Singapore-based cryptocurrency lending and borrowing platform Hodlnaut is teaming up with Nexus Mutual, an alternative to traditional insurance and one that is well-suited to decentralized trading and finance.
Hodlnaut (not to be confused with popular and now-defunct Twitter persona Holdlonaut) allows crypto holders to earn relatively high rates of interest by lending out crypto assets. Now, by way of the partnership with Nexus Mutual, the crypto lender can offer insurance cover on the assets held on the platform – BTC, ETH, DAI, USDC and USDT.
Insurance is thin on the ground in the cryptocurrency space. Even when it is included, the service being marketed doesn’t always match the small print of a policy. For example, when $100 million of digital asset cover is touted, this usually means the cryptocurrency in question must be at rest, held in so-called cold storage, which means not connected to any online environment.
But when it comes to exchanges, trading firms or yield-bearing platforms like Hodlnaut, assets need to be held in workaday “hot” wallets that are very much connected to the internet.
A shortage of hot-wallet insurance cover has led to firms simply holding their own self-insurance funds; now there are alternatives to traditional insurance springing up, such as Nexus Mutual’s tokenized approach.
Juntao Zhu, the co-founder and CEO of Hodlnaut, said his firm’s Nexus Mutual-backed insurance offering is very different from those companies claiming to have $100 million insurance cover provided by a big custodian like BitGo, which relates to the aforementioned cold storage only.
“I feel like we're one of the more honest firms in the space,” Zhu said in an interview. “Even though we use BitGo, we don't claim to have $100 million insurance. But you have Nexo, and you have Vauld [previously known as Bank of Hodlers] saying that they're $100 million insured.”
At this point in time, Hodlnaut’s maximum insurance capacity against losses or bankruptcy stands at $22 million across the platform, but that is expected to increase as the Nexus Mutual community-owned fund grows. (Nexus says it plans to sell over $1 billion worth of coverage by the end of this year.)
Hodlnaut has actually helped boost its cover capacity by purchasing Nexus’ NXM tokens and adding to the capital pool and staking its holdings. It’s not standard for firms seeking cover to go out and buy tokens and join the pool, said Nexus CEO Hugh Karp, but quite a few firms have done so.
“Its primary purpose is to signal to the broader market about how confident they are in their own security. All being well, they keep all the NXM and earn rewards from cover purchases,” Karp said via email.
In addition, Hodlnaut has sponsored $110,000 of equity towards a “shield mining” campaign on Nexus Mutual, a way of attracting stakers (risk assessors) to back a particular project by offering more in the way of reward tokens.
“Shield mining is a way for partners to bootstrap the availability of cover on Nexus,” said Karp. “It works by providing targeted bonus rewards to Nexus Mutual Risk Assessors who back the partners project. This opens up cover capacity on Nexus and therefore helps the partner project attract additional users who are more risk-aware.”
Much of the interest (and much of the cover Nexus provides so far) is directed towards the $44 billion decentralized finance (DeFi) market, where counterparties are represented by smart contracts and powered by automated market makers.
But centralized cryptocurrency lending – now known as CeFi in crypto circles – is also a giant and diverse industry, with firms including Genesis Capital, Celsius and BlockFi holding billions in assets under custody and raising hundreds of millions in capital to expand.
On that note, Zhu is proud of the fact that Hodlnaut has only ever raised $100,000 during its accelerator stage, and retains 90% ownership of a profitable company.
“We had to grind our way through the bear market and it was very tough,” Zhu said. “We are a small and nimble team with plenty of traction and $250 million in assets under management. To be honest, I don't know what we would spend a raise on.”