In-depth analysis of DeFi insurance project Neptune Mutual with over $10 million in funding

Author: veDAO

Neptune Mutual is a decentralized insurance protocol based on a parametric coverage model, dedicated to reducing the risks faced by policyholders in the crypto market. Currently, Neptune Mutual has deployed tests on the Ethereum and Arbitrum networks. Founded in 2021, Neptune Mutual has completed three rounds of financing, raising over $10 million to date. What unique design does Neptune Mutual have that attracts such favor from investors?

1. Parametric Insurance Model

The biggest innovation of the Neptune Mutual protocol is its insurance model based on traditional parametric insurance design. Parametric insurance, also known as index insurance, does not rely on subjective human loss assessment for payouts but rather on the triggering of objective events. The greatest advantage of parametric insurance is reflected in the claims process, where complex on-site human loss assessments are not required, allowing for rapid payouts once the contract parameters are triggered. This not only provides policyholders with more timely compensation but also significantly reduces the claims management costs for insurance companies.

Because Neptune Mutual is decentralized, its parametric insurance also includes a claims process. Unlike other decentralized insurance projects, when an insured event occurs, Neptune Mutual requires only one policyholder to file a claim. Once the claim is verified as successful, all other policyholders of that type do not need to file claims and will automatically receive compensation. Each unit of the policy receives the same amount of stablecoin payout (minus fees), and policyholders receive corresponding compensation based on the number of units they hold. Of course, any policyholder can file a claim.

Compared to other decentralized insurance projects, Neptune Mutual has another distinguishing feature: if a risk event is confirmed to have occurred, policyholders receiving compensation are not required to demonstrate actual financial loss. When a risk event occurs, claimants or other users holding the same policy do not need to provide any evidence of loss, submit data, or screenshots. In other words, if a user speculates or predicts that a covered smart contract risk event will occur, they can purchase a policy even if they have no assets in the smart contract. When the risk event does occur, as long as the protocol verifies the occurrence, all policyholders can receive compensation within a few days, and the amount paid is the compensation amount determined at the time of insurance purchase.

Currently, the Neptune Mutual protocol only offers insurance for smart contracts and exchanges, with other types of parametric insurance still in planning. Below, we will compare the advantages and features of the Neptune Mutual insurance protocol with other decentralized insurance projects (the currently most successful insurance projects).

2. Underwriting Pool Design

The underwriting pool of the Neptune Mutual protocol can be divided into "dedicated" and "diversified" underwriting pools, where guaranteed payments apply only to dedicated underwriting pools. Dedicated underwriting pools do not have capital efficiency, leverage, or support for insurance sub-products. Diversified underwriting pools can support sub-product insurance, jointly underwriting various insurance targets with additional leverage and capital efficiency. The table below outlines some important differences and similarities between "dedicated" and "diversified" underwriting pools.

3. Liquidity Providers

Insurance Contract Creators

Currently, the insurance contract creation feature can only be accessed through an invitation mechanism. Any user who is whitelisted and holds NPM tokens can create an insurance contract. The creator must burn 1,000 NPM tokens to avoid spam, suspicious, and incomprehensible insurance contracts. Additionally, the contract creator must stake 4,000 NPM tokens or more. In the absence of any underwriting liabilities, the insurance contract creator can choose to submit a proposal to terminate the insurance contract, but this must be decided through the protocol governance process or by the Neptune Mutual team.

With the creation of new insurance contracts, a dedicated liquidity pool is also created. Each liquidity pool is jointly owned by liquidity providers, who provide liquidity, share profits, and collectively bear losses in the event of a claim. The liquidity pool does not belong to the Neptune Mutual protocol.

Before providing liquidity, liquidity providers need to analyze the insurance contract to confirm that it meets their risk preferences. Liquidity providers can provide liquidity using DAI, USDC, or other supported stablecoins. When providing liquidity, liquidity providers must also provide 250 NPM or more (as specified by the insurance creator).

When liquidity providers provide liquidity, they will receive POD (Proof of Deposit) tokens. POD tokens are assets that generate income (or losses). POD can be redeemed during the withdrawal period to retrieve stablecoins.

Liquidity providers can earn income from the policy fees paid by insurance buyers, and all policy fee income paid by insurance buyers will automatically be added to the liquidity pool. At the end of each month, when the underwriting commitments expire, liquidity is released again for users to purchase insurance. Over time, the policy fee income added to the liquidity pool (in stablecoins) will increase the price of POD. As a liquidity provider, there is no need to redeem POD to earn insurance income.

Excess funds in the protocol's liquidity pool also support flash loans and lending activities under risk control, providing additional income sources for the liquidity pool.

POD Staking Rewards

Insurance contract creators can offer additional rewards to POD stakers. The rewards given to stakers of POD are not in stablecoins but are paid in the project tokens of the insurance contract subject.

4. Commissions and Income

Purchasing Insurance

Anyone holding 1 or more NPM tokens can purchase insurance contracts for up to 3 months. KYC is not required. To ensure successful claims, the protocol will restrict liquidity providers from withdrawing liquidity for a certain period, meaning that assets in the liquidity pool will be locked for a specific time. Expired policy fees automatically accumulate in the liquidity pool.

Commissions and Income

When users purchase a policy, the protocol automatically deducts a 6.5% policy fee. The commission income is primarily used to guide and maintain long-term liquidity and fund protection pools. To build the community, a portion of the income will also be rewarded to the protocol's governors.

5. Economic Model

The Neptune Mutual token (NPM) does not have a fixed supply, but the maximum number of mintable tokens is limited to 1 billion tokens. It will take approximately 10 years to fully issue all NPM tokens by mid-2033. Tokens allocated to strategic and institutional investors are subject to cliff periods and lock-up schedules, lasting up to 2 years, depending on the region. Team tokens will be released linearly over the next 5 years, resulting in a total token lock-up period of about 7 years.

Locked Tokens: Release and Circulation

Unlocked Tokens

The allocation of community incentive tokens helps to enhance the liquidity of the protocol's underwriting pool and the liquidity owned by the protocol, with the overall goal of supporting Ethereum-based protocols and covering smart contract risks. The distribution timing of these tokens depends on the protocol's usage, as higher initial activity may deplete allocations more quickly, while lower initial usage will lead to longer distribution periods. If these allocations are exhausted, the protocol may consider adjusting other types of allocations to increase community incentives and liquidity pool distributions.

Tentative Token Issuance Schedule

Bond Mechanism

The bond mechanism is inspired by the Protocol-Owned Liquidity feature conceptualized by OlympusDAO. However, unlike the former, NPM tokens are not infinite and inflationary, so the protocol will not have ongoing bond activities. The bond pool feature will only be announced during seasons. For each season of bond pool availability, a fixed allocation of NPM tokens will be offered at a discounted price.

As a user, after a one-week waiting period (lock-up period), users can use the bond mechanism to exchange their NPM/DAI for discounted NPM tokens. After the user's lock-up period, they can receive discounted NPM tokens instead of Uniswap v2 LP tokens. The protocol uses Bonds to guide POL (Protocol-Owned Liquidity), increase the liquidity depth of NPM tokens on DEX, and raise underwriting risk capital for qualified insurance contract projects.

6. Financing Information

As of now, Neptune Mutual has completed $10.3 million in funding. The seed and strategic rounds raised $5 million, with major investors including Fenbushi, Coinbase Ventures, Animoca Brands, GBV Capital, Huobi, OKX, and others. The private placement round raised $5.3 million, with participation from XT.com, Gate io, Bitmart, LD Capital, Mapleblock Capital, Pulsar Global, The DuckDao, Dweb3, Lux Capital, Cabin VC, Poolz Finance, BSC Army, Whitelist Ventures, CryptoLark, and others.

The Neptune Mutual Cover Protocol is currently in the early stages of development. The project has decided not to conduct any ICO, IDO, or IEO public sales, but rather to allocate all publicly sold tokens to the community.

7. NFT Airdrop and Tokens

According to the information provided in the project's documentation, a large number of tokens have been allocated for airdrops to the protocol's users in the coming months and years. The Neptune Mutual NFT series will be divided into the following types - Free to Mint and Soulbound.

Free to Mint NFTs are exclusive artworks that can be minted for free. In Neptune Mutual, users can earn these NFTs by interacting with the platform to gain experience. On the other hand, airdropped NFTs are distributed to individuals without any form of payment or compensation required. These NFTs can be offered as promotional rewards or as rewards for participating in specific events or activities.

Project users can earn points through various interactions with the protocol: they can purchase policies, provide liquidity, or do both simultaneously. Accumulating a certain amount of points gives them the opportunity to receive airdrops of NFTs and NPM tokens. However, to mint higher-level NFTs, users must first mint lower-level NFTs. The higher the NFT level, the more NFT and token airdrops they can receive.

Team

The founders of Neptune Mutual are: Binod Nirvan, Edward Ryall, Gillian Wu.