Robert has reported for a variety of international publications including the Associated Press, The Guardian, Vice, and Decrypt. Current areas of interest include the political economy of technology, cryptocurrencies, and privacy. Robert has a Bachelor of Science from UCL, and a Master's degree from the University of Oxford's Internet Institute.
Insurance is an old industry, one that permeates all aspects of life today. You can insure cars, houses and even human lives. While this may not seem like the most obvious industry to disrupt, blockchain projects are now creating insurance products that insure people against the risks of the crazy new world of decentralized finance, or DeFi.
DeFi is an ongoing financial movement that intends to remove the centralization prominent in many traditional financial instruments. If Bitcoin revolutionized money by offering a decentralized and anonymous currency, DeFi does the same to banking, insurance, and exchanges. Through blockchain, DeFi removes reliance on third parties and makes complicated financial transactions “trustless.“
The main innovation that powers decentralized finance is the smart contract. Smart contracts are blockchain contracts that enforce themselves, requiring no third party (like a lawyer or underwriter or debt collector) to protect the agreement.Buy and Sell Bitcoin, Ethereum, and over a dozen other cryptocurrencies with Wealthsimple. Sign up and Trade here.
This is a departure from traditional legal contracts, which could result in a court case if they’re breached. Resolving contractual disputes is not only expensive, but also time consuming, stressful, and carries the human risk of an incorrect judgement being reached. Smart contracts avoid this: they operate under a pre-existing set of conditions which, when filled, execute the contract automatically.
For instance, if one party to an agreement doesn’t fulfill their end of a bargain, then the other party receives an automatic refund. This means there is no need to trust anybody, hence the term trustlessness. However, while this is great in theory, in practice smart contracts are complicated and the pace of innovation within DeFi is so fast that developers make mistakes. To protect against smart contract risk, DeFi insurance protocols and companies have popped up.
Nexus Mutual, our topic of focus today, is one such company. One component of its service is NXM and WNXM, which both refer to tokens on the Nexus Mutual Network. But how does the whole thing work? Can it really replace businesses that have run for centuries? And how do the tokens influence the platform?
What is Nexus Mutual?
While some consider smart contracts to be superior to traditional contracts, they still carry some risk. Many of the contracts haven’t been audited, and with the sheer number of projects and the rapid rate at which new ones turn up, there are plenty of contracts that could be vulnerable to exploitation. Nexus Mutual is set up to provide users a way to hedge against the risk involved with a smart contract. Through the Ethereum blockchain, this hedging is achieved without the need for a centralized insurance company.
Members can take out insurance policies with the network’s cryptocurrency token, NXM. But Nexus Mutual also has a significant role for its members to play. Unlike a traditional insurance company, which has a board and employees to process claims, members that hold NXM, take on this responsibility instead. Each token a member holds represents membership rights; the more tokens someone holds, the greater influence they can exert over the platform and the larger insurance policies they can take out.
Specifically, members have access to a range of different services, which are each outlined in this Medium post. The first thing is, of course, taking out a smart contract insurance policy. However, a member can also stake their tokens on a smart contract they consider sound. If the smart contract holds, the staker will receive a return in the form of additional NXM. This is analogous to a member acting as an insurance agent. Staking can also be done to assess claims coming from other users. Changes are voted on by members, with more votes going to members with more tokens. These changes can also be proposed by members themselves.
When a user purchases coverage from the Mutual, they spend NXM tokens. 90% of these tokens are then destroyed, which keeps the count of NXM from spiralling out of control. The remaining 10% is held, ready to be used as a deposit in the event of a claim. If the claim is upheld, the policy will refund the NXM tokens.
It is important to note that the Mutual does not technically offer insurance, as this is a distinct legal term which is not met by the Mutual. Instead, members of the mutual cover each other by staking on various smart contracts. This is a form of peer-to-peer coverage, where members of the same organization offer each other coverage without any one entity holding a legal responsibility to pay out on a claim. Members also have full discretion on whether a claim is paid out or not.
A key feature of this system that Nexus trumpets is the idea of aligned incentives. Traditional insurance payments are often pretty hard to get, as companies do not want to pay out if they can avoid it. This can lead to disputes between claimants and insurers. By moving the system into a member-based approach, where members are rewarded by proper functioning of the system, Nexus incentivizes a system where claims are more likely to be paid out. In addition, a member who is staking will likely have their own policies that they may wish to make a claim on. This means they are less likely to begrudge paying out as they could easily find themselves in a similar situation.
What is WNXM?
NXM tokens are a critical part of the Nexus Mutual system. They are the membership tokens that enable a user to use the platform, vote on procedures, and stake. The price of NXM is tied to Mutual’s overall financial performance as well, similar to how a stock price might follow the performance of a company.
WNXM stands for Wrapped NXM. But what does “wrapped” mean in this context? A wrapped token is a token pegged to the value of another cryptocurrency, in this case, it is tied to the value of NXM. This is similar to the idea of a stablecoin, which is a cryptocurrency tied to the price of a fiat currency, such as the US Dollar. This can be used to move a cryptocurrency onto another blockchain, similar to what the project Ren does. When a cryptocurrency is wrapped, it is placed in a digital vault and replaced by a wrapped token, which can be used until a user wants to return to the original token.
Wrapped NXM tokens are useful as it means NXM can be stored on many different addresses without worry when it comes to deciding on which blockchain to store them. Wrapped tokens are meant to be moved between blockchains, so this unlocks different addresses on which to store the token.
How is WNXM different than Bitcoin?
NXM, and by extension WNXM, is completely different than Bitcoin. Bitcoin is a peer-to-peer network that is used to complete transactions, such as buying a new coat online. It also acts as a store of value, as the effort exerted and energy consumed by computers to mint a new Bitcoin costs money, which some see as giving Bitcoin a sort of fundamental value, similar to gold. Bitcoin also has its own blockchain and the currency cannot be transferred between blockchains.
NXM is different than Bitcoin in several ways. First, it is not meant to be used for online purchases. While each token has a value and can be exchanged for US Dollars, this is not its purpose. Instead, it is a membership token that enables a user to act as part of a larger organization, Nexus Mutual. The token has different functionality than Bitcoin, and so behaves in a completely different way. It is also built on the Ethereum blockchain instead of its own blockchain, which is another difference.
WNXM is intended to switch between different blockchains, effectively moving NXM around. It can eventually be “unwrapped“ by a member and restored to its original blockchain. This is something that Bitcoin on its own cannot do. Bitcoin can be wrapped though (into Wrapped Bitcoin, or WBTC), which is a similarity between the two cryptocurrencies.
As an investment, Bitcoin and WNXM are also completely different propositions. A Bitcoin investor might expect Bitcoin to gain widespread acceptance as a new form of gold, or form part of a widely used transaction system. WNXM, on the other hand, has its price tied to the health of NexusMutal. If an investor thinks DeFi insurance is the wave of the future, then they might speculate on the value of WNXM.
How can you buy WNXM?
WNXM can be purchased on a standard cryptocurrency exchange, such as Coinbase or Binance. There, it can be traded against other cryptocurrencies. If a user wants to buy and hold their currency, this can be done on the exchange platform, or it can be transferred off the exchange into a wallet. There are both hardware and software wallets that support WNXM. Hardware wallets are a more secure option, although they have an upfront cost, whereas many software wallets are free. WNXM can also be unwrapped by a user who wants to restore it to its original blockchain, and take advantage of the membership rights which come with holding WNXM.
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