This is a sample of a research note we sent to clients yesterday. For the next 24 hours, anyone who uses code “ETHATH” will get 50% off their first month of any subscription or 20% off an annual plan! Lock in your Delphi Membership here!
As ETH ripped higher in recent weeks, NXM followed suit. Over the past 30 days the price of ETH increased +88% while NXM and wNXM rose +90% and +84%, respectively. The reason for this lock-step appreciation across assets is due to Nexus’ capital pool, which is almost entirely comprised of ETH. As the value of ETH held in, and controlled by, the protocol increased so did the token which has claim on it.
This was expected. In our Institutional Nexus report from July, we outlined our investment thesis and stated that we viewed NXM as a form of “levered” pass-through exposure to ETH. If changes in the price of ETH represent beta exposure for DeFi, then NXM price performance in excess of that would be alpha. If we look at the chart below, the recent gains for Nexus can be entirely attributed to its beta component, as the dollar price soared while the bonding curve price, denominated in ETH, stayed flat.
Now, the NXM bonding curve $ price shown above can be somewhat misleading; it’s a price at which you can buy NXM from the bonding curve but not one in which you can currently sell as the MCR % is at its floor of 100% (see here for an explainer). For true price discovery, it’s better to analyze the price of wNXM, which trades on the open market rather than being priced on a bonding curve. Ideally, when bonding curve redemptions aren’t frozen, both NXM and wNXM should trade at parity with one another or else an arbitrage opportunity exists. However, since bonding curve redemptions are currently frozen, these prices have decoupled in recent months. In addition to the bonding curve and market prices of NXM, there’s also a third way to value the token – it’s book value. This can be calculated by dividing the value in the capital pool by NXM’s total supply, currently ~$200m and 6.7m, respectively.
An interesting occurrence has happened over the past couple of weeks as the price of ETH rose while bonding curve redemptions stayed frozen. Namely, the book value of NXM has actually converged with the market price. To illustrate just how unusual this is, we’ve charted the market price’s premium and discount to book value over time below. A token that had once traded at 5 to 6 times its book value is now trading at an ~11% premium. In fact, for a few days recently, the price of wNXM actually traded at a discount to its book value before savy investors bought spot.
This is remarkable for a few reasons. To start, with a fully diluted market cap of $225m, adjusted using the wNXM price, Nexus is trading at a level that is almost entirely “collateralized” by the $200m of value in the capital pool. That’s better than most new stablecoin projects lately. *However, we should clarify that, with ~$117m of active cover currently underwritten, the $200m in the capital pool is not sitting idle but rather is being used to fund ongoing operations. This capital-at-risk could be netted out when analyzing book value but cover payouts are typically rare and would likely be a fraction of that amount. If Nexus were to entirely cease operations, NXM holders would have claim on the $200m in the capital pool net any residual cover payouts.*
The market is effectively pricing Nexus’ value in excess of the capital pool at almost nothing despite consistent demand for its product, minimal competition in its sector, an increasing percent of total supply staked, a warchest that’s bigger than ever before due to ETH’s recent appreciation and rising DeFi TVLs which should be a leading indicator for cover demand. In addition, for those familiar with the bonding curve math, the MCR is now frozen and won’t start growing again until there is 779,639 ETH of active cover. Since MCR growth is a detractor for the bonding curve price, and with only 94,987 ETH of active cover currently, this is a favorable situation.
For added context, below I’ve ranked the top DeFi tokens by their fully diluted market cap using data from CoinGecko and adjusting for the wNXM price. As you can see, Nexus just cracks the top 50 DeFi tokens, despite almost the entire market cap truly being “cash”* on the balance sheet. How many projects valued higher can say the same?