Table of contents
Introduction
Crypto is a lot of things. Safe isn’t one of them. While most investors know the risks of the game they play, it’s still a good idea to try your best to secure your funds.
Hackers stole nearly $4 billion worth of funds in 2020. Things are much better today, with losses of more than $1 billion so far in 2022. Despite these staggering statistics, there are still many people making a ton of money in the crypto space.
If you want to get in on the action, you might want to check out some insurance. Today, I’m looking at one of the original players in defi insurance: Nexus Mutual. Let’s get started.
What Is a Smart Contract?
In the simplest terms, a smart contract is just some code. This code says what a protocol can and cannot do. Essentially, it’s a crypto project’s constitution.
These smart contracts allow investors to invest, withdraw, and make changes to the money they have in the protocol.
Unfortunately, smart contracts are the primary way that two things happen:
- Rug pulls
- Exploits
A rug pull is when the team that owns the protocol uses the smart contract to wipe out investors. It can take everything they have in the project and even other assets located in that wallet.
Whenever you hear someone say something like, “Sure, you can do that. But keep in mind it exposes you to extra smart contract risk.” they’re telling you to make sure you can trust the project and its team.
Hackers can also exploit the code in these smart contracts. So even if the team is solid, buggy code is vulnerable to attack, leading to stolen funds.
Investing in more defi projects means exposing yourself to more smart contract risk on your wallet.
What Is a DAO?
A DAO is a decentralized autonomous organization. Most projects use a DAO in some way, shape, or form these days. Investment groups and NFT communities also use them.
Developers and Investors alike can easily create a DAO with software like Aragon.
These organizations are built to be trustless and permissionless, but most of them have direct involvement by the teams in charge of investors’ money. They can be used for different things, such as governance, and are often used to build community teams and hold treasuries.
Nexus Mutual is built on a DAO and backed by a UK-based company. Building a defi project on top of a legitimate KYC company benefits the company and investors. It gives the business some clout, allowing members to have some legal protection.
So now you know the risks of smart contracts and how DAOs work, at least in the case of Nexus Mutual. Now let’s get into how it all works to protect your crypto.
How Nexus Mutual Works
Nexus Mutual is a community-driven protocol, which is why I felt it was important to mention the DAO. The community votes on which projects are the least risky, using their ownership of Nexus Mutual’s governance token, NXM.
The more NXM is in a coverage pool, the lower the premium on that pool. The riskier the project for its investors, the higher the premium.
The community also votes on claims, deciding on their legitimacy and if the person making a claim is legitimate.
It’s important to note that the pools can fill up. Nexus Mutual will not bite off more than it can chew. So once they’re at capacity for a particular pool, it’s closed off.
Another caveat that’s worth mentioning is that you will need double coverage in some cases. If you bought tokens on one protocol and use another as a yield aggregator, such as beefy finance, you might have to pay twice.
Finally, it’s possible that whatever happened to your tokens simply isn’t covered by Nexus Mutual. When you go to the website and look for a cover on your funds, it will list what they cover for that project.
How to Use Nexus Mutual
The first thing you should do is read the whitepaper and the docs before jumping into this project. KYC is required to participate. So if you want to keep everything you do in defi private, Nexus Mutual isn’t for you.
Note: I jumped into the discord to poke around and ask some questions. But they required a phone number and email address to join their community. So I took a hard pass. If you’re interested in membership, you have to KYC anyway, so I don’t see this as an issue for joining discord.
Go to their website to check out what Nexus Mutual has to offer. On the homepage, click the Get A Quote button.
Next, find the project you want coverage for and click on it. You’ll be taken to a quote screen. Enter the days you want coverage for and the amount you would like covered, and then click Become a member. The amount can be DAI or ETH.
From here, you’ll be directed towards KYC and finishing up the coverage process. One thing that’s important to note is the Terms and conditions, which explain what kind of coverage you’ll receive.
If you have any questions about what’s covered, join their discord, ask questions, and read their information, such as docs and their whitepaper.
My Verdict
It seems good. I don’t know anyone who uses it, as Nexus Mutual doesn’t cover any of my personally invested projects. But the idea is solid, and we need some sort of insurance in defi to help protect our funds.
I would recommend this product, at least checking it out on a short-term of 30 days, to anyone with a lot of money on Ethereum and some of its defi projects. Most of the coverage seems centered around those protocols.
Provided you don’t mind the KYC, that is. Most of us are in defi because we like to be anonymous. If that’s your thing and you are on other chains that don’t have coverage, you should probably look elsewhere.
Conclusion
I think defi insurance is the next step in crypto evolution. Without it, we’re just opening ourselves up to more and more regulation talk that will only be detrimental to what cryptocurrency was designed to do.
However, it may not be suitable for you or even available in its current form. In future posts, I’ll go over some of the ways you can protect yourself without insurance, as well as some tips on how to properly research defi projects. Until next time, stay safe out there, frens.
If you want to give Nexus Mutual a shot, check out their homepage to start doing your own research.
