Nexus Mutual Quick Overview (Part One)

Decentralized Finance Nov 29, 2020

The contents of this brief write-up have been extracted from a Twitter thread that was published earlier.

You can find that here = https://twitter.com/librehash/status/1332532157429002241?s=20

The thread (like all other content published on the account) provides a comprehensive overview in just a few words. Though Librehash cannot take complete credit for this because, sometimes, these projects write their reviews all by themselves.

Starting From the Top: Avoiding Twitter Shills

The motivation for this thread comes from a fellow that calls themselves, 'DegenSpartan' on Twitter:

Specifically, this individual published a thread praising the convoluted financial structure of 'Nexus Mutual' (screenshot below):

The link to the thread won't be given because Librehash does not want to endorse the promotion of ponzi / pyramid schemes (which is what Nexus Mutual is).

There may be some reading thinking, "Well how is it a ponzi scheme?" - great question. Let's get into that briefly.

Cutting to the Chase

Nexus Mutual is another DeFi project that purports to serve as "protection" in the DeFi space (which is ironic when considering the VCs backing the project are also responsible for fueling investment behind the very DeFi projects that apparently require "insurance").

Below is a screenshot from their website

Since this is a brief review, we decided to cut to the chase here and get right to the whitepaper to see exactly what 'DegenSpartan' felt was profound about NexusMutual.

Taking a Look at the NexusMutual Whitepaper

Like most blockchain projects, there's a formulaic structure to the paper.

Above we have Nexus Mutual's interpretation of how modern insurance works. The characterization of the insurance is somewhat inaccurate and also grossly exacerbates the perceived drawbacks of insurance.

Certain aspects of insurance are outside of the scope of insurance entirely, like the idea that insurance chooses, "Which insurance risks it will back". This is a byproduct of human free will (or determinism if you believe the latter; either way, its out of scope).

Customers also do not find it "extremely difficult to assess how safe a particular insurer is".

In fact, the insurance industry worldwide is highly regulated.

According to The National Association of Insurance Commissioners:

"Regulators require insurance companies to maintain specified levels of capital in order to conduct business. Requirements differ by country or regulatory jurisdiction, ranging from specified amounts of capital to risk-based capital, where the capital amount varies based on characteristics of the insurance company and the risks it faces." [1]

In addition, there is insurance for insurance companies as well. Its called 'reinsurance'

According to the 'Insurance Information Institute',

"Reinsurance is insurance for insurance companies. It's a way of transferring or 'ceding' some of the financial risk insurance companies assume in insuring cars, homes and businesses to another insurance company, the reinsurer."
"Reinsurance is a highly complex global business. U.S. professional reinsurers (companies that are formed specifically to provide reinsurance) accounted for about 7 percent of total U.S. property/casualty insurance industry premiums written in 2010, according to the Reinsurance Association of America."
[2]

But, hey, what's a few gross overstatements about the insurance industry when you're hawking off a revolutionary 'Decentralized Finance' product that will change the landscape of insurance as well know it (a bit heavy on the sarcasm here, yes).

Moving forward, the whitepaper does give the insurance industry at least some credit for building the insurance industry itself. But its certain to not give too much:

Curious Statements Made About Blockchain Technology

The very premise of the first screenshot is absolutely incorrect.

This is in reference to the portion that states:

"Blockchain technology and smart contracts can strip out not only the administrative inefficiencies but a large portion of the governance and regulatory related costs. They can do this by providing trust in a much more cost-effective way. Trust is moved from institutions and regulations to transparent code."

There is perhaps nothing that hurts the "cause" of blockchain more than the pseudo-anarchistic values touted around the space claiming that blockchain is a cure-all for any and everything (including things that do not need to be cured).

To be clear:

  1. Blockchain takes coordination as much as anything else and this has been the case since the beginning. If it weren't, then Satoshi Nakamoto would not have proposed the Bitcoin whitepaper to the Metzdowd e-mail list in 2008. And Satoshi certainly wouldn't have wasted their time contacting individuals such as Wei Dai to gather more information about their methodologies. The forums that were created shortly after Bitcoin's launch were done with the intentions of providing an open forum and, ultimately, a central place of communication where any and all bugs (such as the batch overflow error ; which was ultimately discovered by Jeff Garzik, followed by a patch that ultimately ended up being pushed by Gavin Andresen)
  2. The costs associated with blockchain are, again, enormous when taking the entire ecosystem into account. For instance, when considering the total cost of the BItcoin mining ecosystem, the total is astronomical. However, cost is a moot point here because, in business, cost is justified by profit (i.e, revenue in excess of costs). Therefore, unless a comparative argument is made using the latter (profit) as a benchmark, this erroneous statement about 'cost' only serves the purpose of further 'posturing' for Nexus Mutual.
  3. Going a bit further into the whitepaper, the 'peer-to-peer' aspect of the business model that Nexus Mutual proposes appears to defy all of the alleged benefits that the claimed just a few paragraphs above would be conferred via the use of blockchain.

See below:

This itemized list presented above could not possibly fit within the generalized structure of blockchain. Therefore, it is assumed that there must be some sort of outside 'governance' or coordination among these "peers" (in a non-anonymous / pseudonymous) manner in order to ensure that the appropriate actions are taken on the chain (although, the word 'chain' is a bit of a misnomer here since Nexus Mutual is only a token at the end of the day; we're going to speak more about that fact actually).

Brief Intermission: Nexus Mutual is Only a Token

That means that they are not building the "blockchain" part of blockchain, but rather a theoretical, digitized asset that is not generated by virtue of Proof of Work of its underlying chain that's also devoid of a pegged value to that chain's native asset as well.

In laymen's terms, what this means is that a "smart contract" (could be 'boiler plate' code), was created that established how many tokens would be 'minted' into existence. There are provisions in Ethereum (the underlying blockchain) that allow for the issuance of the asset on the basis of a certain amount of Ethereum contributed, but that still requires the smart contract creators to establish an arbitrary value for the token based on their subjective valuation rather than genuine open market price discovery.

Thus, for anyone creating a token and offering it to the public in what amounts to a perpetual ICO to characterize their endeavor as "blockchain" is not only dishonest, but inherently misleading.

While this may sound harsh, its important to remain truthful about how things actually work in the blockchain space if we are to actually see it move forward in the direction that we anticipate.

Plot Twist: Nexus Mutual is at Least as Restrictive as Any Other Insurance Company

The only differences between the actual layout of Nexus Mutual's ecosystem and that of an insurance company are:

Insurance companies are finite, registered entities that actually have to adhere to some sort of regulatory requirements vs. Nexus Mutual, a form of 'internet insurance' that proposes providing insurance using the very vehicle that it will allegedly insure against.

Insurance companies themselves can seek out insurance (and many larger entities do). However, there is no form of insurance for Nexus Mutual (and they do not propose any either). On the contrary, Nexus Mutual's 'insurance' rests on the reliability of their smart contract code. Should it (or Ethereum, the underlying blockchain upon which this asset was issued), face compromise at any point in time, that's it for investors. And the transaction will be final and permanent as well.

Intermediate Conclusion

The purpose of this write-up was to fulfill a baseline responsibility of actually calling this project out for what it is.

With that being said, we're all pretty aware that the legitimacy of a project means little when it comes to evaluating the potential profitability of investment.

This is a concept that isn't relegated to the blockchain space either. Stories like 'Theranos' (and biotech stocks in general), prove that the markets rarely put too much weight on the legitimacy of the underlying asset.

Instead, its all about how legitimate does that underlying asset appear to be to the general public (at least if we're talking about Silicon Valley and the vapid 'start-up' culture that's dominated over the past decade).

[1]: https://www.naic.org/cipr_newsletter_archive/vol2_oversight.htm

[2]: https://www.fdic.gov/deposit/deposits/faq.html

Tags

cryptomedication

Happy to serve and help wherever I'm needed in the blockchain space. #Education #EthicalContent #BringingLibretotheForefront

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