What is Neptune Mutual? | Crypto Interview

This week I sat down with the team from Neptune Mutual, a crypto insurance provider, to learn more about them and protect against risk in the crypto market. 2022 has seen many billions lost in hacks, making the case for insurance very clear. By the way, Neptune is one of my portfolio companies, you can read my full disclosure statement here.

Neptune recently launched on Ethereum’s mainnet, how did that go?

The deployment went off without a hitch. We are attempting to spread the word around with the help of all of our partners about how unique our approach is and the benefits it can provide to both cover purchasers and liquidity providers.

Ultimately, we are pleased that our solution is now operational and gives users the ability to safeguard their digital assets in a manner that enables an immediate and reliable resolution in the case of a smart contract breach.

Activity wise, it has been relatively quiet given what has happened the past week with all eyes on FTX & Alameda.

What apps are currently covered, and how much does insurance cost?

The Prime dApps Diversified Cover Pool will offer 7 different cover products to cover purchasers, and will offer leveraged returns to liquidity providers. The cover products currently available include: Aave, Balancer, Curve, Gnosis Safe, Uniswap, MakerDAO, and Synthetix. This is just a start.  We expect cover creators to add more cover products to our marketplace.

Speaking of cost, let us spend a minute discussing the competitive advantage of Neptune Mutual. Given the parametric insurance model upon which our product is built, policy payouts are automated and immediate; there is no need to upload any loss-proof documentation or wait for a decision after filing an individual claim. As a result, there is no room for prejudice. All claim payouts are handled impartially and equitably. In traditional finance, policy premiums are usually higher in the parametric model than in the discretionary model due to the direct payout approach of parametric-insurances.

In addition to receiving parametric cover protection, our users benefit from a cost that is far less expensive than other DeFi cover protocols, ranging from 0.5% to 8% per annum depending on utilization of available capital from the particular cover pool

Are you planning to expand to other chains?

Our protection model is chain agnostic. This means it is possible to mitigate the loss of digital assets from any chain by purchasing a cover policy in our marketplace on the Ethereum blockchain with the USDC stablecoin. Our first priority is to focus on increasing the breadth of the Ethereum projects covered within our marketplace.  In our roadmap we still have a lot of work to do and a lot of product releases to accomplish on the Ethereum network. At some time in the future, we shall expand to other chains.

We have seen a lot of crypto insurance players come and go with limited success except for Nexus Mutual, how will Neptune succeed where others have failed?

Where we disagree with the premise of the question is that we believe discretionary cover protocols have succeeded in several cases, including Nexus Mutual. It is true that scaling the adoption of existing projects seems to be hindered by certain structural barriers, but we think that the very different approach of parametric cover might aid in growing the use of blockchain insurance.

Where we agree with the premise of the question is that the problem with current DeFi cover protocols is that they are almost all perfect replicas of conventional insurance on blockchain, which is highly risky. Think about it, traditional insurance companies generally do not go bankrupt because not all payouts are made on the same day, meaning that they can offset losses over time.  In DeFi, however, a hack is a one-time event that can affect thousands of users at once and has the potential to destroy the cover protocol that offers the protection. To be successful, a DeFi cover protocol should incorporate financial risk mitigation mechanisms by design and avoid going bankrupt.  And one important factor is to balance the best interest for capital providers and demand from cover purchasers, not all risks are suitable to be underwritten.

In a nutshell, traditional insurance models are inadequate and ineffective for DeFi native coverage. Comparing hack protection to conventional automobile, life, property theft, or other insurance products is a mistake. Implementing traditional insurance models on blockchain would always be problematic due to these inefficiencies.

We wrote a blog on the important differences between discretionary cover and parametric cover, including areas such as:

1. Parametric cover involves assessing only the incident itself, whereas discretionary cover involves assessing hundreds, or potentially thousands of individual loss claims which is inefficient and often resulting in disagreements.
2. Parametric policies payout to all policyholders that make a claim on their policy if  the incident is validated.  This makes payout fast and reliable.
3. In terms of scaling the amount of liquidity available, one very important point is that LPs have a window to exit their position every 6 months in the Neptune Mutual marketplace.   This is not the case with a number of discretionary protocols where LPs can get locked-in to their position and have to resort to selling wrapped tokens at a discount to exit.
4. Neptune Mutual denominates cover pools in stablecoin- USDC, the returns to LPs are not impacted by ETH or other token price volatility.  Transparent returns lead to investor confidence and better decision making around risk/return investment decisions.   It also provides confidence to cover purchasers that the amount of liquidity in the pool is not fluctuating as a result of market volatility. 
5. Last but not least, be careful of what risks to undertake and underwrite. It is a nascent industry and there is probably acute demand for areas such as stablecoin depeg (which is financial design risk rather than security) and bridges (where security is far from proven) ; we have a tech team with strong cyber security knowledge that conducts due diligence and advisory throughout the whitelisting process and will be very careful on what projects gets listed on the cover market place.

Who are your biggest backers, and how will they help Neptune succeed?

Fenbushi Capital led our seed round. They are one of the most well-known and respected investors in the industry who have supported the Ethereum Foundation in its early days, and are very long term oriented and have committed to support us in the journey of “creating” an industry which is only about emerging, given the entire insurance space on chain is only addressing a tiny bit of the crypto market as a whole.

Our second round of raise was led by Animoca Brands, and we hope to work closely with them to help mitigate smart contract risks associated with metaverse assets. We have a whole range of high profile investors from CeFi entities including Coinbase Ventures, Huobi Ventures, OkX Ventures and XT,  through to custodians like HEX Trust, marketmakers and traders such as GSR that either will act as cover creators or liquidity providers, and we also have spoken with many defi portfolio companies from investors such as GBV and Mapleblock, to explore collaborations,  given these are more new projects founded in recent years,  we will continue to work and grow with them and naturally provide coverage for them as we progress with expanding the cover market place.

What comes next for Neptune?

We plan to build the breadth of cover products available in the marketplace over the coming months by working with industry leading projects/cover creators, with due care given to the quality and risks of the specific projects.

We hope to build, listen to, and engage with our community.

And we will continue to make security our top priority, both for our own protocol and helping in different ways to secure the projects within our marketplace.