0/ This is the first in a series of follow-on posts to our July $NXM report. You can find the full post here, but I also included a video summarizing the gearing factor along with a thread that goes a bit further into the post.
@Delphi_Digital holds NXM
delphidigital.io/reports/how-nx…
@Delphi_Digital holds NXM
delphidigital.io/reports/how-nx…
1/ Projects will often use their supply side to incentivize an environment where demand side can grow. Nexus is dealing with the opposite. It has immediate product market fit, evidenced by growth in coverage and how quickly excess capacity for cover is usually purchased. 
2/ Even with all the recent growth in cover, the target market is still largely unaddressed.
3/ As a result, there is currently a focus on growing capacity, max capacity for a single contract is the lower of 20% of MCR or the total NXM staked to that contract. This is why MCR expansion was accelerated to get to 100k $ETH.
4/ Two of the implementations the @NexusMutual team is working to help scale capacity for insurance cover are Shield Mining and the use of a Gearing Factor.
5/ Shield Mining will enable a project to reward NXM holders with their token for staking to their contract. It’s a very low cost, value accretive proposition for projects to help grow their TVL by increasing the capacity for their users to hedge out smart contract risk.
6/ The slightly longer term solution is a transition from an MCR that’s programmatically grown to one that’s a function of cover. This will be massive going forward because it allows the project to scale with demand for cover.
7/ To understand why this is significant, it’s important to keep in mind how Nexus really begins to take off, and the road that’s necessary to get to that point. As a mutual, its long term source of growth is fees.
8/ The objective is to grow those fees with a focus on efficiency and maximizing reward/risk. A key ingredient here is scale.
9/ The current Capital Pool/MCR dynamic can be thought of as the capacity bootstrapping phase. The structured increase in MCR (which dictates capacity) and the resulting formulaic pricing mechanism helps drive a combination of speculative and functional capital into the pool.
10/ The longer term adjustment to scale capacity is a bit of a reversal in structure, going from MCR dictating cover capacity to cover demand dictating MCR. This is done through a gearing factor, which can be thought of as the ratio of active cover to MCR.
11/ The difference here being that active cover in the numerator is the driving factor, and MCR just grows in proportion based on the assigned gearing factor. Another benefit is that it’s a much simpler on-chain approach for calculating MCR relative to the existing off-chain calc
12/ The goal is to have the gearing factor naturally incorporated by having the factor based MCR catch up to the current version of MCR, while the current version continues to grow at 1% per day.
13/ Effects of a gearing factor are more long-term in nature, which is where the mutual can really thrive. Rather than assessing the factor on an absolute basis, let’s consider what happens when you increase it.
14/ When it goes up, that means total active cover is going up while MCR remains flat. Since MCR dictates the quantity that can be covered in one specific contract, it means the mutual is offering more overall cover while it’s reducing its concentration to any specific contract.
15/ Growth through diversification and horizontal scaling is a much more sustainable and efficient way to scale the mutual.
16/ The other benefit boils down to what we discussed initially, the long term source of growth for a mutual is from the fees that flow to the capital pool.
17/ Increasing the factor means you’re able to offer more coverage/fees for the same level of MCR. All else held constant, a higher gearing factor would lead to a higher MCR % since the mutual is able to accrue more fees and grow its capital pool faster.
18/ Here are some examples of the structure of 3 hypothetical mutuals below, with gearing factors of 4, 6, and 10. Keep in mind that the gearing factor manually gradually increases as the sources of cover diversify over time.
19/ Impact of fees on the mutual will be a function of MCR% and the Factor. Increasing MCR % will reduce their impact since the Capital Pool will be larger. Increasing the Factor will increase the impact since you’re able to offer more cover on the same amount of MCR.
20/ Below is a chart that shows the growth in the Capital Pool purely sourced from fees.
21/ Assessing the impact on price is helpful when trying to understand why a gearing factor approach could keep MCR% elevated.
The values below show the 1 year impact on price, holding everything else constant, from fees that grow the capital pool from cover purchases.
The values below show the 1 year impact on price, holding everything else constant, from fees that grow the capital pool from cover purchases.
22/ This really shows how the mutual can accelerate its growth as it scales. The introduction of new types of insurance will allow the mutual to reduce risk and make it more capital efficient over time.
23/ On the demand side, product market fit is and always will be a primary driver, but accessibility is also important. That’s why the recent integration with Yearn will be huge.
$YFI enables users to purchase NXM underwritten insurance without KYC.
$YFI enables users to purchase NXM underwritten insurance without KYC.
24/ Needless to say, our team @Delphi_Digital is very excited to be supporting the @NexusMutual team.
If you haven't already, check out our full report and walkthrough here:
delphidigital.io/reports/nexus-…
If you haven't already, check out our full report and walkthrough here:
delphidigital.io/reports/nexus-…
