Nexus Mutual, a startup that provides a decentralized alternative to insurance, is extending its community-based offering to cover users of well-established cryptocurrency exchanges such as Coinbase, Binance, Kraken and Gemini.
Until now Nexus, which uses digital tokens to revamp the traditional idea of mutual cover, was only focused on the world of decentralized exchange (DEXs), specifically catering to the explosion of decentralized finance (DeFi), which is susceptible to hacks and losses.
However, centralized exchanges also get hacked on a semi-regular basis, and traditional insurance cover within the crypto industry remains thin on the ground and prohibitively expensive. Indeed, for many large exchanges, the balance sheet is basically the insurance fund, as Kraken CEO Jesse Powell has noted.
Nexus takes a different approach, offering cover to users themselves, rather than relying on an insurance policy held by the exchange – or not, as the case may be.
“We are expanding to provide coverage for centralized exchanges, starting with the big ones like Coinbase, Binance, Kraken, Gemini, which is a product we’ve had really strong demand for,” said Nexus Mutual founder Hugh Karp in an interview.
None of the exchanges mentioned returned requests for comment.
How it works
Nexus Mutual takes a completely decentralized approach to what it calls “discretionary cover.” The firm employs the U.K.’s legal framework of a discretionary mutual, where members have no contractual obligations to pay claims. It applies this to a pool of digital NXM token holders, which uses the Ethereum public blockchain to track proportional ownership of the fund and a governance system to approve or decline payment of claims.
“You don’t have to rely on the insurance that the exchange may or may not be able to purchase themselves, you can come to Nexus separately and get covered, independently of the exchange,” Karp said. “Hopefully, we can provide a community solution to the existing limited-capacity sore point in the industry.”
The centralized exchange cover from Nexus will pay a claim if an exchange gets hacked and the user loses more than 10% of their funds, or if withdrawals are halted for more than 90 days, Karp explained.
“Currently, end users find it very difficult to assess the protections centralized exchanges have in place, like how much contingency funds do they hold back or what proportion of funds does the exchange have its own insurance on,” Karp said.
Nexus members can perform various roles, including being a customer by purchasing cover, assessing claims by voting or assessing risks by staking NXM tokens against specific risks. (For example, if you want to back Compound, you stake NXM against Compound; if you want to back Coinbase, you stake against Coinbase.)
“When the new product launches, Nexus Mutual risk assessors will first have to decide whether to back the risks by staking NXM tokens against them,” said Karp, a trained actuary and the former U.K. CFO at Munich Re. “The more secure an exchange is perceived to be, the more likely risk assessors will back it. Once sufficient staking has been established, cover purchases will go live and members of the mutual will be able to purchase cover.”
Nexus emerged sometime after the infamous DAO hack which rocked the Ethereum community back in mid-2016. The need for additional cover in the nascent DeFi space was underlined with an ironic twist last month, when Nexus founder Karp’s personal account was compromised in a targeted attack resulting in the loss of some $8 million in tokens.
Commenting on the attack, Karp said it was “quite scary” just how targeted it was.
“I think it puts the bar a lot higher for self-custody than I ever had in my mind before. That attack vector was very specific to me,” he said. “We’re still really early in the ecosystem, and we need to get to the point of having an FDIC-insured wallet equivalent in the decentralized world.”
CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk offers all employees above a certain salary threshold, including journalists, stock options in the Bullish group as part of their compensation.