Capital Pooling Risks

There are a number of reasons why Neptune Mutual has your back if you are a liquidity provider


In order for DeFi cover industry to grow sustainably, we at Neptune Mutual feel that a strong collaboration between projects is essential. Having said that, it is equally important to point out flaws of existing DeFi insurance protocols. Creative criticism fosters innovation and growth. DeFi protocol users must be made aware of the risks they are taking by providing them with responsible disclosure and warnings. Many people have expressed their dissatisfaction with "lock-ins" and the inability to exit because they had no idea what they were signed up for.
Before proceeding, you may wish to review some of the risks associated with our protocol.


If you've ever contributed liquidity to a DeFi cover protocol, you're sure to have encountered a number of challenges. We will attempt to address a few obstacles faced by DeFi insurance underwriters and liquidity providers.


Problem #1: Indefinite Lock-ins

Although there are inherent risks in underwriting, you should not be exposed to the unnecessary risk of being locked in for an indefinite period of time. If you want to, you should have a clear way out.
  1. 1.
    Unlike other DeFi cover protocols that provide up to 12 months of coverage, Neptune Mutual provides maximum 3 months of coverage. This enables policies to gradually expire and free up the capital so that it can be withdrawn by liquidity providers when they need it.
  2. 2.
    The POD you receive as a stablecoin deposit certificate is an income (or loss) bearing asset. If you want to get out, you can sell it on the secondary market. You can redeem your PODs to get your stablecoin back.
  3. 3.
    Under special circumstances, Neptune Mutual can even pause policy purchases, let covers expire, and allow full liquidity to be withdrawn from pools, plus or minus profits/loss (if payouts happened).

Problem #2: Offering Impossible Coverage

As a liquidity provider, you do not have the option of selecting a pool to underwrite risks. Whether you like it or not, you are exposed to all risks.
  1. 1.
    Neptune Mutual allows you to select which cover pool you want to join. Incidents in other pools have no impact on your liquidity.
  2. 2.
    Neptune Mutual covers are only available by invitation. Unless a product has stood the test of time, we conduct a thorough review of it. We don't want to offer hundreds of covers that put liquidity providers at risk.
  3. 3.
    Neptune Mutual does not provide coverage for any financial risks, including but not limited to trading, liquidation, or margin calls, stablecoin de-pegs, private key exploits, wallet hacks, and so on. We are concentrating on on-chain risks and, to a certain extent, frontend attacks.
  4. 4.
    We provide cybersecurity consultation to our portfolio cover products in exchange for allocating staking rewards to our NPM tokenholder community. This includes a comprehensive security review of smart contracts, frontend, backend, DNS, supply chain, and hosting, among other things.
  5. 5.
    We provide additional cover funding to projects that pass our security review. Our liquidity provider community may view this positively and may wish to participate.

Problem #3: Loyal Tokenholders Punished During Incidents

Because claimants are selling their payouts, the value of your tokens continues to fall. If you took part, your tokens in staking pools have been reduced as a result of a payout.
  1. 1.
    Neptune Mutual does not have this problem because NPM tokens are not used for risk underwriting, and when there is a payout, stablecoins are distributed rather than NPM tokens. Furthermore, it has the opposite effect: when there is an incident, the demand for NPM tokens increases because NPM tokens are used for incident resolution. People who voted incorrectly lose all of their tokens, and some of these tokens are burned.
  2. 2.
    The NPM tokens in Neptune Mutual's staking pools are immune to underwriting risks. NPM tokens are not distributed as payouts to claimants.
  3. 3.
    Through our cover liquidity support program, tokenholders can stake NPM tokens and obtain a number of tokens in staking pools.

All That Glitters Is Not Gold

New DeFi protocols generate a lot of interest, and as a result of the publicity these projects receive, many misinformed users became trapped in products from which they had no way to escape.
It is well-known that underwriting comes with its own risks. As a co-underwriter, you and a large number of other users pool capital to underwrite risks together. Participation in an underwriting activity is primarily motivated by the desire to earn policy premiums and other incentives while minimising risks, no different than traditional insurers. Although there are inherent risks in underwriting, you should not be exposed to the unnecessary risk of being locked in for an indefinite period of time. If you want to, you should have a clear way out.
We believe that a successful DeFi cover protocol should open up new avenues for the well-informed and educated DeFi users by allowing them to pool their capital together in a cooperative environment. In Neptune Mutual, the users who pool capital for a cover product are collectively known as liquidity providers. Similar to the concepts of conventional cooperative societies, a cover's liquidity pool is owned by the liquidity providers, not Neptune Mutual.
Before listing a product, a robust DeFi cover protocol must reduce LP risks by doing in-depth due diligence on the portfolio covers. The LP community will feel animosity if a they are exposed to an insecure product behind a cover pool without having a choice.

Can You Cover All DeFi Protocols?

Maybe not. We believe that not all DeFi protocols can be successfully covered. This is the fundamental reason we refactored the protocol make the cover creation feature an invitation-only system.
Before we get into the reasons, let's talk about traditional insurance companies for a minute.

Is Traditional Insurance a Profitable Business?

Traditional insurance businesses generate profits by placing wagers on the probability of risks being low enough that they will not drain their financial resources. In order for an insurance company to generate a profit, they must be able to forecast their financial solvency.
Insurance companies are paid fees in regular installments by people who want to cover a specific risk, such as asset loss, theft or damage to property, health, or death. Insurance companies profit from the income generated by the sale of these policies minus the operational expenses.
profit = policy fees - (claims payout + operating expenses)
They make a profit by ensuring that the likelihood of providing a payout is less than the revenue they generate. Insurance companies generally do not go bankrupt because not all payouts are made at the same time and they can offset losses over time. In DeFi, however, a trigger occurs all at once, affecting thousands of users. As a result, traditional insurance models are insufficient and ineffective for DeFi native coverage.

Is Neptune Mutual a company with a profit motive? How Is Neptune Mutual Different?

Despite the fact that our cover pools are operated similar to traditional cooperative societies, please be well advised that Neptune Mutual is not a non-profit nor a DAO. We think DeFi insurance protocols shouldn't disregard the value of being financially stable and able to pay out claims, just like conventional insurance firms. Our primary aim is to maximize profits while minimizing risks. As mentioned in our Risk Disclaimer, the protocol should be able to work even in the case of a black swan occurrence.
How is Neptune Mutual Different?
Neptune Mutual is an infrastructure provider or a marketplace, not an insurance company. You can compare traditional insurance providers to the individual cover pools offered by Neptune Mutual. We do not earn policy premiums, as opposed to typical insurers, but liquidity providers do. Similarly, the liquidity providers own the liquidity pools, not us. In other words, we give the DeFi community with a conduit to crowdsource the capital building part of an insurer. Before we do so, we conduct a thorough due diligence of the protocols we are covering. The process includes a comprehensive security review of the protocols we work with. We even provide liquidity assistance to products that demonstrate a commitment to cybersecurity.
Neptune Mutual, unlike the majority of DeFi cover protocols, does not cover financial risks such as margin calls or liquidations, stablecoin pegs, or private key exploits. We believe we are still early and that these risks are not coverable at this time due to the lack of maturity of these products. Coverage is impossible without projects spending years developing and testing their products. Neptune Mutual is not interested in liquidating LPs' hard-earned capital for the sake of our experiment. Our primary design goal is to protect liquidity providers from unwanted risks and to allow them to exit if necessary for whatever reasons they may have.
In a nutshell, we cannot cover projects that have not prepared and accounted for their own insurance protection fund, lack the confidence to fund their own pool, and do not have a long-term mindset about protecting their community. Projects that demonstrate these fundamental qualities will receive not only stablecoin funding for their pool, but also technical assistance from us to programmatically and gradually bootstrap their cover liquidity via smart contract and SDK integrations.
You can select which cover pool to underwrite as a liquidity provider. Your risk exposure is limited to that pool, rather than everything on the Neptune Mutual marketplace.

Incident Reporting & Tokenholder Discontent

In the blockchain space, it is difficult to gain a long-term attention from community. As we've seen with many projects that come and go, people quickly abandon and move on to the next protocol. The blockchain community is not very loyal to projects that do not provide them with compelling reasons to stay. Every few years, the top 100 projects change. It is critical to first establish trust and then work hard to create a loyal community around a DeFi project.
This becomes challenging when projects do not communicate well about risks they are putting their community into.

Loyal Tokenholders Abandoning the Project After Incidents

When an incident occurs in some cover protocols, tokenholders sell their tokens. Some protocols penalise their loyal community for holding onto their tokens by reducing their balances as a result of the incident. This causes friction within the community because users are often unfamiliar with how DeFi insurance underwriting works. As a result, it is critical to categorize activities into different features and make it simple for users to understand.
Neptune Mutual does not have this problem because NPM tokens are not used to underwrite risks, and when there is a payout, stablecoins are given instead of NPM tokens. Furthermore, the demand for NPM tokens increases when there is an incident, as NPM tokens are used for incident resolution. People who voted incorrectly lose all of their tokens, and a portion of these tokens are burned.

Staking Pool Balance Slashed During Incidents

Numerous DeFi cover users have witnessed a sudden reduction in their staked token balance from a staking pool. The reason for the quick fall in their balance is that the slashed tokens are distributed to claimants as payouts. When purchasing tokens and proceeding to the staking pool to receive a reward, a great number of individuals did not fully comprehend what they were agreeing to. This is a double-edged sword since loyal tokenholders are penalised, yet the claimant may not want to hold on to the tokens because they wish to recover from the incident for which they received the payouts. If the token's value declined between the time the payout was finalised and the time it was received, the claimant may wish to reduce their losses by selling the token as soon as possible.
The NPM tokens in Neptune Mutual's staking pools are immune to underwriting risks. NPM tokens are not distributed as compensation to claimants.