This interview is part of our new Blockchain In Insurance series, where we interview the world's leading thought leaders on the front lines of the intersections between blockchain and insurance.
In this interview we speak with Hugh Karp, Founder of Nexus Mutual, to understand how his company is using blockchain to transform the insurance business, and what the future of the industry holds.
1. What’s the story behind Nexus Mutual? Why and how did you begin?
HK: I went down the bitcoin rabbit hole in 2011 and became fascinated by the technology, primarily the way it enabled financial interactions directly between people. When Ethereum came along I saw an opportunity to apply the technology to my area of expertise, the insurance world. Insurance is simply a community coming together to share risk, it started thousands of years ago, and we now have a new technology that can take insurance back to its roots and allow people to coordinate directly for the benefit of each other. We don’t need the insurance company anymore.
What really motivated me was the potential to provide coverage for people who couldn’t access it easily. Those whose daily lives were really dependent on it. I travelled through Peru in 2010 and saw the devastation earthquakes can cause. While insurance can’t fix everything, it can certainly help families get back on their feet much quicker.
2. Please describe your use case and how Nexus Mutual uses blockchain:
HK: We will get back to earthquake covers in the future but our initial use case is focused on the Ethereum community, and will be Smart Contract Cover. A claims pay-out will be provided in the event of a hack or bug in smart contract code. Think of events like The DAO hack or the Parity multi-sig wallet issues as events that will be covered.
Unfortunately, the regular insurance industry won’t provide cover for this risk currently, so we as a community need to come together and help each other, and our platform provides a way of doing this.
Our primary use of blockchain is to ensure the common pool of funds is not controlled by any one individual. It is held in the smart contracts instead, and this means the funds can only be used under certain conditions. Like Members voting to approve a claim. This is quite different to a regular insurance company where funds are held in back accounts and layer upon layer of regulation and law is required to ensure the funds are used appropriately. In summary, we are like a DAO, but we’re calling ourselves a digital cooperative as we also have a legal company in the UK.
3. Could you share a specific customer/user that benefits from what you offer? What has your service done for them?
HK: There a two main groups, firstly projects who are building a DApp and plan to deploy smart contract code. They will be able to purchase cover and if something goes wrong receive a claim payout which could be used to refund users as an example. These projects can be building literally anything, but a couple of obvious use cases would be DeFi projects that lock assets in smart contracts, smart contract based wallets or DAO’s that hold funds. Also, we’re seeing quite a lot of interest from enterprises that are operating in more regulated environments and therefore require some form of insurance for all aspects of their operations. This could be things like STO’s or supply chain processes that use public Ethereum.
The second group are individual Ethereum users, especially those interested in DeFi or Open Finance. If you are locking funds in smart contracts like MakerDAO CPD or Compound etc then there is a risk these smart contracts could fail, and now you will be able to protect yourself against that risk.
4. What other blockchain insurance use cases are you excited about?
HK: I love Etherisc’s Hurricane Guard and crop insurance for farmer’s in Sri Lanka, these are real solutions helping real people, and I believe parametric based insurance has a lot of potential with blockchain. The challenge is always the regulatory environment and the restrictions it imposes. Hopefully, we can work together and demonstrate the real-world potential of the solutions blockchain can enable and start breaking down some regulatory barriers which are well intentioned but may now be unnecessary.
For us, I’m really excited about expanding our range of crypto based risks initially, for example recoverable crypto wallet cover and we’re also looking into covering slashing risk in proof-of-stake networks. The crypto market has lots of risks that the regular insurance industry won’t touch for a while yet, so we have to do it ourselves and come up with community-based solutions.
Another big one is centralised exchange hacks. In my mind there is a clear opportunity to set-up a specialised mutual where exchanges can pool risk, the wider crypto community would certainly benefit from cover like this.
5. Where will Nexus Mutual be in five years?
HK: Well, on our way to competing with the large insurance companies around the globe, that’s our goal. More concretely, we aim to have grown into a sizable crypto community who are sharing crypto risks with each other, and also beginning to make in-roads into more regular products like earthquake and hurricane risk.
More broadly, regulators and policy makers will have started to take notice and we will be working with them to enable more community or cooperative based solutions for end customers. In the end, we believe the cooperative model of insurance is better for everyone as it aligns interests more effectively. So with any luck, we’ll be helping push that agenda more widely for the benefit of individuals rather than just shareholders.