Insuring Crypto & Mutualisation of Risk, with Hugh Karp of Nexus Mutual


Insuring Crypto & Mutualisation of Risk, with Hugh Karp of Nexus Mutual

October 2020

Posted by

Roland Spencer

Creative Producer

Roland is also responsible for the identification and implementation of new creative strands, with a specific focus on building community, communication and content strategy, and overseeing community output and engagement for the team....read more

Hugh is a 15 year insurance industry veteran who launched Nexus Mutual, a decentralised insurance protocol, back in 2017 and, with the advent of DeFi, whose time has come.

We talk about how insurance has historically enabled risk taking and innovation, forms of risk in DeFi, and how innovations in oracles & NFTs (Non Fungible Tokens) make the industry unstoppable in delivering highly disruptive, bottom up, compliant by design, efficient and effective financial innovation.

Posted by Roland Spencer - October 2020

October 2020

Posted by

Roland Spencer

Creative Producer

Roland is also responsible for the identification and implementation of new creative strands, with a specific focus on building community, communication and content strategy, and overseeing community output and engagement for the team....read more

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Jamie Burke 0:13
You’re an early stage web three founder apply to our award winning accelerator programme base camp at Outlier ventures.io slash base camp, we write your first $50,000 check and give you access to 200 mentors, including many of the leading web three founders, and a network of 1000 of the world’s leading investors and exchanges. We’ve helped over 30 startups from 15 countries from all around the world, raise 100 and $30 million in growth funding, I can help you fast track product market fit and where relevant the launch of your token economy. Today, I’m really happy to welcome on Hugh Karp of Nexus mutual Welcome to you, great to be here. So Nexus is described as People Powered alternative to insurance. You use smart contracts on the Ethereum public chain to allow for discretionary policy cover, which is similar to but not quite the same as insurance. And we’ll unpack that a little bit later, you operate similar to how a mutual insurer might, in that you allow similar users to share risk. In this case, users of DeFi were in the past, historically, it might have been say, farmers or an emerging shipping industry that face very specific forms of risk that the traditional insurance industry would struggle to cover quantified price, and what have you. You do all of this via a specialised legal entity in the UK. And so that allows you to offer a decentralised alternative to regular insured to the regular insurance industry. So some of the reasons why I’ve got you on the show. So I’m in the process of forming my thesis, Outlier Ventures on how we collectively as an industry increase institutional adoption of DeFi. And the management of risk seems to be one of those recurring themes when you speak to institutions, the spectrum of institutions, and one of the important blockers, so risk management in crypto. And of course, especially in defy is complex, highly technical, but I guess no different to ensuring any other new industry, any other new emergent industry. And as I said, historically, there’s lots of precedents of that happening in insurance. So insurance in DeFi, to me feels like the next critical layer to get added to the DeFi stack. Now, interestingly, Nexus launched way back in 2017, which is light years ago, in the context of crypto. Most importantly, before there was a lot of this defy hype. And the fact is, you’re still here. So congratulations on that to start with, you are definitely ahead of the curve. And you’ve managed to sustain and from what I can see, to continue to grow and succeed. So I want to understand, you know, how you’ve made that happen. But all but also unusually for DeFi. You You also have a professional background in your domain that have insurance, I believe, over 15 years of experience as an actuary and the context for listeners and actually as somebody who deals with the measurement and management of risk and uncertainty. So looking forward to unpicking unravelling your your founder story, the last three years of experience,

Hugh Karp 3:33
eco friendly introduction? Yeah, it’s been a it’s been a bit of a journey so far. And you know, I guess, insurance has always been talked about as one of those things that some blockchain technology can actually do really well. That and it’s always been the like, the original thing was referencing the original Ethereum of what it was launched and stuff. But it’s quite, it’s quite challenging to do. So I guess we’ve been working on for a while, and, and especially DeFi coming up, especially in the past three months or something. It’s been, it’s been really good to be there and be able to support that growth as well. And it’s obviously been great for the Nexus as well.

Jamie Burke 4:12
Yeah. So well done for sticking around. Because, of course, it’s not always easy to be right, if you’re right early, because you then have this huge gap of time which you somehow need to finance to be right and timely. And I think certainly whenever I’ve heard discussions around blockchain and insurance, it’s usually been, you know, people in suits talking about how blockchain could, in theory, bring about efficiencies to the existing insurance industry. And I guess, with the advent of DeFi. We’re actually building up this kind of bottom up capital market and therefore you don’t have a lot of constraints or legacy. Things to account for, you can kind of build almost a pure form of power. What the end state would be for the existing insurance industry. So it’s going to be interesting to see how you as a founder kind of navigate that go to market between what is defined today and if this stuff becomes more generalizable for the wider insurance industry. So to just give some context to you as a founder, as I said, you got in 15 years in insurance, and you actually studied, accurate, I don’t know how to pronounce that. actuarial studies. That’s a tricky one, from the Australian National University, graduating 2001. He then worked as an actuary in life insurance from 2002 to 2011. At MLC and Knapp, wealth. And then you did a six year stint that mean it reads, right?

Hugh Karp 5:48
Yes, I moved to London and worked for Munich karelian in the UK. Yeah, for quite a while and ended up being the CIF, CFO for the life operation. So yeah, quite quite a few different things in the in the insurance industry.

Jamie Burke 6:01
So that’s 2012 to 18, you kind of climb pretty quickly. So from your product development, actually, then head of financial reporting. And then as you say, CFO for life, UK and Ireland. So you must be good at golf, right? I imagine somebody that climbs that aggressively in the corporate world is good at golf.

Hugh Karp 6:20
Yeah, I’m actually really terrible at golf. Oh, but yeah, um, there’s, there are, of course, always types of events that the regular insurance industry does say, lots of deals in pubs and stuff like that. I guess that’s how it works. It’s a bit old school. Totally different. Totally different to how things working right now. Which is, in my mind, it’s good.

Jamie Burke 6:41
Yeah, right. Okay. So you must have, you must have done that client based on actual competency, then rather than golf, gobbling abilities and socialising. Then in 2017, you founded Nexus mutual, you conducted a token sale, right, and you chose, so you’re already based in the UK. But I think you’ve chosen to continue to have Nexus mutual to be based in the UK. When I was doing some desk research, I mean, I knew insurance was big in the UK, but it’s really the fourth largest insurance industry in the world.

Hugh Karp 7:13
Yeah, like London and London is kind of a historical home of insurance, especially with Lloyds and everything being built here. So it is a massive, massive market. And obviously close ties into other big markets, like in uterine, etc. So, yeah, it’s it’s a, it’s a hub for insurance knowledge, which is, it’s a really good place to be. But it’s kind of that hybrid approach, like you’ve got the expertise and access to that, the insurance world. But it’s also a good blockchain as well.

Jamie Burke 7:45
Well, long may that continue, I actually had Prime Minister, that of Bermuda on on the show not too long ago, talking about bermudas role in the global ecosystem around reinsurance reinsurance capital of the world. And, as you say, this kind of linkage between the City of London and not to be confused with the kind of Metropolis but the City of London, and you know, this kind of wider group of the minions which cast specialising in capital markets and this kind of offshore system. So, if we look at, you know, what, where you are now, as I said, as I’m kind of building out this thesis about what institutional DeFi could look like, increasingly, the way that I think and talk about Crypto is that we’ve had this decade of effectively building up a bottom up capital market, kind of sequentially, like layer from from money, you know, through to currency, and we’ve got stable coins, and now we’ve got lending and borrowing. And so it feels like a natural conclusion or next step that an insurance layer is needed to make that a functioning economy, functioning capital market and to allow for this financial services industry to grow around it. But are you went was your original starting point, to create something initially native to Crypto web three? Or was it to kind of leverage some of the efficiency gains and apply it to the existing insurance world and did that change or evolve as things like DeFi came about?

Hugh Karp 9:35
Yeah, so we, I mean, the original idea was to build like, instil is to kind of build this kind of generalised bound platform where you can cover any type of risk. And so we actually started building an earthquake cover, we did a proof of concept with earthquake colour, way back and then and then it wasn’t very long until we realised the number of people that were in crypto that were likely to use our platform and wanted us to Cover was very, very small. And so we pivoted, and I think one of the things were triggering that was like, you know, watch the Dow be drained live into like, one day. So Monday coming out, I was like, Okay, well, like, there’s some riskier than if we’re going to be successful, then then we’re going to need some native cover in the crypto world and, and so that’s kind of how we why we pivoted and are offering smart contract cover. So to have cover against the hacks in, in smart contracts. And that’s a bit that’s just kind of the start kind of view here, kind of going back to your point is like, it doesn’t matter what industry it is, if it’s a new industry, in whatever form, like insurance is kind of like fundamental financial infrastructure, it kind of needs, it needs to be there so that people can, can take risk and do new things like, you know, nothing nothing’s, like, you know, it’s just boring, like Rocket Ships don’t get launched or train lines don’t get built or whatever. And nothing happens if there’s some kind of underlying insurance markets there to kind of take off that, that risk. So I guess that’s what we’re trying to provide. And more More, more generally, within within Crypto, they, it’s very hard to get access to the regular insurance industry, because this is a big knowledge gap. And it’s quite technical. And, excuse me, and the markets just perhaps not quite big enough yet, for the big insurers to put some, you know, research and capability and resources behind it. So it’s really good for a, it works really well for any kind of community based solution to to bootstrap this thing and provide the solutions to begin with.

Jamie Burke 11:43
Yeah, so maybe before we go into, we go deeply into understanding risk in DeFi, and Crypto and the kind of specific offering or constituent parts of Nexus mutual, it would be good to just do a very quick one on one on insurance and the reinsurance market, and a lot of people don’t necessarily understand the reinsurance market in particular, but also this idea of the mutualization of risk in a kind of historical context.

Hugh Karp 12:14
Yeah, so I mean, insurance companies kind of started way, way, way back hundreds millennia ago, hundreds of years, millennia, more long time, as like just community based, Mutual’s essentially. So basically, the community pulled money together. And then someone, usually the elders of the community, or something decided when playing payouts, whether that was supporting the worker or lost their life or whatever is supporting the rest of the family, etc, stuff like that. And so, you know, it often developed from like they put in the community. And then as things progressed and developed, then it became more financialized, like standardised, particular, institutions came in to kind of do particular things like the the shipping industry is a good one where it started with just individuals backing certain risks. And then, and then it became standardised contracts and you get, and then you kind of have a company set up, that kind of takes a lot of the risks and backs many of them and diversifies and then that turns into an insurance company, and etc. So they kind of start like that. And then they kind of transform into, like shareholder base companies. And I think it’s, that’s probably one important distinction is like mutual kind of structures are all done for the members. And all that means if there’s no money left over, then it’s owned by the members. Whereas with a shareholder based company, you it’s obviously owned by the shareholders. And so you kind of have this, there’s a different kind of alignment of interests type issue to think about. So that’s kind of how very briefly how kind of insurance has progressed over time. And I guess a reinsurance layer, most specifically, is about really ensuring the insurance companies so for usually the more catastrophic events, or to allow them to write more business quite quickly, so those are the two main reasons you would get Rangers involved. So we interest tend to like be b2b type, structures, Big Lots of capital, writing big, big deals behind the scenes, and they often work for like, make sure we get capital efficient structures and things like that. So yeah, they don’t really well, kind of unknown to the everyday people and then assumably just because you don’t know exactly what’s

Jamie Burke 14:36
with them, but the lack of a reinsurer in a nascent industry is one of the constraints about the amount of liability that any one entity can can cover, whether that’s I guess in a in a crypto DeFi context or protocol or a kind of corporate entity. But also, you know, if you think about some of these mutual Like very prevalent in, on the continent in Europe, you know, these are incredibly large financial institutions. Now, as you say, they might have morphed out of kind of a farmer’s kind of cooperative or mutual, but now become, you know, almost like a high street insurer. And, you know, what they then do as a player in the capital markets, how they invest money is also kind of, can you see? Can you see these entities or protocols becoming beyond beyond the actual act and function of insurance becoming participants in reinvesting in assets and collateral in the wider ecosystem? Um,

Hugh Karp 15:46
yeah, potentially, I think that’s more of a, that’ll take a while, but I think they’ll probably get there eventually. There’s quite a few barriers, but um, about, you know, like, regulatory, can they hold crypto assets or something like that? You know, the regulator kind of has to approve stuff. And then you’ve also got things like, does it make sense to hold riskier assets on your balance sheet when you the main purpose is to hold assets to back claims, and therefore you one more kind of lower yielding the lower risk asset? So you know, but But definitely, there’s a lot of money sitting there and insurance companies like mutual, Mutual’s as well, as well as like pension funds and stuff that obviously is not going to enter right now is a fair way away, but but we need to kind of as a kind of web three industry kind of start ticking those boxes so that they can come at later points,

Jamie Burke 16:40
as these protocols or organisations in the DeFi space become better collateralized, you know, they might look at how they can deliver yield, we all know kind of the importance of yield in the DeFi context, through deploying that capital through different different instruments, different mechanisms. So let’s talk about Nexus mutual, how its structured, its constituent parts. So as I mentioned, there is this governance token, but I don’t understand it a big principle is that it’s a noncustodial. Right?

Hugh Karp 17:16
Yeah, that’s right. I mean, so what we’ve what we’ve done is we’ve tried, the goal is to operate this thing as a Dao, but it’s not technically a Dao because, you know, I guess, you know, there’s, there’s a spectrum of these things. But the, the idea is, it’s one custodio, and the members decide on the key operations of the neutral. So that’s they, they complete actions to kind of price, the risk. And they also assess the claims, and they also vote in governance stuff, they parameters or the system if they want to. And so it’s definitely a noncustodial run by smart contracts. But I guess the interesting thing about what we’re doing is we actually also have a legal entity in the UK. And so the Dow is actually, the way it’s actually structured is you have a membership organisation in the UK. Next is mutual Ltd. And when you join the Dow, you actually become a member of that company. And that provides essentially, a, it’s a kind of a legal wrapper that gives you limited liability on a permanent basis, which is quite something quite interesting, in my opinion, has a lot of value. But it also provides some certainty and allows us to contract with the outside non blockchain world as well, which which can be quite useful in certain circumstances. But I guess, more broadly, I think there’s this that legal and regulatory clarity on what they’re doing, which is often especially in divides, it’s quite challenging right now.

Jamie Burke 18:46
Yeah, so I’ve heard of, you know, dows, with legal rappers being referred to as loughs. I think there is a project called the Dow, but I think it’s also more generalizable than that, and I expect it to become an increasing precedent. Because as you highlight, if that entity wants to contract, engage, but also remove or reduce the liability for its members for its participants, then it makes sense to domiciled within a particular legal jurisdiction otherwise, you’re kind of potentially open to action from any legal jurisdiction where a user may reside and interact with with the system. I’m sure you know all about that from a risk perspective, so more for the benefit of the US the listeners. But it’s also interesting, you know, this idea is that if you think about a lot of the regulation that exists in the insurance industry today, it is to ensure a properly functioning insurance market to protect consumers users to ensure you know, solvency that insurance firm could pay out if it needed too. And I guess the principle here is that you can do a lot of that through code. So whilst perhaps you don’t have that legal regulatory burden, because you’re not a full blown insurance company, you’re kind of doing this discretionary policy, you’re in effect can and can provide greater certainty or comfort to regulated just by by the fact that you’re executing on code, through smart contracts on a on a distributed ledger, right?

Hugh Karp 20:31
Yeah, exactly. So I mean, the to me, there’s kind of two main angles of why you actually regulate there’s a consumer protection stuff about, you know, does the product do what the product says is does, that’s one angle, but the reason you regulate from an insurance point of view, is basically because as a customer or an insurance company, you’re giving your money to someone else, and they are looking after it, and making sure that they’ve got enough to make the claim payments. So that’s kind of the main reason you actually have all this Prudential Regulation. And, and so what we’re saying is, you can actually achieve that much better using using code on a public blockchain. So basically, we’re noncustodial, you’re not actually giving your money to anyone else that has control over it. And so it’s, it’s all transparent, I guess the other big angle here is, you know, one of the reasons you want another reason you regulate is to make sure that everyone’s got enough sovereignty, and the consumers can be confident that there’s like a minimum standard, like all insurance companies will have to be solvent to a certain degree. And, and so here, we say, look, we have real time solvency positions on the entire mutual that anyone can look at at any point in time. Whereas in the regular feature, as well, it takes you at least three months to produce a after the year end date to produce a number to go into the financial statements that then everyone can look at, and then the red guy respond to. And so we’re just doing the same thing, we’re kind of addressing the same principles about consumer protections and making sure that the money is there, but just in a different way. And so whilst we are regulated, because we are a discretion in neutral, we’re definitely following the principles about what we should be doing here. And we kind of use capital models that are very equivalent to the regulatory models that get used to England, throughout Europe. And so, you know, we’re trying to, that’s our approaches, but just do things with the same principles, but just in a different, much more efficient way. Yeah. And

Jamie Burke 22:34
I think, if you look at that ability to effectively self regulate, then that gets really interesting. If you were a regulator, because effectively, you’ll be getting to see all the behaviours that you would want in a market with a much lower burden of oversight, direct oversight, to make sure that that markets functioning correctly. And, you know, I’ve been in this space for many years, I’ve spoken to people in the insurance industry, and, you know, very senior people, and they will often tell you look, to be honest, we don’t even really know the risk on our books on a real time basis, just internally, let alone being able to prove that externally. So I think, you know, clearly there are some gains. So do you see? Do you see what you’re doing as disruptive or transformative to the insurance and reinsurance industry proper?

Hugh Karp 23:30
Yeah, I do. I think we have the, there’s a lot of talk about blockchain being used in the insurance world, but I think we’re one of the only ones that are kind of truly trying to disrupt the current model. There are the other projects are more just using it for like, expense efficiency savings using the exact same approach. But here, what we’re doing is kind of really attacking the kind of core insurance entity and saying, look, we can do this in a much more efficient way. Now, we can we can coordinate, I mean, essentially, insurance is coordinating a bunch of people to do something with a pool of money. And don’t do the right thing with the pool. So if you can create the right incentives using with we have a token to kind of facilitate that. And so if you can create the right incentive structures, then you can do this in a much more efficient way. And you can have it run by the community and hand all the benefits back to the community rather than you know, being paid to the to the shareholders of the insurance companies. And it’s and not only can you do that, you can do it in a much more consumer friendly way because everything’s fully transparent itself. And you can also do it much more efficiently because you get all of the data basically I can greenfields fully automated insurance company, which you could build using non blockchain tech. But you know, it’s it’s still quite hard to to get there.

Jamie Burke 24:53
And so how does that ecosystem or economy function Issue, there are a number of roles that need to be carried out in a distributed fashion. Could you just talk us through at a high level, you know, those those key function roles that make effectively that game play out effectively and efficiently?

Hugh Karp 25:12
Yeah, so there’s there’s four main things you can do within the system. The first one is, you can bike others. So it’s like as being as simple and user and customer, you kind of slip the the protocol that you would like cover on, say, for example, like compound or maker or uniswap, or something. And then you can get acquired and you can purchase cover for a fixed amount in a fixed time period. And that’s kind of the usual thing. And then then there have some other functions behind that to make sure it all works properly. And I guess the first one would be the risk assessment. And here is where it’s essentially the underwriting process or the pricing process. And so that what you would do here is you want to be a risk assessors you can purchase and accept tokens to start with. And then you stake those nx tokens against contracts that you think are secure. So for example, you may think compound is secure, so you can stake something it’s compound. And when, when people do that, the more that staked, the lower the price of people to purchase cover. And the more capacity or more cover can be can be offered on compound. So that’s kind of how it works. It’s kind of like I guess, using prediction market techniques be more structured than a prediction market. But that’s kind of the the idea behind it. And as a staking you can earn rewards when people buy However, there’s also a downside, if there’s a claim. So we want to make sure that people back the protocols that they’re really interested in, really confident in. And so that’s kind of the the pricing side, and then we also have the declaims assessment side, so anyone in the mutual can also decide to vote in on planes. So when the claims come in, they can also stake some extent to participate, that’s kind of your voting weight. And it’s kind of like a weighted average vote. And, you know, there’s a few kind of tiers to it in terms of escalation and stuff like that, there’s a bit of detail, but, but the point being is that the members decide as a group, on an optional basis, you don’t have to vote in claims, but you can. And, and then they get rewarded, like kinda like a fee for the providing work. And so that’s kind of how the claims work. And, and then the fourth thing to really do is like virgin governance, which is kind of more kind of system level stuff. So you know, we want to change this parameter or upgrade the contracts to do something else, etc, or add a new product or something. And so anyone, any member of the mutual Can, can vote in.

Jamie Burke 27:38
Yeah, I mean, it’s fascinating. And clearly a model, that’s a great, great fit, I’ve always felt that a cooperative like model, in this case, insurance and mutual would be the kind of predominant form of governance and coordination in in in these systems. It’s great to see that kind of being played out here. So let’s look at risk in DeFi. Could you unpack where you as an as a mutual see risk, what you’re currently covering? And you know, what, what you would like to be able to cover in in the future and how you evaluate and price those risks?

Hugh Karp 28:19
Yeah, sure. So I think, um, I kind of classify risks in divides up into three broad categories. And Nexus currently covers just the first one, and we’re looking to cover more. And so the first one is going to like the technical smart contractors. So does the code do what it was intended to do? intending to do, and so it’s very hard to code it like 100%, perfect level all the time. And obviously, there are audits and stuff like that, but there’s always going to be some level of risk on that stuff. So that’s kind of our core product right now. And then, then there are kind of two more groups of tumour classifications and got one of them I described as like external risk to the smart contract. So basically, the smart contract works. But there’s something outside the smart contract that causes something odd to happen. Whether that’s like an article that fails or like a price paid as an example causes something to happen. Or it could be like a governance attacks. So you know, a lot of these protocols can change parameters or upgrade themselves if the people vote, and potentially, someone could buy up a lot of the tokens and attack the system and drain it if they get enough voting power. So like, that’s kind of an extreme example. But you know, things like that can happen. And the third classification is probably like economic incentives. So a lot of these protocols are built with incentive structures to make sure something works. So for example, the maker dow system is designed with an incentive structure. So the dye peg holds roughly one US dollar, but if the incentives don’t work, right, then it could deviate from from from $1. And so if those are not imbalanced, then they’re too against you as men at work, so there’s a risk there. And so but those are the kind of three broad risks. And there’s obviously a lot of detail in terms of that. And it’s hard to kind of, for regular people to kind of work out. What’s the right thing to do here is how much do I worry about this or not, etc. And so it’s important that we can develop insurance products or products, we cover like Nexus, that they can really cover the broader range. And so we are working on expanding the the, I guess, comprehensive, integral, comprehensive cover

Jamie Burke 30:33
up. So be great to understand the system as it stands, who were the users who the participants, what kind of policy agreements are they having covered? I know, I had previously that policies around compound, there’s been so much demand is is oversubscribed. And, you know, at what stage and on what type of institutional participants will will join the system and oddish on its evolution,

Hugh Karp 31:00
lots of people are interested in cover for basically, I guess, yield purposes. So you know, the idea being that you put some money into compound or some other protocol, earn a yield, and then you can buy cover a Nexus and kind of the downside risk and get slightly less yield overall, but be in a much better risk reward position. So assess the main idea, then, so things like compound, we’ve got some government compound now, but you know, it has been oversubscribed, in the past, we have been growing a lot recently, as well. So it does change from time to time. But especially with the yield farming kicking off last few months, that’s been a real great boon for us, because obviously, you can get quite high yield. So you have to be able to get very high yields. And but who knows what the smart contracts, what the risk is involved with, some of them are just put out there with potentially no orders, and etc. So, you know, that’s been a really good boon for us. And in terms of who’s buying cover, it actually, like quite a broad variety of people like just regular crypto people, but the most cover is actually being bought by smaller institutions, I guess I described them as like hedge funds, or basically people participating in DeFi, earning yields, but they’re probably managing other people’s money. So they’re more risk aware, in terms of downside risks than than just like us regular people just gambling a little bit of money in DeFi, and seeing what will happen. And so that’s that’s definitely our main market is more the institutions or smaller institution, you know, institutions kind of a big bucket of potential, like in a smaller too large, but it’s, you know, I think that’s more where we’re going to be seeing a customer base from the majority customer base, probably because they just tend to be a bit more aware of these things. And it’s more of a key requirement than getting in.

Jamie Burke 32:54
And I assume, you know, centralised exchanges, people engaging with centralised exchanges. I’ve also heard, he talked about how some protocols themselves, and certainly people may be combining what you might refer to as deep DeFi, multi protocol DeFi taking out cover as well, right.

Hugh Karp 33:12
Yeah, so, um, so we don’t do this right now. But some of the things we’re we’re working on stuff where you can cover like stacks protocol risks. So for example, like some protocols are built on top of other protocols, like always composability. And if you want to get complete coverage with Nexus, you’re gonna have to buy a few different covers to cover all that stuff. But what we want to do is make it much easier for the for the regular user, you know, to just get something that covers the whole thing in one go. So we’re working on stuff like that. There are other products and other things within DeFi. Like, the one thing we can do is potentially provide specific tailored cover for a protocol. And I guess, you know, one example could be that, I mean, some protocols like have like insurance funds, internal insurance funds, and they, you know, they trigger under certain circumstances. So what we could do is actually link Nexus into that process and go look, Nexus will take the first 10 million of cover or something like that, and if something happens, then it injects a claim and then you don’t deep into the insurance fund until that happens, all you get out of the other way around. But you know, something like that, where you create this tailored product to to assist the protocols because it’s interesting, like a lot of those protocols will have the final backstop being are we meant more of the native token. And you do that at a point where if you’re doing it, it’s likely at a point where the token might be like a very low value because there’s obviously a serious issue of some description. And and so you kind of minting tokens at the worst possible time. And so you really kind of want to avoid that situation. And so hopefully, you know, Nexus could provide a some level of solution for for that type of thing.

Jamie Burke 34:57
Yeah, well, I’m thinking you know, just even with Outlier, we Over 30 startups a year at different levels of the stack, each issuing different degrees of risk. And, you know, this is the kind of thing that I would certainly be recommending all of them should be taking out in one way or the other in order to help them manage risk and give greater surety to users especially, you know, the closer to that the edge they are at innovation, I guess the higher the risk, and therefore the higher that Hi, their requirements. So I can imagine this becoming an expectation of not just institutional investors like venture capital, but increasingly with things like fair launch, maybe one of the considerations is that, you know, entities take out sufficient cover before they can launch. So let’s maybe continue in that theme about expanding where all this could go. So as you said, You’re you function like it are, but you’re not quite a dow, I’m assuming, if you’re not already doing so, you’ll be looking to leverage more and more Oracle’s with greater degrees of sophistication. And I don’t know if you’re also looking at turning insurance contracts into NF T’s that could effectively be resold in secondary markets even used as collateral and earning yield and stuff like that. So of all the innovations you see in web three, which do you think are going to be most relevant to this maturing insurance reinsurance market? On DeFi?

Hugh Karp 36:30
Yeah, I mean, there’s a, there’s a lot to there’s a lot of different angles here, I guess. The first one is like, we’re obviously looking to expand the product set and the different types of risks that we cover. That’s kind of step one. It’s interesting, there’s been a, on the NFT angle, there’s actually been why an integration with Nexus has actually effectively done that themselves. So they’ve turned the Nexus cover into an entity that can be traded sold, that you can buy and sell them one variable right now. So if that’s actually really quite cool. And so like, you know, we didn’t even do that. Andre built himself. So like, that’s, that’s been a, it’s been a really interesting thing. And it kind of, to me really shows the power of what web three can do. You can take stuff that you couldn’t tokenize before, and who knows what will happen. After that, like, I got to think what we’re doing things that seem intuitively like the next step, right? Or stuff that we’ve done before, just better from the regular financial world. But there’s, there’s going to be this whole class of stuff that we haven’t been able to do, that we now will be able to do, and we just haven’t quite got bear. Yeah. And that’s what kind of what really, I think fascinates me. And what I guess one of the things is, you know, you can tokenize anything in theory, and so how do you then compose all those together and do new products and new things that they’re actually quite like, fundamentally different to how the regular financial world operates. So I think insurance is like part of that, like, one thing we we have been talking about is once you can turn the cover into an NF T can actually been heard that. And it’s effectively into slices. And in create, like bundled tokens like so you have like a yield bearing token. And you create that together, combine it together with a with the part of the NFT, effectively, and you can create a yield bearing covered token that is just a new product that people can move around. But you don’t actually have to do anything other than just purchase a new token, and you’ve got the covered version. And so stuff like that is really crypto native that this stuff is just impossible to do in in any way in the regular financial world right now.

Jamie Burke 38:50
Yeah, I mean, on the one hand, history rhymes, but as you say, at the same time, you know, we’re moving into a weird and wonderful space. And because it’s a permissionless environment to innovate, and because of the composability, that the possibilities are almost limitless. And to be honest with you, I mean, I don’t know what your perspective is, but it’s easy to talk down on DeFi because of its imperfections, but it is it’s almost impossible to discount the industry and and where it’s gonna go because the rate of innovation, the efficiency that’s possible, and therefore the potential for yield to go direct to participants feels almost impossible for the incumbent industry to compete with, right. It’s just, I don’t know, what’s your perspective?

Hugh Karp 39:45
Yeah, I totally agree. I mean, the stuff that’s coming out, you know, weight is just phenomenal. And like, even if 90% plus of that fails, some of it will stick and some of it will work and and the speed with which you can Do a new financial product or experiment is just so much bigger, it’s like, if it takes you, it can take you two years or more to come up with a new financial product in the rich world. Whereas Hey, you can spin it up in, you know, a few days, if you’ve got some coding knowledge and just trial it at a really low level, and iterate on, and that has to lead to new things. And estimate, it’s just the speeds gonna, it will eat regular finance, in my opinion, it just, it’s just a matter of time. And so I think that that type of approach, I mean, you know, there’s obviously downsides to it, because you know, there can be scams and things that don’t work and experiments will fail and all the rest of it, but I think underlying the the fundamental principles are really powerful. And I believe that it’s just going to keep growing and be more successful.

Jamie Burke 40:52
Yeah, I mean, I think the net benefit, as you say, if you, if you, you know, subtract any of the malpractice that goes on, whilst the industry is relatively nascent, and then you look at the net benefit over the next decade. And because the fact that you can have greater assurances around auditability, and, and solvency everything else, all the things that ultimately regulators are there to make happen. It almost feels irresistible. And of course, insurance itself is an enabler for that innovation to happen as a way of managing that risk. Here, it’s been great having you on. I’m really excited to look at the possibilities of Nexus and as you say, how, how people then take what you’re doing and you know, apply it into wrap it up and apply it and many things and FTS and stuff it’s going to be fascinating to watch. So, thanks for coming on the show and good luck with everything.

Hugh Karp 41:49
Joe, thank you very much. It’s been great to chat.

Jamie Burke 41:53
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