D1Conf 2018 |Blockchain-Native Investment Assets | Reinis Melbardis, Nexus Mutual
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To be able to compete with traditional insurance players, decentralized risk carriers need to be able to trustlessly invest capital in a way that generates interest. There are a number of exciting possibilities and proposals being created within the blockchain world that would allow an entity’s assets to earn a stable, predictable return whilst retaining enough liquidity to allow the entity to meet its liabilities. During his talk at D1Conf, Reinis Melbardis of Nexus Mutual explored the characteristics, risk profiles, and challenges of the nascent asset classes being built on-chain by the open financial ecosystem and explained how to assess their suitability to act as investment assets for a decentralized risk carrier. These slides are courtesy of Reinis Melbardis, Nexus Mutual
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D1Conf 2018 |Blockchain-Native Investment Assets | Reinis Melbardis, Nexus Mutual
- 1. Rei Melbardis D1Conf 2018 2018/10/29 Blockchain-Native Investment Assets
- 2. Why do Investment Returns Matter? 0 5 10 15 20 25 AXA Allianz Generali Prudential Munich Re €bn Investment Yield Operating Profit Source: 2017 Annual Reports 3.3% 3.1% 3.1% 2.8% 2.5%
- 3. Requirements Insurance > Low-risk > Predictable return > Matched to liabilities Open Finance > Accessed without permission > Automated > Unstoppable
- 4. Ethereum Staking Description > Lock up 32 ETH in a staking contract > Expected return in ETH of ~2- 5% pa, dependent on total deposits and number of stakers Risks > Release timing uncertain > Potential punishments > Governance risk Pros/Cons + High Interest + Sufficient volume + Possible to participate via pools - Variable return - Highly illiquid (4 month withdrawal period)
- 5. Dai Savings Rate Description > Lock up Multi-Collateral Dai in a Dai Savings Rate contract (no fees or fixed terms) > Rate of return below Maker CDP Stability Fee (2.5% currently) Risks > MakerDAO system stability > Governance risk Pros/Cons + Liquid + Reasonable volume + Link to meatspace - Uncertain return - Meaningful investment likely to consume large portion of Dai
- 6. Compound.Finance Description > Decentralised money market pools for ERC-20 tokens > Rate of return based on supply and demand of specific asset. Risks > Compound system stability > Governance risk (centralised to start) Pros/Cons + Instant liquidity + Easy to use and understand - Low & uncertain return - Low volume (currently)
- 7. Dharma Protocol Description > Protocol for creating p2p lending instruments > Financial ‘middleware’ reliant on end-user applications being built on top Risks > Credit risk linked to meatspace > Dependent on relayers Pros/Cons + Ability to specify investment parameters + Instruments tradeable (as non-fungible token) - Low volume (currently) - Complex management process
- 8. Conclusions Opportunities > Many new possibilities emerging > Competitive returns possible > Open access and automation Challenges > Difficult to find a fixed, predictable rate > Non-traditional risks that are tricky to quantify > Required volumes currently not available
- 9. Rei Melbardis rei@nexusmutual.io Thank you for your attention!
Editor's Notes
- Hi. My name’s Rei – I’m at Nexus Mutual. Hugh earlier talked about Nexus Mutual’s model of a decentralised risk carrier. One of the challenges that has to be solved is what to do with the pool of capital that sits on-chain, backing the covers. Obvious answer – invest it in something appropriate. I wanted to talk about why this is important, what the requirements are of an investing asset in this context and what are the early possibilities for appropriate assets, currently being built by Ethereum and the open finance movement.
- So why does getting a return matter? Here we can see the investment yield of the 5 largest insurers in the world by revenue, not including gains/losses on investments, just the yield. It dwarfs the operating profit in each case – these entities would not be making any money if they weren’t earning a return on their assets.
- What are the requirements for our assets? Start with the insurance world: We need it to be low-risk, predictable and matched to liabilities. In practice, most insurers stick to sovereign debt, with maybe some low-risk corporates in there. The aims of open, permissionless finance introduce new requirements: Accessed without permission: can seamlessly hook up our smart contracts Automated: no investment managers who need to be trusted Unstoppable: on-chain and can’t be censored
- Read Description + the more people are staking, the lower the rewards. Key risks: Timelines are very variable and prone to change. Maybe 2020? Open to governance issues – you are exposed to decisions made on behalf of the network. Pros/Cons: As per slide.
- Read description again. Risks: System Stability Governance and rate setting: controlled by Rates Policy Oracle chosen by Maker Governance Pros/Cons: Just read out