The Optimist - Onchain Insurance with OpenCover & Nexus Mutual

In The Optimist’s Twitter Spaces, which took place on October 27, 2023, Subli, BraveNewDeFi, and Jeremiah discuss onchain cover, losses in DeFi, OpenCover, and Nexus Mutual. Read our notes below to learn more.

Background

Subli (Host) – Founder of the Optimistic Podcast
BraveNewDeFi (Guest) – Head of Community at Nexus Mutual DAO
Jeremiah (Guest) – CEO of OpenCover
Nexus Mutual – insurance alternative for crypto
OpenCover – a protocol that allows cover against hacks and events as such.

Introducing Onchain Cover

BraveNewDeFi says that onchain cover refers to the provision of insurance or protection for risks in the DeFi space. Nexus Mutual focuses on providing cover products to protect users from smart contract vulnerabilities and hacks.
He adds that Nexus Mutual operates as a discretionary mutual where claims are reviewed and verified by members acting as claim assessors.
BraveNewDeFi says that Nexus Mutual has underwritten the most coverage out of any cover providers since 2019. Members have paid out over $17.9 million to individuals who suffered losses due to past exploits, technical failures or halted withdrawals on centralized custodians.
Jeremiah says that OpenCover acts as a broker, identifying risks that end users need protection for and working with underwriters like Nexus Mutual to create associated cover products.
He explains the covers that they provide;
- Protocol Cover: Protects against hacks, exploits in code, governance attacks, or Oracle manipulation leading to loss of funds while actively participating in a protocol.
- Custody Cover: Provides protection for assets held in custody, ensuring compensation in case of loss or theft.
- Stablecoin De-peg Cover: Offers coverage for stablecoins pegged to a specific value, safeguarding against potential de-pegging events.
- Slashing Cover: Protects validators who make mistakes in their setup and need to claim back losses.
- Bridge Cover: Covers the risk of funds not reaching the intended destination when bridging between different networks.
- Audit Cover: Allows individuals to take out cover policies on audits conducted by companies, providing protection in case of exploitable vulnerabilities found during the audit process.

Types of Attacks and Exploits

BraveNewDeFi says that social engineering and phishing links have been problematic since the early days of the internet. Tools like Wallet Guard through Metamask Snaps can help detect malicious transactions.
He adds that re-entrancy attacks are common and involve repeatedly looping a function within a transaction to exploit vulnerabilities.
BraveNewDeFi says that flash loans are often mistakenly blamed for hacks but are just tools used by attackers for arbitrage opportunities. Logic errors, Oracle manipulation, and math logic issues within protocols can also lead to vulnerabilities. Governance attacks have become a growing vector for exploitation.

Factors Influencing Attack Frequency

BraveNewDeFi says that the number of attacks each year depends on market conditions. Rug pulls tend to increase when the market goes down while more value-locked-in protocols attract bad actors looking for vulnerabilities.
He adds that new technologies or protocols may have abstracted wallet portions that can be susceptible to social engineering or fishing attacks. Forks are historically more prone to exploitation as those who forked may not fully understand the original codebase’s vulnerabilities.

Difference between Onchain Cover and Onchain Insurance

Jeremiah explains that onchain cover and onchain insurance serve the same purpose of protecting people against onchain risks like protocol hacks or governance attacks.
He adds that the main difference lies in the provider of protection. Onchain insurance involves an insurance company organizing the protection and raising capital, while onchain cover is provided by a non-chain protocol like Nexus Mutual.
Jeremiah says that currently, there is no DeFi insurance available for retail participants due to heavy regulation in the traditional insurance industry. Onchain cover serves as a native solution within the defi ecosystem.

Understanding Underlying Capital and Covered Capital

BraveNewDeFi says that underlying capital refers to the amount of capital within DeFi or underwriting capital. It represents the crypto assets that back the covers purchased by individuals for protection.
He adds that if a loss event occurs, those holding cover can file a claim and get reimbursed using the capital backing their cover. This underwriting capital is auditable and visible on-chain.
BraveNewDeFi says that covered capital refers to the actual amount of cover being underwritten. For example, Nexus Mutual currently has around $34 to $35 million in active cover. Across all coverage protocols tracked by OpenCover’s analytics website, total active cover amounts to a little over $88 million. However, this is still less than 1% of the total capital deployed in defi.

Underwriting Capital vs. Active Cover Amount Discrepancy

Jeremiah says that there is currently more underwriting capital available to cover risks on-chain than there is an active cover amount. The supply of capital to provide protection exceeds the actual protection currently in force. This trend highlights a significant gap between the available capital and the coverage being utilized.

Industry Statistics and OpenCover’s Purpose

Jeremiah says that OpenCover was launched to address two main challenges: lack of awareness about cover options and lack of adequate products for certain risks.
He adds that lack of efficiency in the onchain cover ecosystem may be attributed to factors such as perceived “too big to fail” entities like $LUNA or centralized exchanges like FTX.
Jeremiah says that Total Value Insured (TVI) in DeFi is around 44 billion, while the active cover amount is only 88 million, which is less than 1%.

Challenges with Onchain Cover Efficiency

Jeremiah suggests that distribution plays a crucial role in this inefficiency, with two main factors contributing to it.
- Lack of awareness: Many users are unaware of the cover options available for their on-chain positions, resulting in low adoption rates.
- Lack of adequate products: Certain on-chain risks, such as scams, may not have sufficient cover products available at scale to protect against them.

BraveNewDeFi says that the lack of awareness about cover options is a significant challenge in the industry. Tens of thousands of wallets have purchased cover, but there are millions of wallets interacting with DeFi without realizing these options exist.
He adds that communication and education about onchain cover options need improvement to increase adoption rates. Inadequate product offerings also contribute to the inefficiency. Some risks, like certain types of attacks or manipulations, do not have comprehensive cover products available at scale.
BraveNewDeFi says that Nexus Mutual’s setup requires all capital in the pool to stay on Ethereum Mainnet for capital efficiency purposes. OpenCover plays a crucial role by facilitating cover buys on layer-2 solutions, expanding coverage options beyond Ethereum.
He adds that the next wave of demand is expected from users onboarded through layer-2s, who want to buy cover where they participate. Further distribution efforts are needed to reach more users and networks, considering factors like gas fees on Ethereum.

OpenCover’s Role and Improving Products

BraveNewDeFi says that OpenCover is built on top of Nexus Mutual and serves as a distributor of cover using underwriting capital from Nexus. It enables cover buys on layer-2 solutions, expanding coverage options for users participating in those networks.
He adds that the protocol cover by Nexus Mutual is considered the most comprehensive cover available on-chain, covering risks like Oracle manipulation or severe liquidation failure.

Onchain Coverage Experience

Jeremiah says that offering cover at the point of transaction is considered the gold standard. Protocols are often hesitant to add direct cover options within their dApps because it may imply that their protocol is unsafe. However, offering cover at the point of transaction can attract new users who lack confidence in using protocols and provide them with extra assurance.
Jeremiah says that users can purchase protocol cover from Nexus directly on layer-1 by interacting with the Nexus dApp. As more activity shifts to layer-2, users can also go to platforms like OpenCover to buy cover for protocols on layer-2.
He adds that OpenCover focuses solely on cover distribution and offers a unique user experience. By purchasing cover on layer-2, users can bypass the high gas fees associated with layer-1 transactions.

Steps for Buying Cover

BraveNewDeFi says that users land in the Nexus Mutual UI and are directed to the cover buy page. They can review all listings and select the protocol they want to buy cover for. A quote can be obtained by specifying the number of days and desired coverage amount in $ETH or $DAI.
He adds that an approval transaction is required to interact with the chosen protocol, followed by purchasing the cover. After purchasing, users receive a cover NFT that is held in their wallet. It can be used to file a claim if needed.
BraveNewDeFi says that users will be able to sign up for reminders through UI. A cover edit feature is being developed to modify the existing covers instead of buying new ones. This feature will allow increasing or extending coverage without the need for a new NFT.

Participating in the Nexus Mutual

BraveNewDeFi says that people can participate by underwriting cover as an $NXM staker or buying cover to protect their assets. Cover bought on Mainnet covers deposits in any EVM-compatible chain.
He adds that staking pools are available for $NXM stakers, allowing them to delegate their tokens and stake against certain cover products. Risk experts run staking pools, while individuals can also start their own staking pool with control over capacity, cost, and duration of cover.

Adding New Listings

BraveNewDeFi says that for new listings, there is a process that involves risk assessment. The risk assessment team evaluates projects based on factors such as team reputation and project credibility. It is not a permissionless task; it requires review by the risk assessment team or group of people.
He adds that the team audits protocols and reviews the audits to identify vulnerabilities. They check if vulnerabilities were acknowledged or fixed through commits on GitHub.
BraveNewDeFi says that the team considers reputation, previous project involvement, and forks when deciding to list a protocol. The team takes into account factors like Total Value Locked (TVL) when deciding whether to list a protocol. Lower TVL may indicate lower demand, making it less beneficial to list at that time.
He adds that staking pool managers play a crucial role in determining which protocols get listed. Their willingness to stake against a protocol indicates demand and cover capacity.

Future Outlook for Onchain Cover

Jeremiah expects new types of cover products for currently unprotected risks. They will focus on making cover products available on more chains to reach more users.
He adds that OpenCover aims to distribute its products to more end-users. They have a healthy pipeline of protocol covers launching, including DeFi Edge.

Nexus Mutual V2 Overview

BraveNewDeFi says that Nexus Mutual upgraded to V2 in March, introducing significant changes. The risk assessment module underwent significant improvements.
He adds that in V2, staking pool managers can set their own pricing for cover products. This allows for more flexibility in launching new types of cover products.
BraveNewDeFi says that lower pricing enables underwriting different kinds of risks that were previously too expensive. The mutual can now expand into traditional coverage markets beyond blockchain protocols.
He adds that Nexus Mutual is planning to launch a tokenomics upgrade before the end of the year. There will be a bigger focus on slashing cover and expanding product offerings at Nexus Mutual.
BraveNewDeFi says that the company aims to expand into more real-world cover products, such as their deal with the retail mutual.

Increasing Awareness of On-chain Coverage

Jeremiah says that one approach to increase awareness is to enable users to buy insurance at the point of transaction, similar to travel insurance when purchasing a plane ticket.
He adds that continuing education efforts and spreading the word through platforms like The Optimist podcast are important for increasing awareness.
BraveNewDeFi says that collaborating with other protocol teams to integrate coverage options directly into their interfaces is another strategy.
He adds that Nexus Mutual is working on embedded coverage, allowing users to buy coverage at the point of sale. Covered Vaults are being developed, where deposited funds automatically purchase cover using generated yield.

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Show Information

Medium: Twitter Spaces
Show: The Optimist
Show Title: Onchain Insurance with OpenCover & Nexus Mutual <> The Optimist
Show Date: October 27, 2023