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How to Insure Your DeFi Plays with Nexus Mutualby@alfredodecandia
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How to Insure Your DeFi Plays with Nexus Mutual

by Alfredo de CandiaMay 8th, 2024
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- Decentralized insurance is a solution to protect user funds from any future attacks or problems. - Thanks to Nexus Mutual, it is possible to hedge the smart contracts used in DeFi protocols, protecting yourself from any risks.
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When we talk about broad-spectrum finance, we are not only talking about purely super-complicated products, but also about insurance, and also in decentralized finance (DeFi), we also find this type of instrument.

Traditional insurance

In this case we find ourselves faced with 2 parties, the insurer and the insured, the first undertakes to cover any future damage and the second undertakes to pay an agreed amount to cover the risk to the insured, in the event that potential damage may occur in the future and call the insurer to compensate for any damage.


There are insurances of various kinds that cover different objects or situations, think of the normal insurance of our cars or large household appliances, but also of the more complex ones such as in the case of theft of a jewelry store or potential disasters that can cancel a concert and in that case the insurer will undertake to compensate the users for any ticket or other eventualities established in the contract, let's think about what happened during the pandemic, especially with important sporting events, which thanks to these insurances, were able to cover part of the costs.

Crypto insurance

Even in the crypto and blockchain world, the first projects of this kind have begun to appear, although still at a very small and not widespread enough level given that there are particular difficulties and risks that many do not want to take on, think of possible errors in the code of the smart contract or an external attack that causes the loss of funds, all episodes that have occurred and will occur in the future.

Nexus Mutual


However, a project that has certainly stood out in this area is that of Nexus Mutual, founded by Hugh Karp, which is a decentralized insurance company that uses the blockchain (in this case on Ethereum) to create a mutual or a shared risk pool with other users and in this way open up to the insurance of smart contracts, in fact in this case the focus is on the most important part of the project in this sector, because it is the heart around which the whole system revolves.


The system also plans to govern everything with the relevant NXM tokens and therefore take part in decisions regarding whether to cover the problem that has arisen or not, given that it is the members who decide who and how much to cover after the damage has occurred.


Recall that the Nexus Mutual team operates as a traditional company, and is regulated by the Financial Conduct Authority (Bank of England) and this allows it to have the name “Mutual” in the project name.


To participate in this project and therefore also use this form of coverage you need to become a member of Nexus Mutual, which is interesting but requires going through a KYC (Know Your Customer) procedure since we will respond and interface personally with the our funds and in the event of a loss, also bear the same.


With this system we can cover practically every smart contract that we find on the Ethereum blockchain, even if it must have at least some interesting and minimum parameters because it would not make sense to cover a smart contract that has little value within it or that is not used.


Before proceeding to see how this protocol works, there is a detail that we must point out is that if it is true that Nexus Mutual offers coverage for smart contracts, it is also true that it does not use its system, a risk that could put user funds at risk, even though this has never happened and the related smart contract has been audited by Solidified.


Obviously there is other interesting information regarding this protocol, such as the governance model, tokens and so on, which in this case we will not delve into but which is a good idea to read on the relevant website and therefore read up carefully by also reading the project's whitepaper to have an overview.

How to cover the funds

Once we have connected to the site, we will have to log in with our wallet, so as to be able to access the platform and here we will be able to see all the various options available and also search for the relevant protocol we are interested in:


Nexus Mutual - Interface


For example, let's search for the Aave protocol and see what protocol is available:


Nexus Mutual - Aave protocol option


In our case we choose v3 and open the page with all the details relating to this coverage, what it covers and how much it costs:


Nexus Mutual - Insurance info


So we choose both the time and the amount we want to cover and continue to become members of the protocol:


Nexus Mutual - Buy cover


On this page we then have to enter all the information for the KYC part such as our personal data, among other things there is the possibility to choose whether we are acting as an individual or as a company, also allowing companies to cover their own funds in case of future problems:


Nexus Mutual - Become member


Nexus Mutual - Membership


In this way and thanks to this but also other protocols, it is possible to protect ourselves from any attacks or problems regarding those protocols we use, and therefore having an additional level of security for our funds, especially if they are important.


Conclusion


In conclusion, decentralized finance (DeFi) is evolving rapidly and decentralized insurance is becoming an increasingly important aspect of protecting user funds and Nexus Mutual is an example of a decentralized insurance platform that uses the Ethereum blockchain to create a shared risk mutual among users.


Thanks to this system, it is possible to cover the smart contracts used in DeFi protocols, protecting yourself from any future attacks or problems, however, it is important to underline that the use of these platforms requires a KYC procedure and the active participation of users in the governance of the protocol, and in more, it is essential to carefully read up on the characteristics of the project and the coverage offered before using these services because decentralized insurance represents an important step towards greater security and protection of funds in DeFi.