0 - As popularly requested, this will be a thread about $NXM. The token design of $NXM is one of the most elegant I have seen yet. Enough good work had been done by @krugman25, @Darrenlautf, @BatmanDeFi on bonding curves and core mechanics so I won’t repeat here.
1 - $NXM = equity tranche of an Insurance group; despite the “mutual” tag, given buyers of insurance doesn’t need to own $NXM today, feels more like a typical insurance biz. At capital pool of 160-165k ETH and mkt cap of ~900-950k ETH, $NXM InsureCo trades at 5.5-6.0x PB.
2 - 1st thing most need to realize is that $NXM is in persistent ICO / capital raise mode unless (market cap – 3 mm * px) / capital pool <1 (i.e. not raising money when this InsureCo trades below book), which is also coincidentally when MCR % < 100%.
3 - … by extension, this basically means the pace of MCR increase (currently still very much dictated by the team) decides the pace at which $NXM taps capital market. Its governance decision to turn MCR % increase from ~1% / day to ~6% / day in mid-July…
4 - …is then to effectively capture the high capital market demand (200% MCR, ~8-9x PB) and thereby accelerate the pace of capital raise (i.e. faster ICO speed). This is actually very smart capital allocation as expensive raises accrue value to stakeholders.
5 - The 3 things that would be interesting to observe are that (a) how would the initial 3 mm pre-mine act continuously, given if $NXM works long-term MCR % = 100% = 1x PB, (b) how the protocol would act when MCR% falls to 100%
6 - …and effectively “traps” all the capital raised in the past, and (c) how MCR could evolve to be dynamic in accounting for high capital market interest (high MCR % = should raise more) as well as heightened cover buying interest.
7 - 2nd thing is the realization is $NXM is rather conservatively managed capital-wise to account for the unknown-unknown smart contract risk. $NXM with 160-165k ETH capital pool vs. 105k ETH active cover means it’s more than 50% covered even if everything defaults.
8 - …now, one could argue whether a typical premium of 1-5% is too cheap, or whether current price of 5.5-6.0x PB on such 1-5% return with 105/160 = 1.5% ROE, or ~0.25% earning yield (i.e. 400x PE) is too expensive. My answer is you are paying for growth.
9 - On the pricing part, market-pricing of insurance when cover-writers are degens where cost of capital is high (we scoff at even 25% APR, lol) means the product could be priced closer to farming yields and hard to gain much adoption.
10 - …whereby allowing degens to yolo insurance equity while tolerating the more centralized “pricer” to bundle in tail-risk (no matter how underpriced) will help entice potential users and boot-strap the market. In that sense, $NXM front-ran $AAVE 2.0 w/ a spicier design.
11 - To deliver more return to $NXM stakers and compensate them for such selfless degeneracy, there are many things $NXM can / should do – and it comes down to channels, yield, leverage, and calculated outside subsidy, let me tick through:
12 - Re: channels, we could envision B2C end-points / aggregators offering $NXM insurance as an additional check-box (“Do you want to insurance for 2.5% automatically deducted?”). Upon more competition, I could even envision insurance broker aggregators as touchpoint.
13 - Re: yield, $NXM needs to be prudent about it, but a big portion of the capital pool can/ should be deployed into riskfree / low-risk delta-neutral / arb pools (ETH 2.0 staking in the future, YFI now) w/ immediate liquidity.
14 - Re: leverage, this is a thorny one given it’s hard-to-price, potentially cross-correlated risk; but I can envision tranching of insurance risk (1st loss, shared loss, capped loss, reinsurance) + cross insurance w/ competitors and/or opened up to public / packaged as a token.
15 - Re: outside subsidy, $NXM is exploring venues to allow other protocols allocation part of their fees / inflation to incentive cover underwriting within $NXM for their respective smart contracts; return formula becomes = $NXM insurance yield – E[Loss] + $X protocol subsidy.
16 - …this venue would of course need to be carefully assessed. Poorly vetted parties (like exitscam w/ crap contracts) offering enticing yield that lured folks staking could introduce systemic risk that brings the whole mutual down, but very exciting biz dev nonetheless.
17 - In short, the Return [$NXM] today = R[staking] + E[future $NXM raise @ high valuation] – E[loss], whereby in the future E[yield] + E[other protocol subsidy] will be introduced while pace of MCR increase could accelerate thanks to added channels & additional off-takers.
18 - The 3rd point and the last one is to seriously consider the game theory and end-game that is brought by the bonding curve. Eventually, $NXM should be trading at ~100-130% MCR% and close to 1-1.5x PB (market cap = capital pool) and generating 10-15% ROE.
19 - … whereby if we imagine that MCR is re-toggled to be cover purchased, and #DeFi’s TVL (which allows for double-counting!) expands to 10-15 Bn, a 20% ratio of insured w/ ~50-60% market share = ~3.5 mm ETH of MCR or ~35x vs. today. 115% MCR% would be 1 $NXM = 1 $ETH.
20 - …. This would be on ~13.5-14 mm of total $NXM supply and a total market cap of $5-6 Bn USD with today’s ETH price. The end-game of course doesn’t have to stop there -- $NXM can expand beyond just crypto smart-contract risk into other lines of businesses
21 – and before you note 13.5-14 mm ETH = ~12-14% of ETH, think of eventually cross-chain insurance underwriting (whereby a large initial capital base is advantaged) and non-ETH premium (DAI, native layer-1 tokens, etc). No reason why $NXM can’t be cross-chain.
23 - The most noteworthy thing is that the path towards 1 $NXM = 1 $ETH and $5 Bn + market cap doesn’t have to be linear – the 20x of capital pool could ebb and flow while MCR is pegged at 1% increase / day, and assuming team continues to execute…
24 - … while MCR’s ramp curve remains un-tinkered, there’s nothing that suggests MCR % has to retrace to 130-140%. If risk appetite in the market is rampant, there’s nothing stopping MCR % being pegged at 160%, 200%, or every 250%-300%+. $NXM price could go exponential.
25 – We got a taste of that with the previous run to 230% MCR% and recent push to 100k MCR that dragged MCR % from 140% to 170%. Short-term speculators could absolutely whip $NXM around and one could get rekt buying too rich an MCR%.
26 – but back to the points multiple tweets above, the genius of the design is that such short-term exponential pricing degeneracy is the perfect offset to entice capital in underwriting the experimental & existential risk of smart-contract insurance…
27 - …whereby the long-term holders would also get to capture such short-term degeneracy via dynamic MCR function which basically siphons “degenerate capital” into more permanent capital pool at inflated prices, thereby benefiting the longer-term ecosystem participants.
28 - Competition would likely come eventually, but beating such design & industry experience of @HughKarp won’t be easy. $NXM is a highly interesting experiment that found PMF amidst the yield-farming craze that puts SC risk front-and-center…
29 - …and we believe that for those willing to take massive tail-risks to bootstrap this effort (hopefully at low enough MCR %, don’t buy too expensive!) could be well-rewarded much like the Link marines do as another piece of core #DeFi infrastructure.
Exhibit 3a - Hugh & Team aren't sole decision makers here and the schedule change is voted via a governance process, but nonetheless one should note the strong influence one could have to $NXM price mechanics, this point is similar to $MKR in a sense.
Exhibit 21a - I boobed a little here. Mean to say 3.5 mm ETH and 3-4% of ETH supply. But 13.5-14 mm ETH equivalent in capital pool would be sick!
