Nexus Mutual Blockchain Insurance Model to Enhance Smart Contract Security Failure Risk
Nexus Mutual – Enthusing Blockchain Skeptics through Old-fashioned Insurance Model
Hugh Karp believes that blockchain technology enables people to trust people unknown to them; by trusting the blockchain’s framework. Although Hugh’s perception seems cliché, his project, known as Nexus Mutual is developing a solution for investors who do not trust the blockchain framework. Instead of adopting the modern profit-oriented insurance model, Nexus Mutual deploys the old-fashioned mutual insurance model that arguably considers the interests of participants. Notably, Nexus is just a single entity in a pool of blockchain startups that intend to use distributed ledgers to defend the interests of investors.
The first insurance product is Nexus’ lineup of services will cover an ultra-modern risk – the security issues of smart contacts on the Ethereum network. To put of this into perspective, consider the infamous DAO hack in 2016, which resulted in theft of 3.6 million ETH (approximately $50 million back then) from smart contracts. Similarly, the Parity Multisig Wallet attack of 2017 resulted the loss of 150,000 ETH (~ $30 million). As from early 2019, Nexus Mutual will insure clients against such financial losses from the manipulation of the systems.
Nexus Mutual will be a self-executing smart contact built on the Ethereum blockchain. This is what Karp implied when he said that investors should trust the blockchain. To him, distributed technology provides a way for overcoming the restrictions of the mutual insurance model while retaining its advantages. Karp is confident that users will trust the regulations of the smart contacts as stipulated on the Ethereum public blockchain. By doing this, members unknown to each other can have trust amongst them, allowing the network to scale. Later on, after getting form the users, the solution will extends its scope of coverage beyond the crypto space.
Hugh is undoubtedly a prominent figure in the insurance technology sector, mainly due to his extensive understanding of the niche and its underlying technology. He stated his career at Munich Re, one of the leading reinsurance companies in the world. There, he rose through the ranks to become the firm’s chief financial officer. Since 2914, Hugh has been an ardent fan of cryptocurrencies and blockchains, especially Bitcoin and Ethereum.
Normally, Stephen Palley, a partner at a Washington D.C law firm, is skeptical about blockchain technology. However, the insurance expert surprised many by declaring a bullish stance regarding Hugh Karp and Nexus Mutual. Palley noted that very few people have knowledge of both insurance and blockchain technologies. He also lauded Nexus Mutual, saying that its mutualization concept is likeable because it is community-centric rather than being adversarial.
Reinstating Mutual Insurance Concept
It is evident that the mutual insurance model is appealing, which is why modern startups like Nexus Mutual are trying to revive it using today’s advanced technological infrastructure. As noted above, mutual insurance models focus on the interests of the client, instead of prioritizing the making of profits. Essentially, that approach favors shareholders ahead of policy makers.
In the 1960s, the volume of conversion from mutual to stock ownership increased significantly. Later on, demutualization started proliferating as European lawmakers removed the unfavorable regulations between banks and insurers. As per Stephan Karpischek, the CEO of Etherisc, mutual insurance model has dwindled due to certain factors such as network effects, statistical advantages and efficiency gains.
Similar to Nexus, Etherisc intends to deploy blockchain technology to curb the menacing rate of demutualization. Etherisc has already established a parametric insurance solution on the Ethereum blockchain. Besides automatically triggering payouts after the occurrence of undesirable situations, the solution has also extended its scope of operation to cover locations that were previously underserved, including the families in Africa. Stephan maintains that peer-to-peer networks are highly unlikely to suffer hacking attacks, information leaks, mismanagement, and so on.
Besides the Ethereum blockchain, which host both Nexus and Etherisc, similar solutions are being developed in other blockchain networks. Soon, a solution known as Inmediate will be launched on the Ziliqa blockchain. Inmediate is a product of Deloitte, the FWD insurance group and anther unknown insurer. As per the CEO of Inmediate, the goal of the project is to reinstate the original purpose of insurance, which is to look after one another in difficult times.
Another solution that will adopt the mutual insurance model is New York-based Layer 2 labs. This startup seeks to emulate the techniques that were implemented in the 17th century at Edward Lloyd’s coffee house in London. Like Nexus, layer 2 will also cover risks in the blockchain industry.
In addition to allowing users to scale trust, Nexus finds blockchain alluring because of its tokenization ability. Though Nexus has declared its intention of tokenizing in 2019, the company will not conduct an ICO to raise capital. Rather, Nexus will first bold the platform using its seed funding and then launch it alongside a smart contract. Following the inauguration of the platform, Nexus Mutual will tokenize membership rights to crowdfund the insurance solution. This is referred to as a ‘reverse ICO,’ mainly because the money is redirected into the risk pool.
Initially, Nexus Mutual will exploit an unregulated sector within the British Insurance industry, known as the ‘discretionary mutual’ model. Under this model, members are not obligated to pay insurance claims. Moreover, the unregulated nature of this sector allows Nexus to move quickly in the heavily regulated insurance industry.
After realizing its fundraising goals, Nexus will function as a decentralized autonomous organization (DAO) and operate on a governance models that is entirely controlled by members. These members will vote regularly to improve or adjust the governance model. Premiums will be paid out in either ETH or DAI, a stablecoin for the Nexus ecosystem. On the other hand, payment of claims will be subject to the decision of members through voting.
Karp revealed that Nexus will feature an emergency pause button alongside the typical security tests and audits to prevent the frequent smart contact security breaches. By default, the button will be controlled by the Nexus board, although members can also vote in a person to control the system.
Usually, insurance companies invest their capital in bonds and commercial mortgages. Similarly, Nexus plans to invest the money, albeit in more contemporary institutions. Regarding this, Hugh hinted that they may invest in one of the many ERC20 tokens available in the market. Hugh further added that when the Ethereum blockchain finally adopts the proof of stake consensus algorithm, a majority of the investments by Nexus will allocated towards staking.
As the insurance market is normally conservative, one would anticipate most innovations to come through private blockchains. Nonetheless, advocates of public chain insurance technology like Karp are adamant that their favored networks are better than private chains.