Bankless - AMA - Hugh Karp of Nexus Mutual

Episode Date: September 24, 2020

September 21, 2020 ----- Tools from our sponsors to go bankless: 🌐 UNSTOPPABLE DOMAINS - GET A HUMAN READABLE CRYPTO DOMAIN 🌈 ZAPPER - ULTIMATE HUB FOR DEFI - ZAP INTO DEFI 💳 MONOLITH - GET THE HOLY GRAIL OF BANKLESS VISA CARDS 💸 AAVE - LEND AND BORROW DEFI ASSETS ----- AMA with Hugh Karp the Founder of Nexus Mutual Hugh Karp returns to the Bankless Nation to answer some of the question the community has from listening to his recent podcast! ------ Resources: Bankless Podcast with Hugh: http://podcast.banklesshq.com/31-nexus-mutual-to-billion-hugh-karp Read: How to assess the risks of a lending protocol? https://bankless.substack.com/p/how-to-assess-the-risk-of-lending Read: how to protect against hacks with Nexus https://bankless.substack.com/p/how-to-protect-against-hacks-with Nexus Metrics Tracker: https://nexustracker.io/ DeFi Dad Explainer Video: https://www.youtube.com/watch?v=rnzInsKPLR0   Rate the Podcast 5 Stars ----- Subscribe to podcast on iTunes | Spotify | YouTube | RSS Feed Leave a review on iTunes Share the episode with someone you know! ----- Don't stop at the podcast! Subscribe to the Bankless newsletter program Watch Bankless shows and tutorials on YouTube Visit official Bankless website for resources Follow Bankless on Twitter Follow Ryan on Twitter Follow David on Twitter ----- Not financial or tax advice. This podcast is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions.  Do your own research.

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And it will give you a comprehensive report of your entire DFI portfolio. Not only that, but you can even make transactions through Zapper that allow you to invest in various DFI protocols like balancer or uniswap or curve. Check them out at zapper.fi. Bankless Nation, welcome to another Ask Me Anything. These episodes are for you to get your questions in. We've got Hugh Karp today, who is the founder of Nexus Mutual. Hugh, how are you doing?

You very well. Great to be here again. Awesome. Well, great to talk to you twice in about a week's period of time. We had a fantastic podcast conversation with you that came out on Monday. This conversation is really for the bankless community. So to ask you questions. We do these AMAs twice a month, so the second Thursday and the fourth Thursday of the month.

They are broadcast live on YouTube. So you can ask questions on YouTube. Of course, if you are a member of the bankless inner circle in Discord, we will prioritize the questions you ask there as well. But this is our opportunity, really, as a community, to come to Hugh and other protocol builders and interesting people in crypto and ask the, questions that no one else asks of them. So this isn't to ask me anything. There are no rules, no questions you can't ask. We will do our best to filter and moderate and get the best ones

into Hugh in an order. We do have about an hour time slot. So this will probably end about five minutes or so after the hour. We'll check in with you every so often with a time update. Okay, those are the ground rules. Hugh, you ready for this? Let's go. All right. First question. I thought this was an interesting one to start with. So this came from a bankless community member.

Wants to know how you feel about the current yield farming craze. Yeah, good one. I mean, to me, it's temporary. But, well, I like, there's some good stuff underlying it, but it's obviously a bit too crazy in some sections for my liking. I mean, I'm from... What's the good stuff and what's the bad stuff? Yeah, I mean, like, it's hard to draw that line.

That's the problem, I think. I think fundamentally it's cool because there's some experimentation going on and especially about bootstrapping communities and giving ownership to communities and stuff like that. And I think that's really cool. So there's fundamentally some good stuff there. But I also think it's obviously going too far in some places. And, you know, there's obviously potential for scams and red pools

and all of that type of stuff, which everyone has to keep. an eye out on. So, you know, fundamental experimentation is really cool. I think it will lead to some value, but it's obviously getting a bit too exuberant and crazy in some places. And I guess I'm more from a fundamental economic perspective. And so, you know, it kind of jars a bit in some places with me, but I do acknowledge that there is some really cool experimentation going on underneath. So in my mind, this whole yield farming craze is kind of like it taps into that same energy of the ICO mania, right? But it's like a new new and improved upgraded ICO 2.0, which I know is like maybe that hits the wrong way because ICOs, the ICO industry or ICO phenomenon kind of has this bad rap. But as an upgrade to the primitive of the ICO, how do you feel about it?

I mean, it's definitely a lot better, but I still, you know, is that any good? Because ICOs were pretty rubbish. So, you know, you're making something that was not so great, better. Okay, cool. But then look, I mean, I do think there's fundamentally some really cool stuff. We're pretty strapping communities and giving ownership to communities. And I think if we can learn from it and take the best out of that thing, great. Let's just not go too far and too crazy.

And I think it's up to everyone that who's kind of in this community for the longer term to help point out where it's hopefully going a bit too far or, you know, to try and help people avoid some of the worst stuff of it. So yeah, anyway, that's why view. Hard to draw a line exactly. I think some of it has value some of it. So here the same community member asked a follow-up question about how you feel about shield mining. So I actually didn't recognize the term shield mining. I guess, you know, unless that's a misspelling of yield. Do you know what shield mining is?

And if you do, could you tell us about it? Yeah, so, well, I guess there's a few things going on, and maybe there's a few stuff, bits and pieces happening. Nexus is actually releasing something quite soon next week, where basically other protocols can provide additional bonuses to Nexus stakers that stake on their projects contracts. So basically to bootstrap cover for a new project or something like that. So like the Keep network with TPTC is going to probably be one of the first ones to watch

that, which is really great. So that's kind of... You said Keep with TBTC? Yeah, that's right. Wow. So we're really looking forward to that. So basically the idea is that Nexus stakeholders that stake is the stake on the TPTC contracts will be able to earn some bonus key rewards.

And so we think that's really kind of fundamentally. It's actually doing something for the protocol rather than just here, stake some tokens and earn some random other governance token that you jump on the market, and maybe it has some value at a future point in time, you know, which is kind of a lot of what the yield farming stuff is. Not all, but some of it. And so anyway, so that's our version of shield mining. I guess that it may be confused with some of the like safe or cover stuff that's going on at the moment,

which I'm not as close to exactly what's going on, but that's also a thing. So yeah, it can be a bit confusing, but the shield mining stuff, we're launching, we're actually really looking forward to, but we can be out soon. All right, so I just want to make sure I understand

what shield mining is then. So basically it's where Nexus would work with another protocol to provide some protocol rewards to incentivize insurance being taken out on those specific protocols. So with Keep, what Shield mining is doing is it's incenting additional coverage,

cover for the Keep TPTC protocol. Is that right? Yeah, that's right. So like when there's a new protocol that launches, like we can add it on Nexus, but to kind of bootstrap cover or some capacity to start with a decent price, people have to stake against it.

And so this is kind of a good way of bootstrapping that initial staking and provide some additional incentives from the project team, which will open up some cover and allow people to buy some cover at reasonable prices. And then that helps the project because hopefully that gives them more users, because more users are happy to do it if they can buy cover or make sense. So we think it's a very symbiotic way of working together. And it's a, to me, there's actually a fundamental,

it's actually doing something to help the actual projects rather than just, oh, here's another. So good thing could be less. Yeah, for sure. So it seems like a mechanism to help projects like Keep to really solve the problem of like the fact that no one kind of wants to be the first through the door, right? Like especially with tokenized Bitcoin and especially with Keep, which had some problems like getting out the gate previously, right? And like, and, you know, tip of the hat to the Keep team, the reason why they've, they've, you know, started and stopped and started and stopped and had trouble like really getting that engine going is because of how, conservative they are with their ethos, with their ethos and with their principles, right? Like they're trying to retain as much Bitcoin maximalist culture as possible in the code of Keep, right?

And so that and Bitcoiners are very conservative and probably don't really want to be ready to jump out the gate with getting their Bitcoin onto Ethereum with TBTC. But it seems like this new incentive mechanism, which is a cross protocol collaboration between Nexus and the Keep project, really allows to have, more security for people who are willing to like be ventures right who are really to go and go westward first ahead of everyone else and nexus is offering this early insurance this early cover to to people that are doing that right which can really help tbTC get a lot of tbTC onto a theorem quickly which is really kind of what they need right like especially projects in their early days they really need that that early success to generate that flywheel effect right am i getting everything right here.

Yeah, exactly. I mean, a lot of new projects will need early liquidity, whether that's early users in terms of the TPC, or maybe you need a liquidity pool in whatever new DFI protocol you're building. And so to help attract that, it's often helpful to have some cover on with Nexus, but you have to bootstrap that cover to start with. So it's kind of a good way of symbiotically working well with everything else.

So hopefully we're, I'm hoping there's some decent success out of that on the Nexus protocol, but also helping define more widely, I guess. throughout this. I want to ask another question. This one's coming in from DAPLion, and this is maybe more of fundamentals type question, but the question to you, Hugh, is, is Nexus Mutual fully solvent? So if all the claims are claimed at the same time, can the system respond? I bet you'll have a good answer for that and kind of clarify how Nexus works and how insurance works in general. What's your take? So the answer is no. And otherwise, you're effective running a fully collateralized British market.

And so basically that doesn't work from an economic perspective. Insurance companies work because they massively under collateralise, and they basically rely on the law of large numbers that not everything's going to claim that at once. So the probability of lots of low probability events happening at the same time is very small. And so the idea being that, I mean, the example I kind of always give is if you have an event which has a 1% probability of happening. If you fully collateralise that,

the most the person on the other side of the bet can make is 1%. And the most that can lose is 100. And so it's very hard to make that. So you can only do that, make it work economically if you under-collatualise, spread the risk, get diversification, and essentially nexus is operating on that basis. So right now we are under-clatualised. And that may sound bad, but I actually think it's cool

because it's actually how insurance is supposed to work. Okay, a question from GABR is about the theoretical risk. Okay, so let me make sure I get this question right. So he's asking about the theoretical risk that someone or a group purchases a sufficient amount of NXM, that's the Nexus token, of course, to approve unreasonable claims for the benefit, for their benefit. Is there anything Nexus is doing against that? Did you understand the question you put to you?

insiders kind of purchase an XM in order to start approving unreasonable claims. Yeah, yeah, no, we've, that's a definite attack factor we've considered a lot. So, so right now that's one of the, the way we're handling that is one of the more, more centralized aspects of the system and though we have ways to actually decentralize this. So, so right now they're to actually voting claims, you have to lock or stake an XM to vote. And so what they're saying here is you can just buy a chunk of the annex and then put through any claim you want to attack the system. And so the way we're dealing with that is there's actually five members of the mutual called the advisory board members and they have the power to slash the claims assessors bonds.

And so they can get in there and slash the bonds before claim payouts or enough claim payouts would be made. And so that's the prevention. The reason, but that, just to be clear, those advisory board members don't decide on claim payments, but they decide on the punishments of, they can't decide on the punishments of the claims assessors. And the idea here is to prevent malicious attacks. The real idea is that they don't actually ever have to do this, but there's a threat. And that threat is good enough to deter that attack from happening. We're working on ways that we can actually decentralize that into a large group of people,

but we just have to work our way through that. And it's kind of a... If you go back and tell us you, with that specific attack, what does the attacker benefit from that? Like, what's the incentive to do it? Yeah, so essentially the idea here is that you... I guess you buy some cover.

Then you submit claims, even though nothing to happen. And then you buy enough tokens and exempt tokens to kind of approve the claims and perhaps approve. trying to prove a lot of them. And then essentially you just take money out of nexus. But isn't that going to affect the value of your NXM, can you say?

Like if you have NXM, you own a whole bunch of it, and then you're mucking up the system in a pretty severe way. You'd have to think that a lot of NXM would get sold and, you know, decrease the value of your holdings, right? Yeah, exactly right. So you're essentially sacrificing most XM tokens. I catch you. You have to get to the point.

where you have to think that the cover that you've taken and that you can approve is going to be greater than the NXM tokens. So then maybe you also short, you also short the NXM simultaneously or something to make that attack. Yeah. I'm not thinking of doing that attack. Don't worry. I just, I was just wondering how it works. So we do, yeah, we do require like many multiples of the claim value in staked NXM tokens to actually approve the claim. So it is like we've, we've kind of got, we did a lot of work on this one.

it's clearly, it's a good question it needs to be dealt with and it's how the system actually works. But yeah. I don't think this is any different from, like many, many protocols have this same sort of like security assurance where like the, because you own the tokens, you're incentivized to not attack the system, right? And so like, this is mainly a proof of state type system and Ethereum and proof of stake 2.0 has kind of the same security assurances where like, you know, you could attack the system, but the only way that you attack, the system is you have a lot of capital locked up in the system that you're trying to attack, right? So this isn't this isn't unique to Nexus, right?

Yeah, that's correct. And I guess one of the things that we have to be aware of is that derivative attack where you don't care because you're taking you out a short position else there. And sorry, like that's the thing we have to be be careful of. And we, there's the slashing mechanism and there are numerous other ways that we believe we've moved up with that. I mean, you know, it has to be battle tested. I'm not saying it's perfect. We have to work through it over time. And we're willing to adjust it if we need to.

So here's an attack vector that I've been thinking about. So like what happens when, you know, inevitably some contract is going to have a bug because like if that didn't, then like you guys wouldn't need to exist. So like we're running on the assumption that there will be contracts that Nexus provides cover for that there will be bugs, right? So like say someone sees this bug and then they see that Nexus covers it and then they buy a boat load of cover for that bug and then they go and exploit that bug, right? Like, have you guys thought about this? Um, yeah.

Yeah, we have. Um, so, I'm, it's good to hear. So, like, so right now it is actually possible. Um, we like, effectively the cover that Nexus provides is like a credit default spot right now. Like you don't actually have, to have interest in the underlying to buy the cover. Um, so it's kind of like a pretty. might have put it in false opposites. So that that attack is possible. We do have KYC, so that does

provide some soft level benefit. Right, but are they even doing anything bad? Well, no, and not necessarily. They're not necessarily doing anything bad. I guess from my point of view, and this is one of the things we're discussing as a community right now, is we're looking to introduce a like a proof of loss requirement into the claims. So, that would mean that you have to kind of hit here, show you that you control an account or that has actually lost money as a result of this. And then that takes away the potential attack.

And generally, I think, I've always thought that we needed some type of structure like that to make a sustainable product in the long term. But we definitely released with something simpler, just because, you know, going to get out there, got to test the market, and see how it works, and then you can adjust from there. Well, so did you seem,

if you do that where like the user has to prove that they actually lost something in the exploit, you're kind of taking away what I think is a pretty interesting feature where you don't actually need to have lost in order to express an opinion about a, the security of a particular contract. So is what I'm hearing from you just like, okay, well, we have these two products and like one is the fact that you don't need to have loss. And then the other one is like, well, we also need to make sure that we're safe from exploitation and tack. And you're just choosing one over the other.

is that right? Yeah, so there's definitely a balance. I mean, if you don't have this proof of loss, then it definitely should be priced higher in my mind. So there's definitely a balance between, like, what do we try to achieve, which customer are you really aiming for here? And so in my mind,

it's tend to make more sense to offer a lower price product and be able to make it more useful for people. But, you know, that's definitely something that the community is still discussing. So it could go either way. All right. Bankless community just keeps firing away. Awesome questions. This one is from Joseph IT about how is the risk of loss the assessment calculated? So for something like death liability, he says they use actuarial tables and that sort of thing. It's very well known. It's an actuarial science. How about the risk of loss on a smart contract? How do you even figure that out? How are the stakers calculating that at the moment? That's a good question. I'm not sure how they're calculating. I guess that's one of the things we're doing quite differently,

where we're basically saying, look, you minding where your mouth is. This is prediction market-esque type of approach. You can use whatever tools or analysis that you want to do to analyze how secure or not something is, and then you can stake against it. And so I think that's been done pretty roughly right. right now, but we are seeing like more, the more secure contracts or the contracts that you may think be more secure are actually attracting more state. So, you know. So, okay, so this is so

fascinating, right? So the, the actuarial risk assessment is not really part of the Nexus protocol itself, right? You provide the incentive layer to make that risk assessment actually happen. But the risk assessment itself is completely decentralized. And that is such a fascinating answer that question. You're like, I don't know how it happens. That's not up to nexus of the protocol. That's up to the stakers, which is super fascinating. So first I want to just dive in on there. Does that ever happen in traditional insurance companies? Like all of traditional insurance companies from the limited knowledge that I have, my dad used to be a programmer at one of them, like a state farm in the U.S. And they have offices full of actuarial scientists and, you know,

data tracking, like car insurance, every type of insurance imaginable to like a very precise degree, but it's all internal. They don't outsource that to a decentralized community of like stakers. Yeah, maybe can you comment on that? Yeah, I think it's one of the fascinating things. I used to be why am an actuary. I used to do that stuff myself for life insurance and stuff. So, you know, I know for well how it's kind of done, but I think the, yeah, that is one of the fundamental differences in what we're doing. We're kind of saying, look, here's a protocol, here's an incentive layer, do whatever analysis you want to do, we'll just follow the money about how much to the state.

And that has, I mean, it's to be proven how well that actually works, that's for sure. But it seems to be worth getting in the right direction right now. The benefit, the big benefit that it has is you can actually enter new markets really, really quickly. So insurance companies will often wait until, oh, hold on, we need, we need multiple years of data to do this thing. You know, I want a time series. I want statistically significant information. I want it over many years and then and then we'll enter. But here we can go, we don't know, but we'll just put it out there. And if there's not enough staking, then there's no cover off it. But it allows the market to kind of get an early into reindication and enter new markets

really quickly. So I think that's a massive benefit that we have over a traditional insurance a product. So does that mean there's a world where there's these independent actuaries who essentially like quit their job at, you know, state farm, but they're really good at life insurance. And they come and they start staking and make money via Nexus? I mean, yeah, I actually see it happening more like it's what's called MGAs or managing general agents. They're kind of like, there's a group that's an expert in a particular risk type, whether that's crypto or whether that's something else, you know, it doesn't really matter.

And they apply their expertise and they have their models. And then they kind of their own little business that they sell that particular product, they distribute it, they also price it, and they can use the Nexus platform to provide the risk capital. And so essentially what you end up with is a back end of Nexus, which is like this capital coordination layer, risk underwriting coordination layer,

and you have multiple businesses on top that distribute and price their own products. And so it's kind of how it works. So kind of like a lawyads or something like that. And then back to that question. So first of all, that's fascinating. And I wanted to dive deeper on that. I don't even think we fully dove into that in our initial podcast.

So that's just another fascinating point about Nexus. But going back to like how smart contract risk is actually calculated. Do you have any other insight into that hue? Right? So like if I were to just use my model, I feel better about something like Maker Dow, right? Because it's been formally verified,

because it's protecting a large amount of money, because it's been out in the wild for a while, then I do something like BZX, which has had like a couple of hacks, right? So, like, how are these things calculated? Is it primarily Lindy effect, really? Like, you know, amount of value in and duration, and then maybe there's some side things, but the bulk of it is just simply that.

Yeah, I mean, we've, we had a bit more of a complicated formula to kind of take account of those types of things in our pricing, but we actually just shifted it all to say, it's staking. That's what we care about. Wow. And because, I mean, there was a few. technical challenges with the formula but sometimes it didn't quite work properly but the point being that now we have staking we don't care like effectively all of those

factors are kind of condensed and analyzed just pulled into one number and and so if you actually have a look at our pricing right now you will see something like make it out at the minimum price but something like BZX is that a lot higher than that and so you know it intuitively it's it's kind of working how you might think it it should work right now. So speaking of BZX, we have a listener asking about the most recent BZX attack. Did claims go through for that? Were there any claims outstanding on that? Is that a governance decision that's pending? Any update? No, so I personally think we would have paid a claim, but there was no one with any cover over that period. So there was actually two covers taken out

three hours or so after the attack happened. But they wouldn't have different cover periods. So they weren't there during the attack. So basically no claims for that. Just because no one had cover. People buying cover after it was hacked. Did they just not understand the system? They were trying to sneak some cover in?

Yeah, maybe. I don't know. But that's, yeah, that's, yeah. No one had cover for the period of the attack. So we haven't paid any claims. So tell us more about like the timing. on that? Like, what if somebody had bought cover like five minutes before the attack? Well, I mean, in theory, that should be paid. I mean, it's always going to come down to

people deciding what the, if it's a legitimate claim or not. But I guess one of the beauties of the bot-chain world is you can just look at the chain and go, when did this happen? But the cover was bought here, the attack happened here. I mean, I cover the regular insurance world and there's there's many cases where oh this person um really sadly committed suicide five minutes of before or after their policy expired like and like you know so what do you do like then you had to work out like did it actually happen then or did it happen before or after and there's like those real legal cases and stuff like that so you know this stuff um now we have actual data to really determine exactly what happened that's that's a really powerful position

to be. So with Nexus, maybe there isn't any formalized rules because it's up to the NXM holders to determine this, but like, is it, and maybe in your opinion, is it like, okay, you've purchased insurance on this block, therefore the next block that insurance is therefore activated? Is that kind of how you think it works? Yeah, I mean, look, if the covers purchased before the attack or events started happening and before the bug disclosure was made, then it should be, it should be legit. That's kind of nice because I recently had to buy health care and I bought it at like noon and it didn't activate until like 12 p.m. that night 12 hours later. So I had like 12 hours where I was like, well, I'm going to be real drive real slow on my way home. Anyways, a little bit of a little bit of a little bit of a tangent.

Well, you kept safe. Yeah. It is not fun to be with a hospital bill when you don't have health insurance in the U.S. That is for sure. Okay. So a question. coming in, Hugh from above average Joe. So he's asking, when will the current expansion phase start to wrap up? When do you expect the NXM price appreciation to start growing faster than the network size? I'm not going to comment on price. I have no idea. I don't really know. But going back to the underlying question, I guess, we do have this like floor value on what's called our MCR minimum capital requirement, which is kind of like an arbitrary somewhat arbitrary like expansion phase that were kind of driving to get more calmer and stuff like that. And quite recently we shifted a bit earlier than we were thinking it would happen into kind of like

the full long-term growth phase where the actual cover amounts that were driving, that were writing, drive the MCR value. And so I definitely think that probably happened, I know, six months earlier than I was expecting it to happen. So we've had quite a lot of growth recently. And I think that's definitely a point that we're talking about in the community and working out how we transition into that longer term. So we're kind of moving out of the artificial footstrapping phase and into the more longer term phase. And it's definitely a spectrum of ways to go there. And there's no clear answer about this is definitely true. It's definitely a judgment call.

And so I think we're definitely in the process of working out what the best approach there is. But for now, we have both the artificial. official scaling and the cover driven calculation going at the same time. We just pick whichever one's the biggest one. So they're kind of both going right now, you know, unless the community decides we should change that. Very good. Okay.

We are at the halfway point here. So you've hung with us so far. Doing a great job. We've got more questions for you. And this one might be related. This is from Matt 7. So when will the current, no, I just asked that one. I've heard the gearing factor has replaced the 1% daily increase in the MCR calculation.

For some people, you might have to explain what that means gearing factor. What is the trigger for the change? Yeah, so basically the gearing factor is kind of what I was just saying before. It really is cover amount divided by gearing factor. The gearing factor is 4.8. So basically, our minimum capital of requirement is the maximum of either this floor value, which is increasing at 1% per day, or a cover amount divided by 4.8.

And so we just picked the biggest number. And so right now, both of those numbers are really close, and the gearing factor was ahead. I think yesterday the floor value was ahead. And so they're really quite close right now. And so what we want to be in the long term is having the gearing factor driving everything. But it's actually useful to have this floor value in there,

in the short term, so we can keep selling cover on, protocols that are with us a lot of demand like wyon or a compound or balancer etc so so if there's kind of the I guess that's what I was alluding to before is kind of have to work out how to we should be switching the MCR floor increment off at some point but do we do that now or do we do it in three months time or when do we do it and so that's definitely the discussion to have okay here is a question coming in from our scored room from Emozilla. And this is, I think, a question that is being asked in the context of other staking protocols, particularly in EF2.0. It's sort of similar. The question is,

how is the mutual planning to further incentivize staking on contracts? The comment is, it seems in the current yield farming craze, it's hard to track capital with such a long lockup time, 60 days, if I recall correctly. This is also a question I think people have asked about ETH-2 staking, basically, with all of the attractive other ways to leverage ETH outside of the core Ethereum protocol, are we going to have enough ETH to actually launch ETH-2, is kind of the question. So I guess what's your answer for Nexus and NXM? How are you planning to incent staking? Yeah, so I think shorter term the shield mining thing I think is a big change and I think that will help a lot.

We do hear the feedback on this stuff. We're taking it on board, that's for sure. We are actually looking at potentially changing some of the design and hopefully with the goal of hopefully removing the long lockup. So it is currently 90 days, which we recognize is an age in. defy. Yeah, I think yield farming is barely like 90 days old. Yeah, yeah, exactly. So, you know, I mean, the challenge is you need staking for someone that buys a cover for a year, so you need to kind of, but if you have the staking disappear and the cover sits there for a long period of time, then you kind of got this mismatch. But so we have to work out a way of allowing

more fluidity into the staking process, but also dealing with what the mutual needs from an economic perspective in terms of backing the risk. And so working out those two things is going to be the challenge. And I think we definitely can get there. And I think we can remove that 90 day lot up and provide more flexibility with things like token other statement and positions and other stuff. So look, we're definitely looking at it and we're considering options. So we're definitely taking the pragmatic iterate, learn, change it if we need to.

and release again, that's the approach we're taking. This is another in the weeds question, Hugh, coming from someone. But I think it is pretty thoughtful. I don't know if this is kind of the fall on your own sword option here, but the question goes like this. Since NXM insurance is discretionary and paying claims, hypothetical, would NXM holders ever vote for their own insolvency? So if there was ever a large magnitude claim or multiple claims on different protocols,

would they ever vote to burn their own NXM stake to maintain the credibility of the system? Interesting thought exercise there. Yeah, I mean, it is interesting. So discretionary mutuals in the real world have done this. And so they, I know a fact where they've got, they come in and all of a sudden they've just got massive claims. And so what do they do? And the key here is you have a strong community that, is aligned with each other.

And you can work out, you have to work out the best solution. It's not a good situation to be in, but you have to work out the best solution for the community. And so often that may be a trade-off of things, like maybe you don't pay the absolute full claim value, or maybe you look at other options or what you need to do in the future. But basically, it's about the community coming together

and working out the best way forward. So, look, I mean, there's definitely the selfish option of just going, no, we're not going to pay the claims, we're just going to dissolve the whole thing and just split the money between the existing holders. That would be a terrible outcome in my opinion, but it could be done. I actually think that if that were to happen, Nexus would have, by paying the claims in that situation, Nexus would have built a massive amount of trust for the long term.

Like insurance companies are essentially there when the shit is the fan, right? That's when you want them to be there. You want them to be there. And that you build that trust and it will pay the whole mutual back like tenfold in the coming period. So that's, I would hope that that's what the members would come to agree one. Obviously, I'm just one member. But that's, I think we have to design the incentive mechanisms so that that is the favourable option. And that's what we'd be aiming for.

there's a there's a reference to mollock here where and maybe a lot of the listeners aren't familiar with the the meditations on moloch piece but like if you keep on listening to bankless you will be uh mollock is the god of human coordination failure right and so like if nexus mutual decided to like defect and say like you know what eff it we're not paying the we're not paying the claims we're just taking our treasury and we're running because we can't do this right and then you know maybe that's a rational thing to do at least in the short term game but here what you're saying is like well you could take that short term hit but like the signal to the community would pay dividend down the line right so long if the community if the nexus if the

nxm holding community can think long term and not defect from each other well then the the value over the long term what you think is is that will be just orders and magnitude larger than like the short term game of just saying like eff it well let's take the treasury and run exactly and like if you actually get into the details of nexus every single mechanism is designed to push alignment of interest at the long term because that's the only way this whole thing works and so because basically it never makes any sense to pay any claim if you just focus on the short term you have to you have to align interest long term and like it's all going to be about um trading off short term pain for long term benefit and that's really what this is actually about so yeah if you have a look at if you get into

the details of the mechanisms it's all pushing alignment of interest long term and if you know it's still up for debate if we've got that right but that's that's definitely what we're trying to do so we've got a question from juan from from the youtube are there plans to implement easy insurance contracts in popular defy projects like uniswap or zapper and set one says thinking of a simple button or warning when adding liquidity, for example. And so what I think he means is like you're on the AVE site or you're on like the Zapper site or on the Unoswap site and like you have the option to like deposit assets. And then there's another option saying like deposit insured assets, right?

And like that I think what he's saying is buy you buy cover insurance from Nexus when you are also doing that action. Right. And so rather than, and it's a little bit cumbersome when you like go to Avey and then you deposit your assets and then you go to Nexus to. to buy cover. So, like, maybe you guys, are you guys working on, like, a business development team or some sort of, like, way to, like, just have the Nexus, insure with Nexus button,

like everywhere across DFI? Yeah, exactly. That's what we're doing. Basically, we want no one to buy cover on our application. That's our goal. Basically, everyone's buying cover on our app right now. But that's not where we want to be long term. So we haven't prioritized that right now because we're in this situation where we've got

massive demand. quite enough supply. So it's not like the top requirement, but, but that's definitely where we're moving on the term. Basically, you know, flight insurance, click the button at the bottom, add it on. That's the type of thing where we're aiming for. Is that easier to do in, in like on Ethereum and Define because everything is, you know, composable money legos as we've called them? Yeah, exactly. it's, you know, it's really simple compared to, um, compared to like the traditional world. So yeah, I mean, obviously you need to get the people running the partner sites to add it on, but, um, but it's definitely a lot easier.

There's a very strong protocol sync thesis comment in there somewhere, right? Like just make Nexus invisible, but still ensuring all of Defi, right? Yeah, that's exactly it. We don't, we're insurance or Nexus, Nexus isn't insurance. I'll say that a few times. Um, but, um, yeah, but basically it's always a secondary purchase. You want to do something else and then you, like, you know, have a car. You get an insured.

It's always, you're always doing it for something else. So we want to be there all the time, but we're not the lead sale and definitely separately separate purchase. That kind of solves your, um, problem of, you know, selling cover to people that aren't actually like, uh, have loss available to them, right? And so like, if you are only, um, you are only, um, you know, um, able to purchase cover when you are doing something on Ave or doing something on Maker, then like you kind of get, it's a little bit easier to ensure that, you know,

everyone who's purchasing cover, it always also has a loss event. Yeah, exactly. I mean, if you want to take that one step further, I mean, that's just a simple, that's like an integration, like just a point of purchase, right? But what we really want to get to is like bundled products. So like here's an interest-bearing token that's natively covered. And so you just, you just buy that token instead. And then you've got it bubbled up.

So that's the type. I mean, obviously, there's a bit to do to get to that point. But the whole thing is that you, that's what composability really gives you. That's the real benefit of theory. Nice. So with all these interest-bearing tokens out there, there's the possibility of like the nexus version of that, which bears a little bit less interest, but, you know, is natively insured. So like when you buy this token on uniswap, like, you don't have to,

to worry about like is do I you know do I now need to go to Nexus and get insurance because like you're buying it buying it pre-bundled just making it super easy for the for the consumer that's fantastic yeah that's what that's what I want to get to yeah I think everything that you guys were talking about about Nexus being sort of in a long-term game essentially with multiple iterations right David you're talking about like slaying moloch it just occurs to me like so much of what we depend on for human civilization are these institutions that we trust, right? The court system is an institution. The government is an institution.

What we can start to do with Ethereum and some of these money legos, as we've called them, is create new institutions that are less centralized and less dependent on a company and a set of, like, say, shareholders in a big corporate office to kind of set the institutional boundaries. So the idea of nexus becoming an institution for, I guess, safety and risk mitigation across DFI protocols is super appealing. I want to ask a question that comes from, that's coming from Lucas. And this is about, I think, and riff off the idea of everything that we're talking about, all the advantages of composability, Hugh, are, I think, pretty clear to people who are watching this. But there are some disadvantages, too, right? So, for example,

Lucas is asking the question, insuring one, I use the word insurance, his words, right? So we know what you're really doing, not insurance, but ensuring one single contract is simple. You've already proven that out. But what if something happens that affects many different protocols simultaneously? Because again, they're all woven together. So something like affecting AVE, compound, urine, all the same time, maybe because they all have one single point of failure. Maybe there's a chain link oracle problem. Chain link great in everything it's doing and price feed across all these protocols,

but almost the oversaturation of chain link creates a single point of failure for defy. This is kind of scary. So what do you do if there's kind of a single point of failure, cascading event like this? How does Nexus react? Yeah, I mean, there's obviously two sides to this. Nexus has to manage its own risk itself, like which risks it takes on and make sure it doesn't accumulate. too much in one spot because diversification is what will make it work the best. But obviously, it wants to cover as much risk as possible to provide safety to the wider

defy-space. So I think with Oracle failure and stuff, I think we can segment it and stuff like that, obviously within limits. The probably the biggest risk that Nexus is probably also exposed to itself is like a solidity compiler bug that no one knows about yet. basically hits multiple contracts at once. And then maybe Nexus goes down as well. And so, you know, that's kind of DFI extinction level event. I think. I don't know.

Yeah, it's kind of like those words. No, but I mean, it's theoretically possible, right? And I guess from my perspective, I think Nexus is taking on that risk anyway because it's actually building on Ethereum. So unfortunately, we have to kind of just assume that doesn't happen. The best mitigating, I'm going to be completely open and honesty,

the best mitigate for that type of thing is actually having an entirely different protocol. If it's traditional insurance, totally outside the system, because you can't cover something within the system that's like at the base level. So that's the challenge that, like we are exposed to that risk.

So you're exposed to all of the systemic kind of risk that's inherent in Ethereum inherent across DFI, right? You can't get away from that without escaping to a different system. But I want to ask you about that extinction level event, right? So I think this is somewhat of an interesting topic. Maybe David was about to do that. No, I'm just shivering from the words extinction level. All right.

So, you know, it's interesting because for a system like Bitcoin or even Ethereum, the backstop to an extinction level bug is actually the social layer underneath it. Right. So like for Bitcoin, Bitcoiners will constantly argue. will always argue that, hey, even if there was some sort of zero-day bug uncovered in Bitcoin that allowed somebody to inflate another 10 million Bitcoin above the 21 million, for instance, the community would adhere to the social contract and fork that out. And, you know, it wouldn't gain enough support to actually be a critical threat to Bitcoin.

An extinction level event to Ethereum, I would think, would still be backstopped by this social layer, where it's all of the essentially the money protocols, all of the users, all of the all of the validators, all of the miners, all of the core devs, everyone with a vested interest would essentially say, oh, oops, that was not the intent of the social contract of Ethereum. Yeah, there might be a contingent who wants to pump this, this, you know, pre-for. But it would essentially be a Dow type scenario where you can recover from such an event. I just wanted you to put your risk hat on for a minute and maybe talk about that because extinction level event is kind of a scary thing to say, but could the social layer be a backstop?

Yeah, I think we've thought about this is a fair bit. I mean, the way we're designing Nexus is we want, I mean, it's not going to work in absolutely all circumstances, but the idea is that if something is big enough, then it gets multiple protocols at once that takes down Nexus, that's at least in hard fork discussion territory. Like, um, so, basically if something's big enough to take down nexus as a whole, we hopefully we're designing the system so that there is a decent chance that the social contracts kicks in and and makes everything whole again. Do you mean, do you mean for nexus or do you mean for Ethereum? Like, I mean for Ethereum might work. Okay. Yeah, yeah. So I guess what I'm saying is anything that's

big enough to take down nexus in one go, we should we should be managing nexus for a risk perspective so that if there's anything that's big enough, an event that's big enough to take down Nexus from a like multiple claims happening at once, then that should be a, um, an event which Ethereum as a whole should consider hard forking. Um, that's, that's the idea. Can I raise the controversial, uh, phrase too big to fail? Because that's what kind of comes to mind. And maybe not in a bad way, right? Some things, like some failures would cascade across the system that the failure of a core system maybe like Nexus gets to that level. I've often wondered if Maker or Die is at that level right now, where contracts, core contracts become too big to fail. Is that you think there's a possibility

there? Yeah, I mean, I don't, I think it's going to be interesting, like, if one of the really big ones I make it or something goes down. If it was just one, I don't think that's going to be a hard for my personal point of view, but, you know, obviously there's a bunch of other different opinions out there. But I think if multiple go down at once, then it's likely that it's due to some lower level bug. And therefore, to me, that there's a, there should be an active discussion about, hold on here, this, this doesn't seem right. Maybe we should be hard-forking this. So, you know, obviously there's no guarantees on any of that stuff at all. But the idea with nexus to manage our risks so that if the occasion where we fail due to that, it's at least

a discussion that the hard fork might happen. Yeah, we're starting to get into pretty existential in conversation territory. And it's a good conversation to have and hopefully it remains existential. So we have a question from Gonzalo on YouTube. Are there any plans to ensure investors in crypto funds like managers, running a fund could steal like abscond with the funds. So investors in that fund would benefit from having insurance covering that event. Any thoughts on this?

Yes. I mean, to realize, we've built the protocol to be able to cover any type of risk. So as long as we can design a product that, one, you can, like, reasonably determine when a claim should be paid. It's not gable. But by someone else, you know, they can just clearly go, oh, we have full control over this so we'll just make claim. So as long as you have a couple of things like that, then, yeah, we can design a product that works. And so we've had quite a few people that are coming to us on

different products related to that. It's a little bit different. But those types of things were definitely considering. Who does that work here to expand into a new market? Is that somehow governance or is that, you know, kind of nexus as an entity itself as kind of a meets piece entity? Yeah, so, I mean, essentially it's governance. The idea being that someone has to come up with the terms and conditions, like this is when a claim will be paid. And then it's up to the stakers to stake on it. It's basically how it works.

And so it's really relatively as simple like that. So it should, like ideally, we're not quite there yet, but ideally we get to a point where adding a new product should be as easy as adding a new pool on uniswap. You go, here's a new product. Wow. Just add it. bootstraps and cover, you know, add some liquidity kind of much the comparison.

And so that's the idea where we want to get to. But, you know, there is obviously a bit more working coming up with in terms of conditions document than actually just providing a new pool or new spot. But conceptually, that's what we're aiming for. So this is another, I think, great question from Joseph IT. He says first great answers. Thanks to you for that. one of the core components of nexus right now is this dispute resolution mechanism right which claim should we cover which claim should we not have you ever looked at alternative dispute resolution mechanisms like aragon experts or celeros these kind of Dow type court systems is there any appeal to those are they too early your general thoughts there yeah i mean we have to we have to be

able to have a scalable solution for claims on an ongoing basis. So you don't want to be pushing all claims to an arrow on court or a Clarence or something like that. But there could be potential options for like having a like a higher level up dispute resolution in the process there somewhere. We haven't done that now for various reasons. One of the important things is that the members have discretion over which claims are paid rather than the next. outsourcing it outside the mutual. That is one of important aspect. Doesn't mean we can't do it, but it is an important conceptual thing. So yeah, there are various options. The core claims should happen within the mutual, but we could do higher level disputes outside. So a question came in

about memes, and this is crypto, so we can't get away from memes. So synthetics has their Spartans, link has their Marines. Apparently, Nexus, has mutants? Can you confirm or deny that? No, we do. We've had it for a little while, so that's kind of growing. Yeah, it's organic and it's pretty fun, actually. So it's, I love it. How did that come about? Community members just getting in there. Okay, so what is a mutant? I think it's, I think it's like, I think it's coming from teenage mutant turtles. Right. Okay. We're not talking like X-Men. We're not talking X-Men style mutants. It's mainly, it's mainly, well, I think it's opening up, obviously.

These things change and morph all the time, right? So, you know, but I think that's where it's coming from, the turtle thing to start with. Great. So what have you seen is, are there some good memes we should look up after this AMA here? Should I mean, maybe just plug the Nexus Mutants into Twitter. Anything fun that you've seen? Oh, yeah, there was a few of me floating around, which, you know, kind of amusing. But I mean, like, you know, it's a thing, I guess.

But I think the one thing that it's cool is that it kind of, it's the long-term focus. And they're kind of in there with the, it fits very well with the nature of what we're trying to do. So, yeah, it's a bit of fun, obviously, but it is pretty cool. Okay, so I think we've got about three or four more minutes until the conclusion of this AMA. I want to ask you, while we're talking about the community, are you, Like, did you think the community would grow in the way that it did? Are you proud of it? Is there anything you would change?

And how do you think it's going to grow into the future? Yeah, it's a good question. It's definitely growing faster than we thought it was going to grow. And it kind of happened all of a sudden, especially over the last few months with things going. I'm surprised by the memes. I'm surprised by just how people just get stuck in and have so much passion for things. like you know we've clearly got a bunch of really solid community members like you know getting into the discord answer questions like clearly experts what's going on and it's like it's i don't know

it's it's really amazing to see that you know i've personally spent so much time building this thing and designing something building in the dark for a while and then and then putting it out there in the community and letting them take control of it i yeah i find it amazing to be so yeah really happy with it um i think our challenge is always going to be we're a relatively complex system and it's because of this long-term nature and trade-offs and stuff like that, we have to attract the right type of people. And so being able to design incentive mechanisms and also foster our community in the light place is going to be an interesting challenge, especially as we grow. But yeah, it's definitely cool and looking forward to it.

Very cool. All right. We've got time for, I think, one last question here. And so this is maybe hearkening back to the podcast that we just had you on, where you talked about surviving the bear market. And that's really where I think both David and I learned that you guys were kind of on the brink, you know, of saying like, this thing's not going to work back in 2018, 2019. We have just had a 40% drawdown in defy tokens after an exceptional summer of growth, right? You've been a bare market builder. Are we headed back to the bare market? Are you feeling the bare market again? Or is this just, you know, we dust our shoulders off and this is just a mere scratch?

I have no idea. Don't ask me about that stuff. I really don't know. I hope that honestly, the best case for us is just stability and just steady growth. But obviously, that's not how crypto markets work. We just have to go with the extremes in both directions. So managing that's the biggest challenge from a, from a prodigal team's point. And I guess we've done it before, so we're confident we can do it again.

Awesome. All right. I said that was the last question, but this is the real last question. So, Hugh, where are you from in the world? Yeah, I'm Australian. But I've been in London for about eight, nine years now. So when you go home to Australia, do they talk about you having sort of an English accent? And when you're obviously in London, I'm sure they hear an Australian one.

Yeah, I'm somewhere in the middle now. depending on who I talk to. That is awesome. Well, Hugh, it has been a pleasure. Thank you so much for being on the hot seat with the bankless nation for this. Ask me anything. David, how is YouTube looking? Did we get all the questions answered?

We got all the questions answered. And there's a fun comment from Alex. I'm going to read. Alex says, keep it up. I love how people are imagining things. And Hugh and the team just don't have enough time to execute. It's still early and that's exciting. I've never been interested in insurance until now.

So cheers, Alex. Hugh, you got someone interested in insurance. Yeah. You've got to start something. That's awesome. Well, we really appreciate the work you are doing to get Defi a little bit safer than it was the day before. So thanks for spending the time with Bankless today. Great time to be on again, guys.

Good to talk to you. All right. Take care of you. Thanks a lot.