This is going to be an $NXM mega thread where I lay out the bullish case for $NXM and also demystify $NXM's price calculation which does not use standard supply/demand mechanisms.

So grab a coffee and take a set. Class is about to begin.

Before diving into the math I want to take a step back and talk about general trading/investing philosophy.

At the most basic level my philosophy is to look for trades/investments that offer asymmetric reward opportunities. That means opportunities where the reward...

...is significantly outsized versus the risk being taken. The immediate follow up rule is to DYOR so you can be confident in the trade/investment that you are about to me.

This is the exact philosophy that lead me to getting fully involved and invested in #Ethereum.

Before getting into $NXM's tokenomics I wanted to talk about Nexus Mutual itself, because the two are inexorably tied. Nexus Mutual provides "smart contract cover" (insurance) to protect users assets from smart contract bugs.

The demand for Nexus Mutual's smart contract cover is directly tied to the growth of DeFi. This is extremely important because the pricing model of $NXM was designed so that it grows as the platform and demand for contract cover grows.

Staking is another metric that helps us see if the holders of $NXM (buyers/investors) are just buying $NXM to flip them or staying for long term yield opportunities. That is because when $NXM tokens are staked they are locked for 90 days. This is a sign of healthy growth.

Here we have seen Nexus Mutual is growing as fast or faster than the DeFi space that it is providing cover for. Things have been designed so the growth in Nexus Mutual directly affects the price of its $NXM token.

Attached is a screenshot from Nexus Mutual's Token Model doc.

We have established that Nexus Mutual is growing at a healthy clip alongside #DeFi. We have also established that the $NXM token has been designed so that it reflects both short term demand and also long term growth. So lets go ahead and look at $NXM's pricing model.

$NXM uses the price formula: Price = A + (MCR / C) * MCR%^4

A and C are constants. Their exact values aren't important but just know they were used to calibrate the price of NXM at launch and are now permanently set at their current value.

Before getting into the remaining parts of the calculation it's important to understand what MCR and MCR% are. MCR is "Minimum Capital Required" and is the amount of capital Nexus Mutual needs to "do its business. MCR% is the % of capital actually being supplied vs MCR.

Capital is supplied when someone buys $NXM and the $ETH used to purchase $NXM is placed in Nexus Mutual's reserves which are then used to payout claims.

The MCR increases at pre-programmed pace, and continues to increase as long as the MCR is above 130%. MCR is NEVER decreased.

With that settled, $NXM's pricing formula has 2 dynamic parts. It has a long-term part (MCR / C) and a short-term part (MCR%^4).

Let's look at the long-term part first.

The MCR increases as long as buyers/investors are purchasing $NXM and supply capital to $NXM's reserves. Because MCR increases and never decreases, this part of $NXM's price is always on an upward trajectory.

In the future cover purchase will also increase the MCR.

As a visual I took the current price of $NXM (in $ETH) and increased the MCR in 1% increments. You can see that $NXM's price also increases in 1% increments. I have provided both regular and log versions of this chart.

Let me repeat this 1 more time because it is worth repeating. MCR can never decrease which means the (MCR / C) part of the pricing calculation can never cause a decrease in the price of $NXM (in ETH).

Now let's talk about the short-term part of $NXM's pricing formula. This is the part of the calculation that CAN cause NXM's price (in $ETH) to go down. This is also affected directly by supply/demand economics. More buying than selling then price goes up, and vice-versa.

This part of the calculation is expressed as MCR%^4. That means the actual demand of $NXM vs. the Minimum Capital Required moves the price of NXM to the power of 4. This ^4 mechanic is meant to keep price somewhat near the MCR in the long term.

As a visual I took the current price of $NXM and increased just the MCR%. You can see that the price moves exponentially faster as it goes up the curve, which is in contrast with MCR with moves linearly.

One final note, and perhaps one of the most important for many is that $NXM is price in $ETH! That means when you hold $NXM you are 100% exposed to $ movements in $ETH. If $ETH doubles from $400 to $800 next week, then all other things being equal, $NXM will also double.

In summary, the price of $NXM is being affected by MCR increases and MCR% increases/decreases.

As a final visual on $NXM pricing, I take 2 versions of price movement, one increases MCR and the other MCR% in 1% increments. You can see the pricing impact of each contrasted.

A lot of $NXM's pricing is based on both healthy demand for cover but also healthy demand by the community to invest in Nexus Mutual to meet cover demand. Is the community demand increasing? We can see by looking at the "Capital Pool", the pool for Nexus Mutual's $ETH resrvs

I want to know a few things. 1) if the reserves are growing at the same pace as #DeFi and 2) if that pace were to continue what might the price of NXM look like in the future.

I first compared the growth of the CP (capital pool) to #DeFi TVL...

This graph uses an exponential curve which projects not only CP growing with #DeFi but also outpacing #DeFi at a consistent pace as people wise up to the important of smart contract coverage. You might call this the uber-bull-case.

Here is another look at this but forecasting using a linear trendline. You might call this the base-case scenario.

I personally believe it will fall somewhere in between the two. As we get more data I can fit a trendline to the non-bubble data

Here we can see the size of the CP vs #DeFi TVL. It has clearly been trending up since the explosion in DeFi TVL. This is going to be a huge driver of $NXM's price as people looking to protect their crypto assets will drive this % higher.