DeFi (decentralised finance) may be innovative, but it gets more hacks in one day than a full season of Stihl Timbersports. It’s a good time, then, for Stockhead to chat to Hugh Karp, the Australian founder of the blockchain-based insurance and smart contract cover protocol Nexus Mutual.

 

Hi Hugh. There’s been no shortage of DeFi exploits lately. THORChain, Wault Finance, and this week’s US$20.7 million Popsicle Finance attack. Is crypto still the Wild West?

“Yeah, it’s still the Wild West but overall I think it’s improving and headed in the right direction.

“More established protocols are investment grade or very close to it but due to the open and permissionless nature of crypto there will always be new projects, some which take a more reckless approach than others.

“If you’ve been around long enough you can get a feeling for which projects are riskier than others.”

Do you think we’ll ever reach a point where we see far fewer DeFi exploits?  

“They’ll always be there, as there are always going to be new protocols, but tooling and more standardised security practices are definitely going to help and bring down the average rate of hacks.”

What do you think are DeFi’s biggest pain points? A perceived lack of trust? 

“Crypto in general has a pretty bad reputation, undeservedly so in my opinion as there is a lot of genuine innovation going on that can really help people.

“That will change in time, but it’s probably quite useful for right now as it allows the risk-seekers and experts to figure out all the details to create robust and scalable protocols that are required for a wider audience.

“Easy access to fiat on/off ramps and UX [user experience] in general are probably the two biggest pain points.”

Is the US government’s potential to over-regulate stablecoins a big threat to the industry? Can regulation be a good thing for the space? 

“It could certainly put a dampener on innovation and the crypto sector, but that’s probably only a year or two blip as innovation will shift elsewhere, it just won’t come from the US nearly as much.

“Some regulation can be good, if it’s done in the right way. What I believe a lot of potential regulators miss is that crypto, and DeFi in particular, can provide better solutions for end users – ones that are safer, less reliant on individuals, and cheaper as well as better, more innovative products.

“Hopefully regulation will be framed with this in mind, but unfortunately I’m not that hopeful, given what we’ve been seeing lately.”

Why do you think some politicians and regulators are so afraid of crypto and its “shadowy super coders”? 

“When I’m feeling cynical, it’s because they’re wanting to protect their existing power structures, and they see stablecoins in particular as a direct threat to that.

“There is much more nuance to it, though, as they also have genuine consumer protection concerns. Government officials don’t really want the newspapers to be filled with pensioners and other people losing lots of money on crypto that they didn’t understand or were scammed out of.”

Any thoughts on how DeFi and crypto would be affected if a stablecoin black swan scenario took place? What would happen if USDT went to zero? 

“This is likely a catastrophic systemic risk for DeFi. It would recover but there would be many losses along the way. The lending protocols would likely go into liquidation mode, some platforms would break and ETH would likely drop significantly as well.

“I believe [USDT] is extremely unlikely to go directly to zero, but there is an outside chance it could de-peg significantly – to 80 cents or something, for example.”

What exciting trends are you seeing in DeFi or crypto more broadly? 

“I’m encouraged by a few things, decentralised fiat on/off ramps would be amazing for broader adoption and resilience.

“Another section I’m really interested in is gaming, as I believe this is a likely gateway to mass adoption. Young users can play to earn within a game and then take the earnings and deploy them into DeFi, this has huge potential to help real people.”

Nexus Mutual’s UK-based Australian founder, Hugh Karp.

Despite DeFi’s teething problems, do you think crypto could see its DeFi Summer 2.0? Or is that just hopium? 

“Honestly I have no idea. Nexus Mutual is building for the long term – we’ve been through several large cycles already so we try to filter out a lot of the noise and stay focused on our goals.

“The positive cycle is great for attracting new users and expanding our footprint and the down cycles are great for building. Knowing when to switch gears and make the volatility work for you is important.”

Fair enough. Insurance is clearly an important part of the crypto ecosystem. Please give us a quick rundown on what Nexus Mutual (NXM) is and does. 

“It’s a platform for communities to come together and share risk amongst themselves. It’s a community-based alternative to insurance.

“We’ve been operational for over two years and have grown our shared pool of capital to $400m and our members have shared over $1 billion in risk between them.

“Right now, the mutual is focused on sharing risks in the crypto ecosystem but our vision is much greater, we aim to become a platform for many different types of communities to protect themselves without the need for an insurance company.”

Is Ethereum the right blockchain to help your enterprise grow further?

“It’s the only logical choice for Nexus Mutual. We need a high level of security and an active ecosystem to cover. But we’re also investigating the best way of making coverage purchases more accessible on other chains.”

What’s the biggest hurdle Nexus Mutual needs to overcome to gain further traction and users? 

“Building out a robust distribution network is key. Distribution is a fundamental aspect of insurance and while it will look different in the DeFi and crypto space, the same principles remain. Providing users easy access to coverage at the point of sale is one example of what this will look like.”

As the biggest insurance project in crypto, does Nexus Mutual have a first-mover advantage over the newer competitors starting to enter the space? 

“It certainly helps to have the largest capital pool out there, as it gives us capital efficiency and scalability benefits, but we’re really only getting started here.

“Our biggest edge is, somewhat ironically, the brand and trust that we’ve built up after paying claims. That’s very hard to replicate, especially when it comes to convincing institutional players.”

What does the DAO (decentralised autonomous organisation) model bring to insurance cover? 

“Mutuals are actually very old, thousands of years old, so fundamentally we aren’t doing anything new. People have been sharing risk together for centuries. The main benefit of the mutual model is that everything is driven for the members, not shareholders.

“But Nexus’ real advantage in rebuilding the mutual model on Ethereum is that it can scale much more easily. Multiple communities around the world can coordinate directly with each other, and capital can be much more easily sourced. These are the fundamental barriers to scaling mutuals in today’s insurance world.”

You have a background in traditional insurance – what sparked your move into crypto?

“Yep, I’m an actuary by training and worked in traditional insurance for over 15 years before starting Nexus Mutual. My primary goal was to scale the mutual model and provide underserved communities with access to coverage in a more fair way.

“When I saw the DAO being drained live in 2016, that’s when we decided to provide coverage for DeFi and crypto risks. It was a wake-up call, that if crypto was going to be successful it needed to have basic risk-management tools like insurance.”

We were sorry to hear you personally lost a painful amount of NXM late last year in a spam attack [US$8 million worth]. You probably hate talking about it, but is there anything to be learnt from that? 

“Yeah, it was a very sophisticated attack that spoofed a transaction and tricked me into approving a large NXM transfer on my hardware wallet directly to the hacker.

“My main lessons are to use a separate computer for signing transactions, that doesn’t do anything else, and to double check the “To address” on the hardware wallet whenever I sign a tx – to make sure I’m signing what I intend to.”

Noted. Lastly… anything of interest coming up for Nexus Mutual? 

“We’ve got a lot of exciting updates in the works for Nexus, broadly under the banner of Nexus 2.0, so keep an eye out for those as we share them.”

 

You can learn more about Nexus Mutual here.

 

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