31 - Nexus Mutual to Billions | Hugh Karp

welcome to bankless where we explore the frontier internet money and internet finance this is how to get started how to get better and how to front run the opportunity this is ryan sean adams i'm here with david hoffman and we're here to help you become more bankless david how you doing after this epic episode just fantastic ryan we brought on hugh carp from the nexus mutual project nexus mutual and insurance on on d5 insurance on ethereum it's one of those things

that you know when i first saw it i was like you know what that's that's never going to work in my bear market mind i was like that's never going to work like you can't do insurance on defy and you know shame on me for being a bear market pessimist but now that now that the bull market is here and and looking deeper into nexus mutual it just makes so much sense like if you wanted to just like take the the institution of insurance and make a d5 version of it what you get is nexus right and so tip of the hat for hugh for

for building something throughout the bear market blood sweat and tears to to build something that he's passionate about that he really understands and then have it come to absolute success over the last few months as the need for insurance on d5 has absolutely exploded you know this has become a basically a trilogy with our d5 builders right these are the bear market builders so at one point during our conversation with hugh he said something that like surprised me i i didn't know but they almost shut down in 2019 like

hugh almost stopped working on nexus mutual because he and his team had it he had to do layoffs and it didn't seem like it was going to work out um i'm glad he didn't because now here we are in 2020 and we have a protocol with 230 million in insurance coverage in the d5 market so necessary glad he was uh i guess he persevered through that with

his team and kept on building and i think that's a that's a hallmark of the last three guests that we've had on the show these d5 builders uh they didn't quit you know they kept going they had the vision even when no one believed in ethereum no one believed in d5 and i think that's what makes these projects really special um i think nowadays with the d5 bull market and the crypto bull market starting to heat up again we're starting to see a lot of uh

fair weather builders coming to the space you know maybe more the tourist crowd and we'll have to see how many of them stick around and stay how many of them have the quality of these bear market builders and who are able to stick it out and build something lasting or are they just here for the gains so really enjoyed the last uh three episodes in in this series it's been a lot of fun and um you know these are these are the protocols to pay attention to there's also something unique here with

nexus mutual that's different from our previous episodes with synthetics and with ave right so you know nexus and insurance needs defy or something like it to exist in order to have product market fit right and you know while kane expressed you know his apprehensions and his tests of faith during the 2018 bear market and stani from ave said the same thing they didn't it didn't really hit me as hard as when hugh said some of the

things that he said in this podcast right like hugh even went so far to pull out a personal loan to make sure that that nexus mutual would survive and the thing is like nexus mutual could have done exactly what it had needed to have done like gone down the exact same phases of the road map built the same exact things but if it wasn't for other products like synthetics like ave like chain link like maker dow like compound then synthetics wouldn't have anything to have ensured right and so

part of this uh this ecosystem is composability and not only did nexus need to make it through the bear market but other projects also needed to have made it through the bear market too in order for nexus to be able to insure them and grow into success later and that's one of my favorite takeaways i think from this podcast is specifically the construction of nexus and how its token model is linked to upside in the nexus system in ways that tokens like the lend token is not so incredibly codified to upside in

ave and how the snx token isn't so explicitly linked to upside in synthetics the nxm token has this one-to-one relationship with usage of nexus and therefore nexus needs other applications to ensure so nexus can almost like say like typically they have to hue but nexus can also say thank you to synthetics and and ave and and all these other projects for also making it through the bear market so that it has other protocols to ensure

absolutely the ecosystem grows together and it also you know dies together if if that's the case but right now it is growing it is growing fast and this is a new money lego added to the stack the insurance money lego hey david one other thing so listeners you guys are hearing this on a monday so this episode is being published on on that day but we're also putting together a special bonus episode for you guys this week so that will be published on the podcast david what's

our bonus episode you want to tease that a little bit yam speaks yam speak the original vegetable the original vegetable farm is finally coming out and talking okay the the media embargo is over uh i i didn't know everyone who put the the yam farm together but i did know will and i did know dan and so as soon as the yam farm came together i messaged them and said hey like we want you on the podcast yeah we got to get you guys on the podcast

and uh you know in an abundance of caution and not wanting to appear as like the figureheads of the of the protocol which totally fair take uh they said that there is a media embargo that embargo ends on the podcast on the bankless youtube yam speaks wow i want to hear i want to hear what they say because uh this week is the replanting week where emv3 is coming out and i'm pretty shocked that they put it together so quickly after all of the issues that uh that it had in the in the first version

pretty phenomenal i'm really looking forward to hearing what they have to say hearing uh the original vegetable token actually uh speak for itself so yeah really looking forward to this one so stay tuned all right so we're gonna go ahead and get right into the interview with hugh of nexus mutual but first we're going to talk about some of the fantastic sponsors that make the bankless nation possible one of the tools i've started to use recently is zapper for those of you that were part of the 2017 bull market it was characterized by just opening up block folio and refreshing it over and over

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all right guys let's go ahead and get right into the episode with hugh carp of nexus mutual bankless nation we are so excited to have hugh carp he is the founder of nexus mutual he is the father of smart contract insurance he's an actuary with over two decades of experience nexus mutual the protocol has brought over 230 million in contract cover to the space hugh how

are you doing welcome to the nation thank you yeah great to be here guys all right hey first question is d5 safe yet no i don't think so i think we're at the early days um we're getting there in the right direction but um definitely a little way to go in my opinion so like what percentage are we like are we one percent are we 10 are we 30 percent yeah maybe five um i think i think we're starting to focus on the right stuff like um but we definitely have a long way to go education and uh you know stuff that we're doing stuff

that other people are doing more open information that people can easily access um that's more readily available that type of stuff um we'll get there we'll get there we want to understand a bit more about nexus and how you are helping defy get there but could we start with some background because i think you have a fascinating background we've had some other uh crypto native d5 founders on the podcast lately this has been sort of a trilogy for us and and uh you're the conclusion hugh but you're the only one that we've met and that we've had on that has a ton

of real world i guess almost like traditional experience like you were uh in the insurance industry the traditional insurance industry as an actuary for almost two decades can you tell us about that and how you stumbled upon this whole defy crypto thing and decided to start something here yeah so yeah i've been working in traditional insurance for a while um 10 years in australia and then um quite a bit of time in in london in the uk um so

yeah i think um i've always been fascinated by ways of like doing things a bit differently and stuff um i guess um i stumbled i stumbled across bitcoin like many other people did um quite quite a while ago um and oh it really fascinated me that you could do something where like i could send money to you and there was no one else in the middle and like i just could just do that um i didn't really know how it worked from a tech point of view but i found it really fascinating um and then and then after

um i put it down i investigated for a while but i put it down um but then i heard about ethereum a bit after it launched um and that's kind of i guess that's what really triggered it for me because if you can you know write an if then statement then you can kind of write an insurance contract and that was my area of expertise and i was really fascinated by this way of coordinating people or a community together um like directly um because actually that's that's really what um

insurance is all about um like if you go if you go back like millennia like um it's it's just about a group of people um coming together and sharing risk like you know you had like people um like one of the big examples i guess is chinese river merchants like way back um they used to like share the load of um of their goods um in different boats instead of one of them um capsized or whatever they lost their load then they don't lose part of their own um cargo and so they were all kind of more

resilient as a whole and so that's kind of like how insurance started like a group of community coming together and showing risk and it's evolved from there and went through many iterations and things but um but it's and it's now transformed into a shareholder company predominantly um rather than the kind of mutual community aspect and i guess our real um goal or vision here is that you can really do it better if you can use that community approach but now we can have this new tech that could really scale that direct community

peer-to-peer approach um so that's kind of like at a very high level from what we're trying to do want to get into some of the just the history of insurance as as you were you're going down that path you but like just one more i guess question on this it's a curiosity point for me so what about crypto first drew you in was it some sort of a you know a hobby or an interest or a you know way that you were brought up we talked to kane from synthetics and he has sort of a a crypto anarchist type of background we

talked to stani from ave and he was a tinkerer uh you know his brother uh dabbled in linux uh when they were younger and growing up so he came from a tech background what about your background drew you immediately to bitcoin that first spark of interest and then later ethereum i guess i've always been interested in tech stuff though i haven't done like i have done coding in the past but i'm not a i'm not like a coder or a techie heavily um i'm yeah more kind of on the actuarial side of things um which

is more like stats and economics type stuff um i guess i guess a couple of things i've always been interested in tech kind of off to the side but yeah not a massive kind of tinkerer i guess that i guess the aspect to me that perhaps sparked it more was the kind of philosophy and principles behind it my um my dad actually well he's retired now but he used to be um he worked in the insurance industry for a long time as well um but he used to be a uh one of the regulators of the australian um insurance industry and um that perhaps

sounds a bit odd but um but the point is that it's always they've always got the the customer focus here and the the individual focus um making sure that it's done right by um the people and protecting them and so it's kind of like i kind of got a bit jaded by the insurance industry as such because um you felt like you were just shifting big money around balance sheets rather than actually focusing on the end customer and here was a technology that you could actually like really just put in the people's

hands um and so i guess that's kind of where it's come from so it's more from a philosophical point of view rather than a kind of really tech trigger so when did ethereum come into the picture yeah so um i guess basically um it was pretty much a year after they launched i guess early 2016 um i guess the light bulb moment i mean i was kind of i was interested in space kind of dive back into the stuff there but the light bulb moment for me was seeing the day i'll be drained live um and i thought oh hey here we go

um this this this needs we need to do something here we can't we can't just let that stuff happen um i mean you know hard fork or new hard fork whatever you know that's a different discussion but like the if if people are going to adopt this thing we needed to address those types of issues a lot of people couldn't see past the dow at the time though they thought that would be the fall of ethereum and that it would never work i guess you were able to see past to a world where we can have lower risk smart contracts yeah i mean i guess i guess so i mean there was definitely a stage there when

everyone thought oh it's you know it's not i'm not going too far from here but i mean i i still fundamentally thought that the tech was like doing something incredibly new that no one else had done before and so to me that had to evolve and and progress from there so when you grew to understand ethereum and the concept of a smart contract did the light bulb immediately go off as with the marriage between smart contracts and insurance or how long did that take to make that connection

well um not too long because um a lot of people were just always talking about insurance as like a very natural use case for for blockchain like from the really early days um it's you know it's a financial product um it's about bringing a bunch of people together it's effectively a dao so it like all of the stuff people were talking about um were kind of it fit very naturally um so it didn't take me long and i and to kind of work out that you know there is something here i need to dive in and

work out how to do it um and so yeah i guess i started that process so hugh let's go into that a little bit more why is it so obvious for people that insurance and smart contracts are just like this match made in heaven um well in my mind it's basically this fact that insurance is all about risk sharing between people and creating a community that is more resilient as a whole because it can more able to take on risk or downside as a group than you can as an individual and

and so if you have this technology that can coordinate people um then then you you kind of like can superjudge this whole thing and so to kind of make that work what you need to do is have um essentially you know a pool of funds and a an incentive mechanism to kind of make sure that people do the right thing with that pool of funds and and so um it's sort of very early like you can coordinate a group of people and a pool of funds really easy like you know the kind of the dow was like a good example of that potentially working really well

um and and then if you can put that right incentive mechanism on the top with you know tokens or whatever it is um then that that forms the genesis of the whole of the whole thing um obviously there's a whole bunch of details to work through and how do you make those mechanics work and the incentives aligned and all the rest of it but fundamentally if you can get those two things to work then that's really what insurance is so it seems to be that with nexus and building insurance on on quote unquote on the blockchain that you know you're not

disrupting anything in the same way that like maker dao is perhaps disrupting central banks or you know unit swap is disrupting centralized exchanges it really seems to be that when you build something like insurance on using smart contracts that you're just building this age old primitive on this new substrate does that resonate with you i mean it does to a certain extent but you can also do a whole lot more um and i kind of think that puts it in the kind of disruptive category really

um i mean you can you can strip out massive layers of cost i mean one of the one of the key things here is that you can actually get a better um outcome for the customers because you have you no longer need that shareholder-based entity that has a potential conflict of interest um and you have a much reduced level of conflict between the members of the mutual because they're all the members and they can all be working together there always will always be some level of conflict but you don't have that natural just are we

going to pay this claim or not because you know that's a shareholder profit versus paying a claim um you know and that's largely handled by regulation right now obviously but um we just think that there's a much better way and if you can coordinate this on a community basis you're going to have much more flexibility so we definitely want to dive into nexus and how it does some of the of the things you just mentioned but i think it would be helpful both for our listeners and for me is if we could get a quick history lesson of insurance and mutual funds and i've

listened to a few of your talks and you kind of give a nice like account of how insurance came to be so like to the best of your ability can you kind of give us like the early early instances of how insurance came to be in this world yeah sure i'll just pick a few like different points and then we can you know that kind of tells a bit the bull wider story but um yeah so you kind of have these really like small community stuff to start with you know like ancient history type stuff where you know that those chinese river merchants saw um a different community over here

that would pull together and you know if someone um one of the like workers died then the rest of the family would get looked after because the elders had some um funds or whatever to look after things and you know it didn't necessarily start as monetary based but um but you know you get food for them or whatever um and so that's kind of like it really started in that local community side of things then then you kind of move into like i guess a bit more advanced when you had a lot of it comes from shipping um and so first kind of like insurance contracts

that are closer to modern day stuff um is when you had like um loan contracts or something where you go um here's a merchant that's going to deliver a whole bunch of goods to the other side of the world um and you've got some backers who will give them a loan um to do that and they would share in the profits um assuming it went well but if it didn't um and the ship was lost at sea or whatever then they'd write off the loan and so that's kind of an early form of insurance and that kind of started with like um here the shipping people here

are a few merchants that are got some more money and you know it kind of started a very small community level and then what tends to happen it gets institutionalized um and so you put like standard structures in place um there's a there's a bigger group of financial backers that come in um rules start getting set up and it becomes more standardized and you can have a big market type happens and that's kind of how like the shipping industry started and you know that's kind of a lot of where insurance has really come from so i guess the other thread going

through all of this is that they generally have started new um markets or new industries um where insurance like it's kind of needed generally starts with the community first um and so you you like the regular industry is not there or doesn't exist so the people that need the cover just band together themselves to do it um and so then and then it progresses into a more regular industry stuff and so that's kind of i see a lot of strong parallels with what we're doing now

but the the interesting part is that how that shifts from the community-based approach where it's all done by the community for the community and if there's you know bigger losses than the community wears them if there are if there are not as many losses than the community benefits because you know that they get to share and what's left over um and so then what's happened over time and and even if we kind of fast forward to um earlier this this century um the you you end up with these mutuals that start as communities but then what

happens is they get to a point and they get to a scaling point where they struggle to grow because they can't necessarily grow outside their community base because often you will need capital to come in to make it grow further um and so usually the community is not like deep pocketed and so they kind of have they're limited in their growth and also you know conceptually if you've got one community over here and they they want to like share coverage and scale with a different community they have to actually

trust each other to pay on the claims which can be a bit of a an issue and so so what tends to happen is these mutuals turn into shareholder-based companies doesn't happen all the time but it's happened a lot and um and what that means is they demutualize they get shareholder equity based capital and the shareholders then go to capital markets and raise bigger capital for equity and then they grow and conserve more people but they've now introduced people into it that are kind of not

necessarily there as part of the community they're um to help um you know with the aligned interests that they're the shareholders um and so that's generally how things have worked and so i guess our premise here is that um because we can coordinate people using token um incentives that's much more scalable and so you can coordinate people on a global basis to do this stuff um really efficiently and therefore you don't actually need to inject equity capital at any point you

can scale a mutual really really large and the members will be the ones that benefit and so it's really the community cooperative type of approach to to insurance and so that that's kind of the history and the um i guess our view one um how we think the blockchain could really kind of disrupt the insurance world yeah talk a little bit more about that friction between like a shareholder based model and the average individual who's trying to get a payout from you know their their house burning down talk

about talk about that discrepancy yeah i mean by and large it works fine i've just like if you're in if you're in a developed nation with a reliable legal system and a good regulator then this all works fine all of the kind of bat there's always going to be quirks and stories around the edges and that's always happens but by and large it works fine the but it only works fine because you have legal and regulatory barriers um in in place and that's costly and and inefficient so there's definitely that conflict of interest but but by and large the customer is looked after

because there are protections in place um and so and so i think that that's important but what we're saying is we can do the same thing in a different way in a much cheaper way without that risk um and so um if we get those token incentives right that um that means we can achieve the same kind of um projections but on a global basis and also for people that don't necessarily live in a jurisdiction where you have that reliable legal and regulatory framework

hugh you mentioned earlier that there's just a lot of inefficiencies in the current state of the insurance and mutual markets can you kind of elaborate on that as well yeah sure so i think um probably the easiest way to explain this is if you pay a hundred dollars in premium then you expect to get basically 60 65 maybe 70 back um in claims and the rest gets lost in expenses and profit and all the other costs in there um and so that's kind of the um

the the kind of tax in the system so we're talking like 20 to 30 percent overhead ish for the industry it's more like 30 to 40 but yeah wow um so it's big um chunky numbers um i mean you know some of that kind of it's hard to get away from but um but that's a big that's a big um target to aim at um and you know there are obviously a whole bunch of reasons for it but um but that's it's not very efficient and lots of paper-based and stuff like that so i i just want to you know maybe

uh zoom out for a minute and and talk about risk and insurance right so um i i just started reading have you read this book here it's called against the gods by peter bernstein um no i haven't actually i mean it's been on my list for a while but yeah it is fascinating so it is the story of of some of those ship merchants who basically created some mathematical models and kind of early probability and statistics and actuarial you know kind of tables to um

to you know kind of science the the risk out of uh out of markets right so out of you know the first the shipping market and then others uh and it it talks about how um getting risk quantifying risk in actually creating markets around risk essentially is a scalability technology i was thinking about that with the context of of d5 right so defy can only grow so large um you know before it's like essentially

hindered by lack of insurance because there's plenty of people who just are going to be unwilling institutions for example um other you know traditional banks they're going to be unwilling to get into defy if it doesn't have a an insurance if if the risks cannot be assessed can you talk about that from a macro perspective i mean do you see basically insurance and the ability to measure risk and quantify that with some market price as a scalability limiter to defy yeah

definitely um the simple one is there are a whole bunch of institutions that have a checklist about what they need what needs to happen before they get involved and insurance is just one of them um at really high level like um insurance is actually just fundamental financial infrastructure for economies and you the economies with uh with the highest gdp growth and stuff like that tend to be the ones with a meaningful or well-developed insurance industry it's just that's just how things work

like if if you want to develop anything or do anything new or take your risks then that happens much more often when there's a reliable um risk management tools in place and the reliable insurance in place you know if you want to build a railway launch a rocket whatever like no one's going to let you launch a rocket unless you've got insurance in place like um you know things can't go wrong um so um you know this this stuff you know it may be boring and sitting all in the background