After much deliberation and careful thought Neptune Mutual decided to close the cover marketplaces.
After much deliberation and careful thought Neptune Mutual decided to close the cover marketplaces. Below the reasons for the decision as well as what it means for the community.
The marketplaces will be closed using an emergency withdrawal process whereby the liquidity provided to cover pools by LPs will be returned to the wallet addresses from which the liquidity was supplied. In addition to protecting cover pool LPs, there will also be refunds to all cover policy purchasers with an existing and valid policy who have paid over 10 USD in policy fees in one transaction.
For veNPM holders, please fill out this form to receive a refund for your veNPM to NPM conversion penalty.
From the end of June there will no longer be NPM emission incentives for LPs i.e. Epoch 3 of the liquidity gauge emissions will be canceled.
Unused funds raised from financial backers will be returned to those backers; this includes DEX liquidity that has now been removed from SushiSwap and Uniswap. A small amount of liquidity on SushiSwap Arbitrum has been left to enable a minimum amount of NPM trading.
The protocol will be open sourced, and become a true public good. Enabling the community to fork the code developed by the Neptune Mutual team such that others might use the existing resources to further our mission to make the blockchain space better protected against smart contracts and other risks.
There are numerous factors that have led to this difficult decision, some of which are external factors which are uncontrollable or unforeseeable. A few factors summarized below:
“Given Neptune Mutual’s Tier 1 backers, why have you not listed on a top CEX?”
This is perhaps one of the most frequently asked questions. In short, the answer is that for a variety of reasons Neptune Mutual was not able to achieve the diverse set of performance metrics (community size and engagement, marketplace user activity, DEX 24 hour trading volume, TVL growth etc.) required to list on top tier CEX. The CEXs that are prepared to list NPM token do not have the depth of liquidity or breadth of user-base to offer good prospects for NPM tokenholders.
“Why has Neptune Mutual not achieved strong growth?”
It is tempting to take a shortcut to answer this question by pointing a finger at one specific factor, but the reality is that there are many contributing factors. A few summarized below:
Since the outset of engaging with the community we have endeavored to highlight the need for DeFiInsurance; Neptune Mutual built a comprehensive dataset of on-chain hacks available, anywhere, and each week we highlight the many millions of dollars that are stolen as a result of smart contract hacks. Despite this, we have consistently been confronted by projects unwilling to spin up cover pools in our marketplace because of the sentiment that audits of their code are sufficient to persuade their community that their protocol is safe. Less than 0.3% of all digital assets are protected with some form of DeFiInsurance, and yet despite all the media reports of hacks, the conference discussions about the importance of governance or CEX proof-of-reserves, it continues to be the case that it is extremely difficult to get media attention to focus on the need for a fast and efficient means of mitigating smart contract risk.
A variety of approaches have been taken by different DeFiInsurance protocols to address this, from attending multiple conferences throughout the year and significant marketing spend, to the leaner approach that Neptune Mutual took (in part as a result of the bear market in 2023). What can be said is that no DeFiInsurance protocol has managed to achieve significant growth over the last 18 months, sadly the overall TVL of the sector has shrunk a lot.
For all the reasons above, at this moment the best course of action is no longer to double-down on investing in growth, but rather to refund unused capital and close the marketplaces.
The consequences are very tough for the Neptune Mutual team who have spent the past 3 years of their time on the mission to facilitate safer environments within DeFi. The team has delivered products according to the roadmap and the fact that the protocol was never hacked, despite attempts being made on the darkweb, is testament to the expertise, passion and absolute focus on security. The team survived the FTX and UST crisis unscathed, and believed that the continued growth in hacks would lead to growth in the demand for a good solution to mitigate these risks, but sadly, as can be seen right across the DeFiInsurance category, this is not yet in sight. So we would like to thank the team for all the dedication, skill and passion invested into the Neptune Mutual project since the outset.
The team will open source the protocol, including blockchain indexing protocol (subgraph alternative), frontend, middleware, database, and backend code, to make it a true public good. This will allow anyone to fork the code and create covers by defining parameters and premium ranges, potentially leading to innovative covers and organic usage.
The Discord channel will be closed to reduce the risk of phishing and other types of cyber attack, any questions / queries will be responded to in the Telegram channel.
We want to take this final opportunity to thank you all for your support.
Neptune Mutual will contact only its financial backers, with whom a signed agreement exists, in relation to next steps (i.e. holding NPM tokens does not qualify you for any form of refund). Contact will be made only from a neptunemutual.com domain email address so please check the source of any email you may receive very carefully. Please ignore any messages from any other email or social media accounts in relation to token/cash refunds.
Understanding the basics of parametric cover protection and it's major benefits.
The crypto market is often volatile. This means delays that get compensated for losses can be highly problematic. A challenge traditional insurance models are struggling to surpass.
Protocol parametric protection offers a simpler alternative with defined terms and wider coverage. More importantly, it is versatile and flexible enough to accommodate changes in an evolving digital assets market.
Blockchain-based digital assets are transforming how financial markets operate and how users all over the globe interact with financial systems. And what a wild ride it has been. From zero market value less than 15 years ago to a total value estimated at over $3 trillion in 2022.
However, this growth has been accompanied by a corresponding increase in risks. Cyberattacks and data breaches worth billions of dollars in the digital assets space strike fear in the hearts of market participants and stakeholders.
Decentralised protocol cover might provide the necessary safety net that investors and stakeholders need to protect their digital assets and transact with more confidence.
But first, what are these digital assets worth protecting?
The digital assets market and underlying blockchain technologies are evolving rapidly; this makes it difficult to establish a precise definition and categorisation of digital assets. Given the rate at which the market changes it doesn’t take long before definitions become out-of-date.
As it stands, the simplest way to describe digital assets is that they represent value in digital form. From a regulatory standpoint, the Swiss Financial Market Supervisory Authority (FINMA)focuses on the economic function and purpose when defining digital assets. It also classifies tokens in terms of three primary categories:
Payment tokens — These assets are driven by market demand and supply. Examples include Bitcoin, Ether, Litecoin, Dash, and Bitcoin Cash.
Utility tokens — These assets are unique to their respective ecosystems. They allow users to perform certain actions or gain digital access within a specific network. Examples include ChainLink (Link), and Basic Attention Token (BAT).
Asset/security tokens — These tokens represent digital claims on a physical asset and are therefore backed by that asset. In terms of function, they are comparable in certain respects, to real-world assets such as equities, bonds, or derivatives.
What Digital Assets Are Most Targeted by Cyber Criminals?#
All categories of digital assets are subject to risk. In addition to the risk of targeted hacks and data breaches, the market is inherently volatile, which presents its own set of risks. There are also risks in terms of custody, technology flaws, asset valuation, and regulatory change, amongst others.
However, based on how much has been lost so far, DeFi digital assets have proven to be the most targeted over recent years:
Despite their swift growth and mass adoption, DeFi projects are among the most hacked blockchain protocols in recent times. In 2021 alone, the total value locked (TVL) in DeFi projects rose from around $18.2 billion to well over $243 billion. But in the same period, over $1.3 billion was lost to criminals, according to CoinDesk.
In a related analysis, DeFi project hacks are reported to account for around 76% of major hacks in 2021.
Crypto markets have been flourishing since Bitcoin made its debut in 2009. Following Bitcoin’s halving in 2020 the cryptocurrency’s total market capitalisation grew by over 59% over the course of 2021, and other cryptocurrencies recorded even more impressive gains.
However, where there’s money, you can expect that there will be people trying to steal it. In a recent report by Business Insider, hackers made away with over $4 billion in cryptocurrencies in 2021, which is almost three times what was lost the year before.
Even though NFTs and Metaverse projects are relatively new, hackers have wasted no time in exploiting vulnerabilities and carting away millions of dollars. In February 2022, the world’s largest NFT marketplace, OpenSea was hit by a phishing attack that saw users lose NFTs worth over $1.7 million. One month later, an attack on the Ronin bridge system for the popular NFT-based game, Axie Infinity, lost over $600 million following a network breach.
The reality for digital asset owners is that nothing is 100% secure. Even if they adhere to all the security best practices, other risk elements, such as code exploits, flash loan attacks, human error, and rug pulls, remain ever-present.
Cover protection can become a crucial factor in mitigating these risks and facilitating an environment where market participants can initiate transactions more confidently. But while traditional insurance has been pivotal in improving risk management and operational efficiencies in finance, progress has been slow when it comes to protection for blockchain-based assets.
In part, this is due to the different nature of digital assets and the ecosystem within which they fit. Peer-to-peer digital asset transactions in reality often take place wallet-to-wallet where there is no information available about either party, and this obviously doesn’t work well in a traditional insurance model context where you need to prove your identity, your ownership of an asset, and prove that the loss of you have suffered conforms with the terms of your policy.
This leads to another issue relating to the blockchain ecosystem and digital assets which is that frequently the digital assets and the risks they are exposed to are highly technical, and equally importantly the exclusions that relate to policies are also highly technical. It can often be far from clear to policyholders what risks their policy protects them against, and what it does not. This can lead to situations where users pay for policies and expect to receive a payout as a result of a hack or exploit, only to find that the specific technical nature of the exploit was excluded from their policy.
This lack of clarity about what policies cover has accelerated the need for a new approach, namely, parametric cover.
From the name alone, it’s easy to get a general idea of what parametric cover is all about. It’s a type of policy that provides a financial payout conditional on a set of parameters that define the risk events that the policy protects against. When these predefined parameters are met, the policyholder automatically receives a predefined payout.
Because payouts are tied to predefined parameters being met, the insurance policy is disconnected from an underlying asset, as well as any damage or losses sustained on that asset. In other words, instead of trying to quantify losses to determine whether a payout should be released and how much, the insurer only needs confirmation that the event leading to the loss indeed occurred, in order to make the agreed-upon monetary payment.
Parametric coverage offers many benefits, including:
Replaces subjectivity (discretion) with objectivity (parameters) — Coverage is based on objective, agreed-upon parametric triggers. The event that triggers the payout either happened or not. Furthermore, and importantly, it is the event that is assessed, not individuals’ losses; this makes the payout process more predictable and reliable.
Quicker payouts — Claims payouts, and the rules for releasing them, are predetermined. This allows for policyholders to be paid within days of a validated incident, instead of weeks or months.
Elimination of the claim adjustment process — With parametric cover there’s no claims assessment process for individual policyholders, so no need for an adjuster to investigate countless claims using a discretionary approach and often, questionable outcomes.
Protocol Parametric Protection with Neptune Mutual#
The Neptune Mutual ecosystem is built on four founding principles — security, scalability, risk minimisation, and user experience. Together, they create a conducive environment for stakeholders to facilitate the exchange of value within the system.
Under the Neptune Mutual ecosystem, cover creators can generate parametric-based cover protocols with guaranteed stable coin liquidity to cover losses resulting from specific hacks or smart contract vulnerabilities.
By providing liquidity into cover pools these stakeholders earn a variety of income and rewards. Income from the protocol includes cover policyholder fees, flash loan interests, and lending incomes arising from loans of “excess” capital within the pool. Other rewards for liquidity providers can come in the form of staking rewards, native project tokens, and discounted NPM tokens.
These stakeholders are integral to incident governance and reporting. Using a fair, transparent, and efficient system, NPM token holders vote to confirm whether a triggering incident occurred or not. The resolution is made within 7 days of the incident.
Anyone can become a policyholder by connecting their wallet to the platform, navigating to a cover pool, selecting the cover amount and duration, and confirming the transaction.
If an incident occurs that appears to fall within the scope of the cover parameters, it will be reported and be subject to the community incident validation process that determines whether or not a cover pool should payout or not.
If a cover incident is validated by the community then a payout to ALL policyholders of that cover pool is guaranteed.
Once the incident report process is initiated, withdrawal of liquidity from the cover pool is automatically suspended. The rules of the protocol are such that there is always more liquidity available in the cover pool than the total liability underwritten by cover policyholders’ payout; this ensures that there will always be sufficient funds in the pool to cover all valid claims.
Cover creators can set up new dedicated cover pools by staking NPM tokens, the fixed and deflationary native token of the Neptune Mutual ecosystem.
The minimum stake required to initiate the cover creation process is 4,000 NPM tokens. The more NPM tokens staked by the cover creator, the better the cover pool’s ranking and visibility on the Neptune Mutual product list.
The cover creation process itself is straightforward and can be broken down into three simple steps:
What are the parameters of the risks that the cover will protect against? What are the exclusions to those parameters? Generally speaking, the fewer and more specific the parameters, the better. The parameters also need to be binary, that is to say, either true or false. Exclusions should be kept to a minimum and typically include: deliberate and malicious actions by the project team; or, acts of gross negligence on the part of the project team.
Let’s say a cover creator wants to create a parametric cover pool for their DeFi lending platform. They might include a parameter that states that if a smart contract code is hacked and the amount lost is over $10 million. If any of these parameters are fulfilled, the incident resolution and payout process are automatically triggered.
Price the Cover
This involves setting up a pricing spreadsheet containing a number of variables that influence policy pricing offered by the cover pool. Examples of these factors include floor and ceiling price, cover commitment, and reassurance pool support, just to name a few.
Many cover creators that are confident in the security of their projects will want to provide confidence to liquidity providers through a reassurance mechanism. This is one in which a reassurance pool that is financed by the cover creator is used to recapitalise the liquidity of the cover pool (up to a certain percentage) in the event that a validated incident arises causing liquidity to be drained from the pool. It is provided by cover creators to provide a layer of protection to the capital provided by liquidity providers.
The cover pool will require enough liquidity to get it started. There are different ways to go about this. Usually, cover creators will invest their own capital to kickstart the process of attracting liquidity. They will also attract liquidity providers through the use of the numerous features available on the platform, including staking and proof-of-deposit (POD) staking programs, and so on.
Neptune Mutual and cover creators will work closely together to communicate the value of parametric protection to their respective communities. Putting in place a solution that can rapidly provide a payout in the event of a hack or exploit demonstrates a mature and considered approach to risk management as well as a sensible and respectful way of looking after the interests of a community.
Neptune Mutual recently launched its protocol testnet on the Polygon network. Users can sign up to test various functions of the ecosystem, including validating incident reports and claiming cover policy payouts.
