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.
We explored what Defi insurance is, how it works, and the benefits for the digital assets.
Let’s first examine what attributes make DeFi so attractive so that we can understand why so much capital is invested in this space.
Decentralised finance, or DeFi for short, is a growing ecosystem of financial protocols and applications that are built on the Ethereum blockchain. By utilising Ethereum’s smart contract functionality, DeFi apps provide a wide range of financial services that are typically offered by traditional centralised institutions, such as banks, exchanges, and lending platforms.
One of the benefits of using DeFi apps is that they are often permissionless, meaning anyone can use them without having to go through a lengthy KYC (know your customer) process. This not only makes it easier for people to access financial services, but also opens up opportunities for those who are underserved by traditional financial institutions.
The Decentralised nature of DeFi is made possible through the use of smart contracts which are self-executing and do not require the involvement of a third party. Removing the need for intermediaries not only makes for a faster and more efficient process but also removes some significant costs that are charged by financial institutions. Transactions carried out in DeFi are transparent as data stored on the blockchain can be accessed and reviewed by anyone. DeFi also enables users to retain full control over their funds as they are stored on the Ethereum blockchain in a smart contract. The combination of these attributes explains why it is growing so rapidly in popularity not only with individual users but also mainstream financial institutions.
DeFi, however, is not immune to problems and whilst the attributes of blockchain make blockchain data inherently secure, the smart contracts which are commonly used to interact with the blockchain in decentralised applications, or dApps, can be vectors of attack for cybercriminals. Other vulnerabilities include bridges from one blockchain to another, as well as more traditional cybersecurity weaknesses including phishing links, website/application front end attacks, and social engineering scams that trick people into providing access to their accounts or wallets. Much media attention has been devoted to the theft of digital assets that have arisen from these weaknesses. Unlike traditional finance, where insurance is a precondition of business for most financial entities, in DeFi various constraints and challenges have meant that there are very low levels of adoption of insurance schemes to protect users and investors from incidents. This sets the backdrop for the need for a new approach in the field of DeFi insurance.
What Types of Digital Assets Are There and What Type of Risks Do They Have?#
Broadly speaking, there are two types of digital asset in the blockchain industry:
1. Cryptocurrencies: These are digital assets that utilise cryptography to secure their transactions and to control the creation of new units. Bitcoin, Ethereum, Litecoin, and Monero are all examples of cryptocurrencies.
2. Tokens: These are digital assets that are issued on top of existing blockchain platforms. They typically have a specific purpose or use case within the platform they were created for. An example of tokens includes Neptune Mutual’s NPM ERC-20 token that will, when launched, be issued on the Ethereum blockchain.
Digital assets come in many forms, from cryptocurrencies to NFTs. They each have their own unique risks that need to be considered when selecting an insurance policy. Cryptocurrencies are susceptible to price volatility, hacking, and scams. Lending platforms can be at risk of default or fraud, and algorithmic stablecoins, as we know, run the risk of depegging from the fiat currency they are supposed to be tied to. It's important to select an insurance policy that covers the specific risks of the digital asset you're looking to insure, and it is particularly important to understand what type of insurance you are taking out so that you understand the risks of delay in terms of receiving a payout, and more particularly the risks you run of not receiving any payout whatsoever (read below the paragraph on The Problems of DeFi insurance).
Digital assets are often stored in wallets that are connected to the Internet. This makes them vulnerable to hacking and other cyber crimes. In addition, many digital assets are traded on decentralised exchanges that are also built on the Ethereum blockchain. These exchanges are often less secure than traditional centralised exchanges, making them more susceptible to hacks.
As a result, it’s important to have some form of insurance in place to protect your digital assets from loss or theft.
A traditional insurance company works by pooling together premiums from many different customers and investing this money in a variety of assets. The income generated from these investments is then used to pay out claims made by policyholders.
One problem with this model is that it is very centralised, meaning that there are a lot of middlemen involved who take a cut of the premiums and the claims. This not only makes the process expensive, but also slow and bureaucratic. In addition, the traditional insurance model focuses on individuals proving that they have suffered a loss that is covered by the policy and this doesn’t fit well with the DeFi environment in which many users are anonymous, and more particularly events can impact many thousands of people all at the same time, creating a huge and lengthy backlog of work for claims assessors. We will also review an approach called discretionary insurance which is being used by a number of entities to provide protection policies to DeFi users.
An insurance mutual is a type of organisation that is owned by its policyholders. This means that the profits generated by the mutual are distributed back to the policyholders in the form of dividends. One of the advantages of an insurance mutual is that they are typically more aligned with the interests of their policyholders than traditional insurance companies. This is because traditional insurance companies are typically owned by shareholders who are looking for a return on their investment, whereas policyholders are the sole owners of an insurance mutual. In the case of DeFi insurance mutuals it is important to understand who is bearing the underwriting risks and who shares the returns or losses in the event of claims on the underwriting capital.
Discretionary insurance is a type of insurance that pays out based on the discretion of the insurer loss assessors. This means that the insurer will decide whether or not to pay out based on their own discretion, as opposed to a legal obligation based on the insurance policy contract.
Parametric insurance is a type of insurance that pays out based on predefined parameters. This means that the payout is not at the discretion of the insurer, but is instead determined by whether the incident conforms to the parameters set out in the cover policy.
In the following blog we highlight a number of challenges facing implementation of insurance solutions in the DeFi space including:
The mismatch in understanding between the policyholder and the insurer as to the scope of the policy
How do insurance protocols deal with scalability i.e. how efficient, rapid and reliable is the individual loss assessment process when say 50,000 users suffer a loss at the same time.
We also cover the design principles used by Neptune Mutual in order to solve these problems and create a low risk, reliable and scalable protection solution. Read the full articles here: Understanding insurance protocol design
The challenges of DeFi insurance are not limited to cover policy holders, but also extend to liquidity providers that invest underwriting capital. Three of these less well-known problems were described in our blog about understanding underwriting capital, namely:
Problem 1: Indefinite Lock-ins Problem 2: Open-ended risk pools Problem 3: Loyal token holders suffer from incidents.
Again, if you are interested in learning more about becoming an LP then you might to read further about these issues: Understanding Underwriting Capital
The first step in getting started with DeFi insurance is to understand the nature of the risks your digital assets are exposed to. This forms the starting point from which you can research how best to mitigate these risks. As we have seen, there are different types of insurance protocols and not only are their protection mechanisms quite different, but they also vary quite significantly in terms of the risks that they cover, so you will need to do some research about the different insurance protocols in the market. A good place to start for this is the list of insurance protocols, and the corresponding TVL (total value locked) provided by DefLlama: https://defillama.com/protocols/Insurance
The second step is to research insurance protocols and understand their differences and how they operate. At Neptune Mutual we are developing a set of resources in different media forms and channels to help the community understand the risks and solutions being proposed to mitigate these risks. Joining a community interested in security and digital asset protection may be a good starting point, and at Neptune Mutual we have active Discord, Telegram and Twitter communities.
We also have YouTube tutorials that explain how to use the Neptune Mutual parametric cover pool marketplace that is available for anyone to try out and use for free on one of the blockchain testnets.
Finally, we regularly produce and publish content to the blog section of our website. In terms of discovering DeFi insurance, you might be interested in: Parametric protection: covering the basics
Are you worried about the safety of your digital assets?
If so, find out more about what we at Neptune Mutual have to offer with the parametric cover policies available within our marketplace that provide protection against hacks and exploits.
The dedicated cover pools offer guaranteed payouts in the event that an incident is validated as we believe users are looking for policies that they can rely on when problems arise.
Join our Twitter and Discord communities to learn more about Neptune Mutual and our parametric insurance policies.
