, A, I just love bonding curves. They're, they're one of the coolest pieces of DeFi infrastructure. But it's, it's a dual purpose curve in the sense that like, if you want to become a member of the mutual, right? Like you purchase NXM by depositing Ether into the curve. And then that increases the value of the NXM token, kind of in the same way that Uniswap works, right? Like if you, if you purchase Ether with your DAI in the Uniswap DAI pool, the price of Ether goes up, right? And, and the NXM on the bonding curve does the same thing with more Ether deposited into, into the pool. But you can, then there's like a fork in the road as to like who you want to become.

• 56:30David Hoffman?

  Do you want to be someone who backstops the Nexus Mutual by adding capital to the pool? And then if you, if you do, you keep the NXM token. Or you can therefore instead become a person that purchases cover. And instead of receiving the NXM token, you burn the NXM token. And that burning event is the purchasing of cover, right? And so both, both participants put Ether into the pool. One keeps the NXM token, one burns the NXM token. And the one that is burning the NXM token is purchasing cover for some contract somewhere. And the burning of the NXM token means that there's more Ether in the quote unquote treasury, right? More in the curve. And there's less NXM tokens.

• 57:15David Hoffman?

  And so the remaining NXM tokens for any of the individuals that just want to be a part of the mutual, their NXM token has the claim on a greater share of the Ether in the, in the treasury, right? In the, in the mutual. Is, is all of that correct?

• 57:30Speaker 02

  Yeah, exactly correct. Yeah.

• 57:31Ryan Sean Adams?

  I, I have a question about, so I think most Bankless listeners are more familiar with bonding curves in something like an automated market maker, which we talked about many times before. See your episode with Hazeable, including the show notes. This is different right here, like, you know, you, did you create your own custom bonding curve? Or was this inspired by a Uniswap or some other automated market maker?

• 57:58Speaker 02

  Yeah, no, we we created our own bonding curve. We we actually

• 58:04Speaker 02

  we were developing this stuff before Uniswap existed, but we just had to do a lot more testing because it's a bit more complicated than than the Uniswap curve. We we designed it like specifically for what we were doing. It's a specific use case. Like, it's not as generalizable as as Uniswap is for, you know, you can use it in a few different scenarios, etc. But the, yeah, that I mean, it was really developed for a specific purpose. I mean, we did a lot of like simulation testing and stuff on this thing because I guess it was relatively new.

• 58:35Ryan Sean Adams?

  And this means basically because there's a bonding curve present. It's not like if somebody wants to purchase an XM, I guess, you know, they they can purchase it from the bonding curve itself. So they're not like purchasing it from from Nexus Mutual, some entity or something else. Of course, they can also purchase it on the secondary market, but they can always buy and sell tokens directly to the bonding curve. Is that correct?

• 58:59Speaker 02

  Yeah, that's exactly right. Yep.

• 59:01David Hoffman?

  The Uniswap bonding curve is just like a straight curve, right? Just a it there's super uniform. It doesn't have any any other. It's like one single curve. But the Nexus Mutual curve is different, right? It's more custom fit to your guys' use cases. And earlier you said that like as there's more and more capital in the curve, the the curve goes exponential really, really fast. Why? Why is there a disincentive to add more capital to the Nexus Mutual pool?

• 59:32Speaker 02

  Well, we just want we want to make sure we've got enough capital, but not too much, basically.

• 59:36David Hoffman?

  Why is too much bad? Wouldn't you want more?

• 59:40Speaker 02

  Well, it's kind of like, not necessarily, because what what we do, perhaps there's a few subtleties to it perhaps. So this this concept of like, if there is one capital pool, but if we kind of like segregate it into two sections. And there's kind of like the reserves, um which is what we call our minimum capital requirement. And then there's the buffer over the reserves. And so what we want to make sure is that we've got enough reserves and we only write cover up to our kind of reserve level. So make sure that, um like we, we'd never allow cu- cover on any particular protocol to be more than twenty percent of our kind of reserves. Um, so that if there is an issue, um, we, we're confident we can pay.

• 1:00:22Speaker 02

  Cause, cause basically if the, if people start taking money out, um, and they can't take money out below our reserve level, it's locked. Um, so that's kind of like, there's a free buffer which you can buy in and out of, but as long as you're above the hundred percent level, um, but you can't do it that below the hundred percent level. Um, and so what we want to make sure is you can, you can do your buying and selling as much as you want, but we have to have enough money to pay those claims. And that happens over time. It doesn't happen just now. Um, and so that's kind of what we're making sure. And so what we do is where we have excess capital, um, like for example, what we do right now is when there's, um,

• 1:01:02Speaker 02

  well, up until actually two days ago, but, um, what we've been doing is when there's excess capital is in our solvency ratios over a hundred and thirty percent. We, we ratchet up the reserves a little bit. So we just kind of arbitrarily shift some of the buffer into reserves. And that allows us to write more business on, on each protocol. Um, and so one of the interesting problems we've been having recently, um, you know, good problems to have, I guess, um, is there's lots and lots of demand, but we have to be able to kind of scale our reserves up to, to meet, to meet that demand. And so it's, um, you know, we have to do that in a good way. Cause if we did it too fast, then we just absolutely crashed the token price.

• 1:01:39Speaker 02

  Um, and that's obviously not what we want to do. So we want to do it on a gradual, um, steady basis, which is definitely challenging in the very fast moving DeFi space.

• 1:01:49David Hoffman?

  So Hugh, you own, an individual comes and they purchase NXM because they want to be a part of the mutual and they want to access the upside of people paying cover, right? And so you express that interest by purchasing NXM. But there's one more function, which is that you can stake NXM to a particular contract. Can you, can you talk about that?

• 1:02:09Speaker 02

  Yeah, sure. So, so you can, what you can do is really take an enhanced risk reward position by staking on specific contracts. And so when you do this, then you earn a specific amount of the cover price that gets,

• 1:02:25Speaker 02

  that gets paid when someone purchases this cover on that. So for example, you might stake on yeah, Compound or Uniswap or Maker or whatever.

• 1:02:33Speaker 02

  And when someone purchases on Compound, then you get a specific share of the cover price. There is obviously a downside to that in the fact that it's enhanced reward, but there's also an enhanced potential punishment. If there is a claim, then your NXM can get slashed proportionally to the, the claim amount versus the stake that's there. So it's, there's definitely more risk involved. And so this is, this is really kind of using prediction market-like techniques to price cover. So, so the mechanic here is basically if there's more staking, there's lower price and more capacity on that particular protocol is, is provided. And when I mean cap capacity, I mean more people can buy cover.

• 1:03:19Speaker 02

  And so those with more stakers gives you a better price and more capacity. And, and that's kind of the, it's important to kind of incentivize the backing the right protocols. Cause you know, we don't want to provide cover on some random new protocol that hasn't been audited, that's potentially got a zero day bug, et cetera, that people have planted, for example. So we have to make sure that there's, there's a way to select good risks.

• 1:03:44Ryan Sean Adams?

  So this acts as almost like a, a kind of a skin in the game type function, right? So it's, it almost acts as a risk assessment. So people who are staking to something like Maker, they might be willing to stake more to Maker because they, you know, it's.

• 1:03:58David Hoffman?

  Been formally verified, it's been in action for a while. It, you know, already houses billions of dollars, you know, Lindy effect is, is, is going strong. Whereas some new protocol, um, you know, that's going, people are going to be unwilling to, to stake to it and, and risk their portion. So does this essentially act as a whole kind of risk assessment framework for individual DeFi protocols and, and contracts?

• 1:04:29Speaker 02

  Yeah, exactly. That's exactly what it does. Um, so you can, you know, assuming we, you know, get, get more scale and, um, and keep, keep growing and, um, gets, um, more kind of, you know, a bit more experience on this stuff. You should be able to use the price on Nexus as a one indicator of the risk of a, of a protocol failing.

• 1:04:46David Hoffman?

  And that means as a staker, you have to know what you're doing. You can't just blindly just park your funds in one contract versus another without having some understanding of it. It almost makes you kind of an assessor, a risk assessor in some way. Is that sort of who you're looking for in terms of the community members?

• 1:05:02Speaker 02

  Yeah, exactly. It's an expert function. It's a knowledge-based staking function. Um, you know, that's ideally who we want. We want the experts doing this stuff. Because that's where we're going to get the most value out of it.

• 1:05:13David Hoffman?

  So you said this, this is a prediction market type model, uh, and, and one of the core features of a prediction market is that people with privileged information or just are better equipped to analyze something are going to sway the market using their own capital at stake to, uh, express a certain opinion about the future of something, right? And so people that have, uh, more, uh, more privileged information about whether a contract is risky or not, or at risk at all, can stake their NXM in an expression that, uh, this particular contract is safe.

• 1:05:49David Hoffman?

  And the reward for that is they get an outsized share of the cover being paid to that particular, uh, uh, contract. And, and, but also it's some, some of that cover also goes back into the treasury to repay all of the, um, all of the NXM holders, their, their share. But it's the people that are staking on that particular contract that get that outsized return first, right? Just a nice little reward for that extra risk. Uh, let, let, I want to go into that, that extra risk just a little bit more. How, how does, you said that, um, if that contract gets, uh, you know, exploited or bugged or whatever.

• 1:06:28Ryan Sean Adams?

  And there is NXM staked to that contract. You said that gets slashed. How does how does that?

• 1:06:36Ryan Sean Adams?

  Maybe punish isn't isn't the right word, but how does that cost the stakers before the rest of the mutual?

• 1:06:43Speaker 02

  So so when a claim is paid, the the actual claim payment gets paid out from the from the mutual fund. So like ether or dye, depending on what the cover was purchased in. And so that's a direct negative on the treasury. The in addition to that, the equal value of NXM that is staked in that contract is also burned. And that's proportionally shared amongst the stakers. So if there's if there's if there's a lot more NXM than the claims paid, then it's a partial burn. If it's the other way around, then then all the NXM would be burnt. So it's kind of like an offset. So you the you definitely still pay the actual funds out. So we kind of have like hard capital, which is like ether and dye.

• 1:07:28Speaker 02

  Used to to pay the the claims. And then we've got incentive layer on top. So make sure you stake on the right stuff, which is the NXM. And so after a claim payment, the treasury has gone down and the number of NXM has also gone down.

• 1:07:43Ryan Sean Adams?

  Okay, so the the treasury that you keep talking about here. So there there is about 230 active cover. Right. But the treasury is smaller than that. The treasury is about 73. That's just how 73 million or so, I think you said earlier, which is just how kind of insurance works, right?

• 1:08:02Ryan Sean Adams?

  That's 73 million. Would you would you call that float? And and the reason I ask is because, you know, people like Warren Buffett, of course, have famously been in insurance business for for decades. And that's kind of where they make their money, right? They they take all of those insurance premiums, essentially that becomes the float, that becomes their treasury, and they go and they reinvest it. And Buffett famously reinvested that in bull run stock market for the past, you know, 40, 50 years or so.

• 1:08:31Ryan Sean Adams?

  Is that is that treasury float for Nexus? And what what do you do with it? Do you do you make your money on float in any way?

• 1:08:37Speaker 02

  So yes, it's a float and yes, we will use it, but we aren't currently. So that's going to be a big part of Nexus in the future, that's for sure. The, we have to, we have to kind of make a few enhancements to the protocol to make that happen. They're on the roadmap. The other aspect that we have to be a bit careful of is if, for example, we put money in, say, Compound, and we're also covering Compound, and Compound goes down, then we lose assets and liability and have to pay claims at the same time. So, you know, we just have to be careful about the risk accumulation. One, one thing that could be that we're, you know, obviously very excited about is like ETH 2.0 launching and being able to earn some sort of return on the ETH we're holding by staking,

• 1:09:22Speaker 02

  because that could be potentially uncorrelated to the risks that we're riding. And so that, that could be a really good thing for, to put some of the float to work in. And that would flow back to the Treasury, to all mutual members, and it just helps the mutual members directly.

• 1:09:38Ryan Sean Adams?

  So you don't want to play a hedge fund manager with that float, of course, right? But if you did put that 635,000 ETH in something like staking, for instance, we, we've, part of Bankless, we've kind of talked about that as being almost the risk-free rate of ETH in a way. Not to say there's no risk, but to say it's, it's almost kind of like, like T-bills or Treasuries in the US government, where that interest rate that you receive as part of a T-bill is kind of the risk-free rate of, of capital for that market. Is that sort of how you see ETH with staking? Is that why it's kind of a safe, a relatively safe place to put some of that float to work?

• 1:10:23Speaker 02

  Yeah, exactly right. We want to, we want to make sure that we have the funds available for paying claims. So you want to, you know, you can invest some of the float in more riskier stuff, but you don't want to invest the majority of it in riskier stuff. So we need to work out what we do with that majority. And something like the ETH 2.0 staking is perfect.

• 1:10:42Ryan Sean Adams?

  And that float, the interest received on the float, whether it's, you know, 3% or whether it's 8% or whatever it ends up being, that would flow back to the mutual holders. So holders of NXM, the asset, is that correct?

• 1:10:56Speaker 02

  Yeah, exactly right. So basically, as you know, they've got that treasury pool and you've got money coming in for covers, money going out for claims, money coming in for people who put ETH in and going out for the other way. You also have the float, the investment returns. And so to the extent that, to the extent you're in this stable environment where you're just writing business, same amount of business going on and off, then the surplus that's generated from the cover purchases plus the investment earnings on the float just accrue directly to the treasury and then that starts pushing the token price up on the bonding curve because you've got, your funds actually held over funds required

• 1:11:39Speaker 02

  just keeps ticking up because funds held goes up but funds required stays the same. So that's, that's basically how the model works. It all goes back to the members.

• 1:11:48Ryan Sean Adams?

  So what's super interesting, I think, about Nexus is that all of the capital backing these claims is ETH-based. So it's all in essentially Ethereum's reserve asset, which is ETH. Why did, why are you guys going?

• 1:12:03David Hoffman?

  Nexus is an ETH maxi.

• 1:12:04Ryan Sean Adams?

  Yeah, it's, it's like, it's an ETH, it's hungry for ETH. Like, it's an ETH monster. It just consumes more ETH and the more ETH that it has, the more cover it can provide, essentially. Why, why Ether? And have you thought about other assets or what are the kind of the trade-offs, pros and cons of using non-Ether assets?

• 1:12:25Speaker 02

  Yeah, so we won't be all Ether forever, that's for sure. We started off with Ether because we believe that, I mean, sorry, stepping back, the key way to actually manage an insurance company here is to match your assets with your liabilities on a currency basis. So if you're writing claims, potential claims, or writing cover, denominated in ETH, you have to pay claims in ETH potentially, or you have to pay claims in US dollars, DAI, then you should theoretically hold the same assets in the same mix. So if you write 50% cover in ETH, 50% cover in DAI, you should probably hold 50% ETH and 50% DAI-based assets. So that way, if currency rates move, they move on both sides of the balance sheet and your funding position is stable.

• 1:13:07Ryan Sean Adams?

  You're not taking any FX risk for like currency exchange risk in that way.

• 1:13:12Speaker 02

  Yeah, exactly. So we started with ETH only because we believed that most of the cover purchases would be done in ETH. And we were over collateralized to start, and so it was all kind of okay. We're getting to the point now where we probably should start having more of the value being held in DAI to match things a bit better. But it's okay for now, but we are a relative ETH maxi compared to other stuff, that's for sure. The, I guess, what we need to do is when we kind of enable this investment earning stuff, we also need to balance the the weights of what the assets are and make sure that the currency risk is not too much.

• 1:13:49Ryan Sean Adams?

  So in theory, the treasury, the makeup of the treasury and all the assets inside of it should generally match or track on to the demand for cover based in specific currencies. Is that right?

• 1:14:03Speaker 02

  Yeah, exactly. So if we're writing, as I say, 50% ETH

• 1:14:08Speaker 02

  cover and 50% DAI cover, then we probably want to hold 50% ETH-based assets. And that could be staking or whatever. And correspondingly, you want to probably hold 50% US dollar-based investments in whatever shape or form that is.

• 1:14:25Ryan Sean Adams?

  One of the things we've talked about a lot is how you were able to put all of this essentially in smart contracts, right? And presumably, the typical traditional insurance industry, it costs 30 to 40% in administrative costs. And your costs are much smaller relative to the amount of cover that you can provide. So that's one efficiency gain in making all of this Ethereum native and smart contract based. But I'm also curious about this. Could this thing continue to operate if your team, sort of the management team and the developers of Nexus kind of went away?

• 1:15:09Ryan Sean Adams?

  I guess, how bankless is it? How decentralized is it today? And what are your goals there?

• 1:15:15Speaker 02

  Yeah, so not right now, it wouldn't be able to. There are a few centralized elements that we're basically working to remove. The the idea is to become a fully permissioned, the most decentralized protocol. That's that's the goal. We've got a few things to do to get there. There's a couple of more complex calculations that we want to bring on chain and we're kind of in the process of doing that. But it's kind of a it was definitely on the progressive decentralization end of the spectrum. I guess relative to something like a compound or something, we do have a lot more mechanics involved and and a lot more things that we have to iterate on and test them. And we're, you know, we're going through that process and fine tuning stuff and working and working it out.

• 1:16:00Speaker 02

  So the but we're on that process and we're working towards it. In terms of like the actual kind of underlying risk there, there's effectively a multi-sig behind this. That we have governance that can get formalized on chain governance that that does updates and stuff like that. But there is also a multi-sig of the five advisory board members that they could do potential harm to the protocol if they colluded. There is a protection there, the fact that they are actually legal directors of Nexus Mutual Limited, a company in the UK. But but, you know, that is, that's the situation we are in right now to be blatantly out there and transparent about exactly what's happening.

• 1:16:45Speaker 02

  And but we're, I guess, working to to remove that over time.

• 1:16:49Ryan Sean Adams?

  There's always the question we learned in 2008 of who who ensures the insurers? Which I don't know if we have a good answer for right now for for Nexus, but do you see any help on the way? Who's going to ensure Nexus?

• 1:17:02Speaker 02

  Yeah, that's a good question. No one right now. We're covering open, but. Yeah, but no one, no one for Nexus right now.

• 1:17:11David Hoffman?

  We have this treasury and this treasury is funded by this bonding curve with you when you deposit capital into it. The capital is largely ETH right now, but it's going to diversify into a much more diversified basket of assets to mitigate risk. On the other side of that bonding curve is the NXM token, which is the token that can purchase cover, which gives you a some amount of rights to the funds in the treasury if a particular contract goes under. And, and so this is the, the general core Nexus mutual system. What we haven't covered yet is what happens when a contract blows up. And, and this has actually happened. So there are actually real life instances of, of contracts blowing up.

• 1:17:56David Hoffman?

  So, so Hugh, can you kind of walk us through the process of what happens when a contract that is insured by Nexus, quote unquote, blows up?

• 1:18:04Speaker 02

  Yeah. So basically the cover holder submits a claim, Ethereum transaction. And then that goes to creates essentially a workflow item for our claims assessors. And so anyone can be, any member of the mutual can be a claims assessor by staking some NXM. And then it basically goes to a vote. So this is, these are humans interpreting stuff. So, um, you know, that has pros and cons, obviously. It means we're massively flexible in terms of what cover we can provide in the future. But, um, but it also means that, you know, there's, there's people involved rather than programmatic rules.

• 1:18:39Speaker 02

  And so that's essentially a voting process, stake weighted. There must be a 70% or more consensus on things. And if that threshold is not reached or there's not enough staking, et cetera, then it escalates to a full member vote, where you, where any member of the mutual can vote without staking. And that's kind of the resolution mechanism or the dispute resolution mechanism, I guess. And then depending on the vote, it either gets approved or denied. And so I guess we, we paid our first claims of the Visa X hack back in February. It was, um, which was, which was interesting. Visa X got hacked again recently.

• 1:19:23Speaker 02

  So, um, I, uh, no, it wasn't. So, um, well, there was actually two covers purchased two hours after the, um, attack. Um, so I'm not quite sure what was going on there, but, um, but there were no covers that were, um, like live, um, before then. So I'm, I'm pretty sure we would have paid a claim, um, as a result of that event, but there was no one with it, no one with any cover.

• 1:19:48David Hoffman?

  So the, there's no objectivity to insurance claims, right? There's no way to automate this in the, the payouts into a smart contract. Because when, uh, like, for example, if Nexus Mutual was around when the DAO hack happened, right? We call it the DAO hack, but it was more of a DAO exploit. And even, even more objectively, from the perspective of like a robot, the DAO hacker was really just using the DAO code as written, right? Like, he didn't change the code. He didn't, there wasn't a, a bug because that doesn't, that doesn't happen in Ethereum technically, right? Like, there aren't bugs. There are just, there's just code and then there's people using the code.

• 1:20:29David Hoffman?

  And so, and so there's always going to be some sort of human subjectivity component to Nexus Mutual. And so how, how do you guys go around, uh, how do you guys deal with the issue of, you know, technically, there's nothing that's actually like an exploit or nothing that's actually a bug? And so how do you determine what should be paid out and what shouldn't be?

• 1:20:49Speaker 02

  Yeah. So, um, I guess the first point here is if you, if you could codify a way of doing it, then you could ignore that, you could get rid of the bug in the first place. Um, from a theoretical.

• 1:21:01David Hoffman?

  That's a fantastic point.

• 1:21:04Speaker 02

  So, um, so basically you can't do that really. Um, the, the way we've done it is, um, we've got essentially old school terms and conditions document. It's basically two pages long. It tells you what, um, should be paid out, what shouldn't be paid out. And people make a, a subjective interpretation of what that means. And it all comes down to what was the intention behind the code. Um, like, you know, clearly, clearly the DAO, the people who coded the DAO did not intend for it to be able to be trained. Um, clearly the. People would go to BZX didn't intend it to be able to be exploited the way it was like, you know, tho- those types of things, right? Um, and so, and so, you know, th- there's definitely human subjectivity in there, but I think that's, um, I think that's what people expect.

• 1:21:46Speaker 02

  Um, and, you know, that's, I think we're going to be in a much better, well, I believe we're going to be in a much better position with that type of stuff available. The, the, the one of the benefits that we've got here is that if we want to put out a new product, we can just write, and you said it terms of conditions in a document and essentially socially coordinate around those. And, um, off a cover on, on anything, whether that's something on Ethereum, whether that's something on a different blockchain, whether that's something in, on crypto related, um, it doesn't really matter. We can use these same mechanisms and apply them to any risk.

• 1:22:22Ryan Sean Adams?

  Well, I think we want to talk about some non-crypto, non-blockchain stuff later, um, but one question I had, so what about an options-based approach? So you, you mentioned the open protocol, they have O tokens and, um, they're able to provide some level of insurance through basically people betting, uh, on options. That doesn't seem to require as much governance. Is that a more scalable approach or are there trade-offs with that too?

• 1:22:48Speaker 02

  Um, yeah, no, that's a fantastic approach. I love it. Um, the, the thing that it does really well is works for tokenized networks. Um, when you can like swap one token for another, for example, you got this token that's supposed to be worth, um, one US dollar, you can swap it for another token, et cetera. Um, and so, you know, there's, there's potentially ways to, um, to do that, um, with Nexus as well, um, that we're looking at. Um, the one thing you can't do with that is if you can't tokenize it, then, um, you can't cover it in using that option-based approach.

• 1:23:21Ryan Sean Adams?

  The, another advantage of Nexus, of course, is because it's crypto native, uh, it's composable with all of these other money protocols. So we, we use that idea of, of Dye and you can, you can literally have Dye and wrap that inside of some kind of a, a Nexus protected token and have an insured Dye, almost like an FDIC type of, of Dye. Inside of your wallet and it could be just as as fungible as before. You could you could pay your bills with it, whatever. So that's something that's super cool. Can you talk about how Nexus's relationship with some of these other early DeFi protocols and the money Lego aspect? Maybe maybe talk about YFI.

• 1:24:03Ryan Sean Adams?

  So Wi-Fi, they've got this Y insurance dot finance thing. What is that all about? Is that backed? Is that powered by Nexus? And how does it work?

• 1:24:13Speaker 02

  Yeah, it's basically white labeled Nexus. That's pretty much the one line description of it right now. I'm sure Andre has different plans to do different things with it.

• 1:24:23Ryan Sean Adams?

  So he just put in a user interface on top of Nexus, basically, and integrated it into the rest of the, you know, wire and flow, I guess.

• 1:24:32Speaker 02

  Yeah, exactly. But I mean, it's a bit more complicated than that. It actually turns our cover into an NFT and allows it to be traded outside the Nexus platform. Which is kind of

• 1:24:41Ryan Sean Adams?

  The protocol sync thesis metaphor in there somewhere? Yeah, definitely. Okay, so what does that mean? Turn it into an NFT. So our listeners know what NFTs are. These are non-fungible tokens. So this would be essentially like a, you know, a claim document for some certain amount. What's the advantage of turning insurance into an NFT?

• 1:25:03Speaker 02

  Essentially, you can make it tradable, I guess. That's kind of one of the big advantages. But you can also like potentially split an NFT into lots of little bits and pieces. Like you create a token which represents fractions of the NFT. And then you can like really do some tricky stuff with that on like stream cover and do some fancy stuff. So that's that's kind of a really cool advantage that you can that isn't done now, but could be quite easily be done in the future. And so those are the types of things that composability on Ethereum is just amazing. We're only we're only doing the stuff we can kind of think think right now about. It's a bit easy to comprehend, but there's going to be so much stuff that we haven't even thought of yet.

• 1:25:44Ryan Sean Adams?

  So Nexus as an NFT, that would be like you could create an NFT for a $500 policy on Compound or something.

• 1:25:52Speaker 02

  Yeah. Yeah, so it basically.

• 1:25:55Ryan Sean Adams?

  That could be traded.

• 1:25:55Speaker 02

  Yeah, so three things, you know, the time of the, how long it's for, like, so the covers for a month, it's for this amount, it's on this protocol.

• 1:26:01Ryan Sean Adams?

  Ah.

• 1:26:02Speaker 02

  The, the three elements. And then you could, then what you can do is like, so I'm gonna, I'm gonna buy a million on compound for a year. Um, and then, um, and then I'm gonna turn that into a million, um, compound dye. Um, and wrap it with C dye. Um, and so now, now I have a million C and then an XM dye, whatever you wanna call it, which is natively covered compound dye. Um, that, that earns interest, so.

• 1:26:28Ryan Sean Adams?

  It's crazy. Like, there could be entire apps and entire businesses built around just taking the Nexus, uh, mutual primitive and creating NFTs out of it and then, you know, selling that in some way, wrapping that in some way. What, what about another one? Uh, so recently, I think this week, uh, Safe came out. So this is kind of like, uh, insurance mining. Um, and there's a safe token. Can, can you tell us what that is? I haven't kept fully up to speed, um, but got a lot of questions about that.

• 1:26:56Speaker 02

  Yeah, I'm not absolutely fully up to speed on it, but I'll give you my best shot. Um, so, so basically, this takes the why, um, the wifi stuff that, um, Andre's built, the NFT, and you can stake that NFT, um, to earn safe governance token. Um, and I'm not quite sure exactly where the project, um, is headed, was headed, um, all the rest of it, I'm not sure. Um, but the whole point was to kind of like bootstrap, um, a, a, a new governance token, so you can earn, um, earn that. So it, it was basically just using Nexus effectively in the backend via wifi.

• 1:27:34Speaker 02

  Um, and, um, so we just had a massive boon in cover purchases as a result of this. So basically people were buying covers so that they could farm, um, safe token. Um, not really knowing exactly what safe token was going to do in the future. Um, but, you know, that's, that's what people are doing these days. Um, so that, that, that's kind of roughly what it is. And obviously there was, there's some stuff happened earlier today that I haven't quite got on top of, but, um, that may not last for that much longer.

• 1:28:02Ryan Sean Adams?

  Well, the crazy thing about all of this is no one needs to ask your permission in order to build these things. Like, Safe team didn't need to ask your permission in order to come up with this NFT Nexus market. Neither did, uh, Andre and Wyarn, right? They, they could just build it on top of these primitives.

• 1:28:18Speaker 02

  Yeah, exactly. That's, that's, that's one of the amazing things, yeah.

• 1:28:22David Hoffman?

  So right now Nexus's core product is ensuring smart contracts because that's what DeFi needs, right? That's what we need, especially right now, especially with yield farming and definitely into the future in order to be legitimate. But like as Nexus grows and grows and grows, I would imagine its product offering can also expand. And so is there a future world where I can purchase cover on my, my dog, my, my house, like my computer? Like is, is something like this possible?

• 1:28:50Ryan Sean Adams?

  How about some healthcare in the US? That'd be nice.

• 1:28:52David Hoffman?

  Yeah.

• 1:28:52Ryan Sean Adams?

  You gonna fix that?

• 1:28:53David Hoffman?

  Yeah.

• 1:28:55Ryan Sean Adams?

  Health insurance?

• 1:28:57Speaker 02

  Yes, with some caveats, obviously, but that's definitely what we've brought it, we've built it to be able to do. I mean, our, our vision is kind of like a decentralized version of Lloyds of London. Basically, come to the mutual with any type of risk. And if people want to back it, great, we'll offer some cover. There you go. And so that's definitely the idea. We'll, we'll stay within crypto for a while yet to get some scale. But in terms of stuff outside crypto, it's probably more likely to be things where there's a reliable data source on the, to assess claims. So health insurance is probably the last thing we're going to do because, you know, putting public, personal information available to, for people to assess claims, should there be

• 1:29:41Speaker 02

  an event, is probably not the best thing to do. But we can do things like, like earthquake cover or hurricanes or stuff like that, where there are kind of objective, reliable data sources to assess claims on a remote basis to start with. And then you can start developing the networks and distribution channels and stuff where you have like localized claims assessment teams and those types of things because they should be able to earn income from providing, providing that work on the, on the system. So that's definitely where we're headed. It's a, you know, it's a long journey, but that's, we do have a, quite a big vision outside of crypto for this stuff.

• 1:30:18David Hoffman?

  So if in theory that I if I could convince the chain link oracles to somehow make an oracle about the health status of my dog, you could insure it with Nexus.

• 1:30:29Speaker 02

  Well, I mean, in theory, we could ensure it anyway. And like if you're a claims assessor, you could actually hook up your own assessment up to a chain link oracle. That was that's up to you. You could do that. But I think what we need to do is make sure that there is a reliable way of assessing claims. And yeah, yeah, if that's by chain link, great.

• 1:30:49Ryan Sean Adams?

  David, you seem super concerned about your dog. Is he doing okay?

• 1:30:54Speaker 02

  She's doing good fine, yeah.

• 1:30:55Ryan Sean Adams?

  Oh, great. All right. I got worried for a minute.

• 1:30:58David Hoffman?

  So with with the the future world of, you know, ensuring real world items, real world phenomenon, there's also the the relevant issue of like the nation state and KYC, right? And Nexus actually currently has KYC built into it in specific arenas, like not not just purchasing cover for, you know, the typical contract like Maker Dow, but for more specific niche use cases. And that's just a function of an artifact of how you guys bootstrapped the the protocol. And how are you? What are your guys' plans to remove KYC and also to kind of remove dependence on a core key actors and become become deeper in the protocol sync thesis?

• 1:31:41Speaker 02

  Yeah, yeah, that's it's definitely on the on the on the plans and in the plans. So you do actually have to have KYC to purchase cover as well. Any member of the mutual has to be KYC right now. So the I guess the key here is that we have a legal entity in this thing. So we're kind of like a hybrid DeFi protocol, but we have a legal wrapper that gives us some benefits that you can't actually get within DeFi. Like, we have limited liability on a per member basis, which is not something to just throw away lightly, but but there are obviously trade offs with all of this stuff.

• 1:32:19Speaker 02

  So yeah, so I think the the key is decentralize on a on a gradual basis. My my goal here is like, remove the centralized aspects of the protocol, get them fully unchain, and then the rest of it. And then we have the option as a membership group to shed the legal entity if they wish. And once you've done that, then you can remove the KYC. So that's definitely an option. I think it's up to the members to decide at that point. But we can, that's definitely the path we're working towards.

• 1:32:53David Hoffman?

  And is there a timeline on that? Is like, is that a small obstacle or a big obstacle?

• 1:32:58Speaker 02

  I I think, look, it's probably going to take us over a year, maybe, maybe two. We'll see how we go. The key here is that, you know, there are a few kind of more challenging incentive mechanisms to make sure we get right, and we want to iterate on them. And you don't necessarily want to harden them into a protocol too early, when you're not quite sure if they've worked. So that's that's kind of the the approach we're taking, making sure we iterate, get things right. And then once we're happy with it, we'll end up with a hardened protocol that we can step away from.

• 1:33:30David Hoffman?

  Love it. Fantastic. So in terms of other developments and other part things on the roadmap, like what what are the next steps? Like, what are you working on today? And then once that's done, what are you working on tomorrow?

• 1:33:41Speaker 02

  Yeah, so it's been a bit reactionary recently, given the DeFi stuff is just going crazy. So I guess one of the one of the things we're working on is Shield Mining concept, where basically different projects can provide bonus rewards to Nexus stakers that stake on their project's protocol to kind of bootstrap early cover for new protocols. So that's that's an interesting one that'll be coming out soon. Then we're going to be looking at things like enhancing the the core features of the protocol.

• 1:34:14Speaker 02

  Things like offering partial claims, also like potentially tokenized cover and and things like that. Then I also mentioned the investment earnings one before, but that's going to be a key, larger one on the on the roadmap as well. So there are quite a few things, you know, the priorities and stuff that does move around a bit with with everything moving so fast. But but we've got a lot of interesting stuff coming out and looking to, you know, integrate with more people and stuff as well is going to is going to be key to to our success.

• 1:34:44David Hoffman?

  So if you had to make a guess and say it's two years from now or five years from now and Nexus Mutual didn't work, it blew up for some reason. Uh, if you could guess why that would happen, what would, what would you guess?

• 1:34:58Speaker 02

  Uh, yes, good question. Um. The, I guess the, um, I mean, there's always a potential for a bug in ourselves. Um, that's, that's kind of one, one thing. The, I think it probably would be the incentive mechanisms, um, on the staking side of things if we can't get those right. Um, I think they're pretty good now, but they definitely need to be looked at again. Um, and, um, and we, we are looking at them right now. Um, and so I think we, we need some more iteration there. If we, if we have to make sure that those, those staking mechanics work, because that's kind of like key to the whole thing.

• 1:35:33Speaker 02

  If you, if you can't bootstrap cover on new stuff, then you know, that doesn't quite work very well. So, um, and you have to be have an engaged staking, um, community that, um, that it's really involved in this stuff. So, um, those are probably the, that's probably the one, the one key thing, or, but you know, there's always a potential for us to get hacked as well, I guess.

• 1:35:52Ryan Sean Adams?

  Hugh, we started this whole conversation with the question, is DeFi safe yet? What's it going to take for DeFi to be safe for my parents, for institutional investors, for mainstream?

• 1:36:06Speaker 02

  Yeah, it's, it's a good question. I mean, I think, um, I think you're going to have to have several particles. Um, key core ones that have stood the test of time for a while. Um, and that they become reliable. Um, you're going to have to have, um. Unfortunately, you're probably going to have to have, um, some sort of insurance or safety net of some description around these things to protect. Um, individuals, you know, you don't want, you don't want, um, you know, moms and dads or whatever, putting in a chunk of their life savings and then it just boiling up, right? Um, it's, it's a bit okay. It's more okay when people are just gambling under their own, um, and they know what's going on.

• 1:36:48Speaker 02

  But, um, but I think we need to have those safety nets in place. Insurance is probably one. Um, but I'm sure there are, there are other things that, um, probably need to be involved as well.

• 1:36:58David Hoffman?

  One of the conversations about the difficulty of spinning up ETH 2 is that no one kind of wants to be the first through the door with when they deposit their ether into the deposit contract to get it over on ETH 2 because it's a one-way, it's a one-way bridge, right? And if it doesn't work, it's not coming back. Has Nexus talked about ensuring the ETH 2 deposit contract?

• 1:37:19Speaker 02

  We can, out of the books, actually, on that one. So yeah, that's definitely an option. We can also cover the stakeholders. So for example, if you delegate your ETH to a validator, because it's one-way, you're actually taking on like credit risk of the validator. So because you know, if they stop validating for whatever reason, they can't run their infrastructure, then all of a sudden your ETH gets eaten up by penalties. And so you know, there's definitely kind of coverable risk there that we can look at.

• 1:37:59Ryan Sean Adams?

  Hugh, this has been exceptional. Thank you so much for spending time with the Bankless Nation today. I've got one concluding question. So Vance Spencer from Framework a few episodes ago, made the bullish, bold prediction that we would see 500 billion, billion with a B, locked in DeFi this cycle. If we get to, let's, let's cut that. Let's say we're not as bullish as Vance. Let's cut it to, I know David is, but you know, I do this for the sake of others who haven't listened to all of the Bankless episodes and aren't as bullish as us, David. So let's say we hit 100 billion. What percentage of that is insured? And what percentage of that is covered

• 1:38:44Ryan Sean Adams?

  in Nexus?

• 1:38:47Speaker 02

  Yeah, good question. We're covering about 2% now or something. So I hope we can get up to something like 10, which ends up being a pretty big number if you multiply both those growth rates together. But you know, that's, that's, that's what the opportunity is right now. It's a pretty big exponentially growing market. And so, you know, hopefully we can be there to support it and protect people as we do grow.

• 1:39:12Ryan Sean Adams?

  All right, so.

• 1:39:13Speaker 02

  No pressure, Hugh.

• 1:39:14Ryan Sean Adams?

  Yeah, so, but if total locked value is 500 billion, then we're talking 10 billion in Nexus cover then. That would be exceptional, and hopefully we can get that number higher so that DeFi can remain safe. Hugh, thanks so much for spending the time with us. You know what? I'm really glad that you continued building through the bear market, my friend. I'm glad you didn't quit, because if you did, we wouldn't have had this conversation, but we also wouldn't have had this entire DeFi primitive. So, we appreciate it. This is all about the builders. That's what the series has been about. Thank you.

• 1:39:47Speaker 02

  Cool. Thank you both.

• 1:39:48Ryan Sean Adams?

  Awesome. Bankless Nation, a few action items for you today. The first is this. You've got to read Hugh's canonical Bankless article where he talked about the risk of lending to a smart contract. We'll include that in the show notes. Just get your head wrapped around the main risks when you're doing something in DeFi. And once you do that, also read about how to protect against hacks with Nexus. We'll include that in the show notes as well. May make you interested in some smart contract cover for what you're doing in DeFi. Finally, David, how are we doing on reviews, man? I think we're 150, maybe more. What do listeners need to do?

• 1:40:30David Hoffman?

  We're pretty happy about it. The Bankless Nation is strong, and we want it to become stronger. And the way that we do that is that we get the Bankless Podcast to the top of the iTunes charts. We are already in the top 100 in the finance and investing category on iTunes Podcasts, which is just fantastic. And as this bull market continues, we want to just pump those numbers up. Our goal is to get into the top 10 of the investing and finance podcast charts. And the way that you can help us do that is by going to wherever you listen to podcasts and giving us those five-star reviews so that we can move up the ranks. There are some forgotten ICO podcasts that had a bunch of views during 2017, and

• 1:41:14David Hoffman?

  for some reason, they're still sticky. And so, I definitely think that the Bankless Nation deserves to be ahead of those. Another fantastic resource that I highly recommend people who are looking to gain a further, more intimate understanding of how Nexus works. DeFi Dad made a fantastic video of how to buy insurance cover with Nexus. That is one of the videos that I watched in order to prepare for this podcast. And so that is should, if you are looking to learn more about Nexus, I highly recommend that video.

• 1:41:44Ryan Sean Adams?

  We will include that in the show notes as well. All right, guys, risks and disclaimers. ETH is risky. That's why we have insurance. Crypto is risky. DeFi is risky. You could lose what you put in, but hopefully left if you insure it. We are headed west. This is the frontier. It's not for everyone, but we are glad you're with us on the bankless journey. Thanks a lot.