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Nexus Mutual: a decentralized insurance on Ethereum

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Nexus Mutual is a type of decentralized insurance available on the Ethereum blockchain, the purpose of which is to allow its members to share risk through a mutual insurance company, which is actually owned by the insured. In this context, those who have paid a premium, become partial owners of the company.

All participants are thus linked by a common objective through an aligned, and not conflicting, incentive mechanism, and receive a reward for their role, be it inherent to risk and/or claims assessment, participation in governance or having invested funds in the project.

Nexus was created with the aim of using blockchain technology to try and cut the fixed costs of the classic insurance system in order to make the system decentralized and fair for all. This would bring the insurance model back to its real origins, i.e. to the point where all contributions are aimed at the welfare of members.

The latter, i.e. the insured, are granted the possibility of purchasing insurance to protect themselves against possible attacks on the smart contract code. It is precisely the smart contract that is the main subject of the insurance cover; specifically, the risk against which one is insured is the possibility that this contract may be attacked due to its vulnerability. Among the most famous of these are The DAO hack or the Parity hack.

How does Nexus Mutual work?

It all starts when the owner of a smart contract, plausibly linked to a dApp, decides to offer its users the possibility of protecting themselves against the risk of suffering economic damage caused by possible bugs in the relevant app. The owner submits its smart contract to Nexus Mutual, whose team verifies the contract’s security data and, if successful, adds it to the list of insurable contracts.

Nexus has launched Smart Contracts Cover, which covers unintended uses of the insured smart contract code where someone other than the purchaser of the cover has suffered a financial loss. This contract does not cover events such as loss of private keys or hacking of one’s wallet, but rather the unique technical risk that the smart contracts do not behave as intended by the developers. It is indeed very complex to code error-free, so the technical risk is never zero.

However, audits, extensive testing, formal verification, as well as the ‘battle test’ of the contract are just some of the factors that can reduce the impact, greatly lowering the likelihood of such a problem occurring. However, in the event of a bug, funds could be stolen or made inaccessible, which is why it can be worthwhile to take out insurance.

Members who purchase the Smart Contract Cover choose a fixed amount to insure, as well as the period of time for which they wish to do so. This means that the payments are not necessarily matched by the losses generated by the bug or hacking of the smart contract, and in fact it may even be possible to decide to insure part of one’s funds. In the event that something happens to the smart contract during the coverage period, policyholders would have the opportunity and the right to file a claim, which would be followed by the claim assessment process that, if approved, would lead to the payment of the insured portion.

In this community, however, participating members are not the only protagonists. Alongside them are the investors, who bet on the soundness of the contract itself, i.e. that it will not be breached. These investors, by depositing a quantity of NXM tokens in staking, guarantee a common fund for compensation in the event of a claim that falls within the scope of the policy. A percentage of the premium paid by the insurance company’s customers for the purchase of cover goes to them, and their profit is related to the amount of policies purchased on that particular contract. The maximum duration of staking is set at 250 days, or until a profit of 50% of the deposited amount is earned. In return for the commissions earned, the stakers bear the risk that the contract will cause damage to the insured and that the staked sums will therefore be used to pay damages.

Future objectives

The Nexus Mutual team is working to make improvements and prove that the system works. In support of this, important future goals are:

  • growing the capital pool to offer new products, expanding coverage to new markets;
  • simplifying the pricing structure to make it more user friendly;
  • allowing partial payments to be made on covers.

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