Thread by @jdorman81

Nexus Mutual ($WNXM) is the most undervalued token in digital assets & it's not even close. Trades at just a $23mm net market cap despite being one of the most utilized #DeFi projects.

A thread on valuation and upcoming catalysts 👇

(h/t @arca head of research @KatieTalati )

First, why does Nexus Mutual exist?

Digital asset builders are trying to build the car while simultaneously driving it. Fine in theory, but in reality, not laying key pieces of infrastructure early on can stymie growth & innovation.

For #DeFi, insurance is infrastructure

Insurance is a sleepy, boring business, but insurance in the case of #DeFi is also crucial to an ecosystem that is still being built yet already holds a massive amount of assets and is still growing (current DeFi TVL: $43 Billion).

But insurance is also a huge, profitable business

In 2020 the global auto insurance industry reached $709 bn insured & the global P&C insurance industry reached $1.6 trillion.

If Nexus captured 10% of that market, it would have $160 billion of coverage (vs current $500mm).

Nexus Mutual foresaw the need for insurance in the fast-growing Ethereum ecosystem, launching a year ahead of 2020’s #DeFi Summer.

DeFi summer proved that Nexus has the number one element that all early stage companies and projects must have: Real product-market fit

Case in point: #DeFi TVL grew from $906mm to $7.1bn (+683% increase) by the end of August, while active cover on Nexus grew even faster from just over $3mm to over $55m (+1,674% increase).

Product market fit + operating leverage = a strong investment

Defi’s TVL is currently $43bn of which Nexus currently only covers 1.28% of the market.

Imagine if cover expanded to 10-20% of Defi’s TVL - that would mean Nexus would have to grow 10-20x!

So how do you grow that coverage further?

To start, you can argue Nexus isn’t even going after the right audience yet. Imagine having this much success & not even targeting the correct point of attack.

Once coverage is built into the system, instead of optional --> 🚀🚀🚀

https://twitter.com/ceterispar1bus/status/1372509910450237440

h/t @RyanWatkins_

While other projects rewarded users with liquidity mining campaigns & gimmicks, Nexus grew its user base organically through its in-demand product offering & token design.

Again, that's product market fit, which leads to the next most important startup trait: Traction & growth

To date, 2 smart contract hacks resulted in successful claims payouts:
- bZx for $90k
- Yearn Finance for $2.4mm

Claims temporarily lower the $NXM price as ETH is withdrawn from the capital pool to repay claims, but it shows necessity of insurance & the soundness of the system.

Nexus has generated $17mm+ in revenue, $11mm of which goes directly to $NXM token holders via the sell spread fee & premiums (net of what stakers make).

2021 revenue is on track to 3x that amount

Compare vs other #Defi projects where most revenue goes to users:

$UNI: 0% of revenue goes to tokenholders (100% goes to LPs)
$AAVE: 6% of revenue goes to the protocol
$COMP: 16% goes to token holders

$NXM: 50% of premiums go to tokenholders as does 100% of the sell spread

Compared to many other top dapps, $NXM has a far lower P/S ratio of 2.1 (calculated using the Net NXM market cap):

NXM is clearly undervalued and has not participated in the 2021 Defi rally

(NOTE: @tokenterminal data uses gross market cap which inflates numbers).

A technical aspect many miss is that Nexus' TVL is actually a subset of market cap -- the market cap is driven by the $ETH in the capital pool. Most other DeFi protocols have these completely separate.

TVL isn't everything, capital efficiency and actual revenues matter too.

And it gets even better. Nexus Mutual has yet to utilize this large Capital Pool, which contains 162,413 $ETH worth over $290m.

nexustracker.io/capital_pool

The mutual will begin investing its $ETH assets soon & we can assume that they will earn a rate > or = to the staking APY on ETH 2.0, a low risk contract.

Using the staking rate on ETH 2.0, $WNXM can earn ~7.5% annually which would add ~$20m of revenue, lowering the P/S further.

But if Nexus Mutual was liquidated tomorrow, all of that ETH in the capital pool belongs to NXM holders. The $NXM token is fully backed by the ETH in the capital pool.

That means the true risk of NXM / $WNXM is the mkt cap of the token ABOVE (or net of) the ETH balance.

How can $NXM be undervalued if its priced on a bonding curve?

$WNXM is a freely tradable version of NXM that represents the market's assessment of Nexus' true value.

WNXM trades at 72% of NXM's value, creating a temporary arb that is hindering growth

https://twitter.com/HughKarp/status/1347582496867815429?s=20

The Math:

$WNXM is trading at just a $23 net market cap (value in excess of the book value of the ETH).

DeFi has $59 bn in token value, yet the company that supports this growth trades at just 0.40% of that value.

A P/B ratio of 1.1x is criminal for a company this successful

Book value matters for insurance companies

More mature insurance businesses have a P/B of 3-4x while newer tech-focused solutions such as @Lemonade_Inc have P/B of 10x representing the larger opportunity set for growth companies.

$WNXM can go up 10x and still be cheap vs peers

All of this creates a positive feedback loop:

Demand for insurance --> Higher revenue --> more ETH in the capital pool --> More investment earnings

As the capital pool grows, & the market starts to assign Nexus w/ a higher growth multiple, $WNXM & $NXM take off

At worst, buying $WNXM is just buying $ETH exposure via the 1-for-1 backing by the capital pool, but you also get a a super cheap call option on Nexus’ growth for virtually nothing.

Optionality is key to investing - and this is an insanely cheap, mispriced, perpetual call option

Over and over again we've sounded the "fundamentals matter" alarm while others continue to chase layer 1 protocols with nothing built on them.

The next hot thing isn't what's next, it's what's already here, is working, and is being mis-priced or ignored.

$WNXM $NXM