Underwriting capacity keeps falling. On-chain funds are proactively avoiding protocols that have structural risk amplifiers built into their design—specifically, those with highly correlated risks that would leave the insurance pool unable to pay out when something goes wrong.
This insight is based on an analysis of Nexus Mutual's underwriting capacity. Nexus Mutual is currently the largest insurance protocol in DeFi. Its capacity is essentially determined by how much NXM is staked on it. When that underwriting capacity drops, it means staked funds are pulling out, and behind that withdrawal lies the market's repricing of risks in certain protocols.
The Direct Cause of Declining Capacity: Stakers Exit on Their Own
Nexus Mutual's underwriting capacity is calculated as: Total Capacity = Active Staked NXM × Global Capacity Factor. Right now that factor is fixed at 2, meaning 1 NXM staked backs 2 NXM worth of coverage.
When staking pool managers consider a protocol too risky, they withdraw their staked NXM, and the available coverage for that protocol shrinks. According to a professional risk rating agency, Nexus Mutual's C+ rating reflects doubts about whether its capital pool can survive a "correlated multi-protocol attack"—if the same vulnerability hits more than five insured protocols at once, its roughly $150 million capital pool could be exhausted and payouts might be cut to 50–70 cents on the dollar.
What Kinds of Protocols Are Funds Steering Clear Of?
High-risk, correlated protocols: DeFi risks are strongly linked—oracle failures and cross-chain bridge exploits can cascade and hit every protocol that relies on the same infrastructure. During the USDC depeg in March 2023, all protocols using USDC as collateral were affected on the same day. The risk premium for insuring such protocols is extremely high, and stakers are unwilling to underwrite them.
Protocols where yield can't cover the premium: Aave V3's USDC deposits earn around 3.14% APY, but premiums run as high as 1.5%–2.5%, leaving a net yield of only 0.6%–1.6%. Maple Finance is even more extreme, with premiums of 3%–6% that can push net returns into negative territory. Funds are being actively pulled from these protocols because insurance costs eat up the earnings.
Protocols that depend on bridges or oracles: Nexus Mutual founder Hugh Karp has clearly said, "The core failure of bridge risks will not be covered by insurance." If a protocol's core mechanism relies on a cross-chain bridge or a single oracle, the insurance pool may not be able to pay when that infrastructure breaks. Stakers naturally won't provide capacity for such risks.
Risk warning: Nexus Mutual's capital pool is about $150 million, while DeFi's total value locked runs into hundreds of billions—a coverage ratio of less than 2%. Its total historical claims add up to only around $18 million, yet DeFi security losses in April 2026 alone exceeded $600 million. A single large incident on the scale of Kelp DAO (a one-time loss of $292 million) could drain almost the entire insurance reserve of the industry in one go.
Common Misconceptions
Many people think underwriting capacity drops because a protocol has been hacked, but the reality is that the decline often happens before any attack. Stakers see structural risks in a protocol (heavy reliance on a bridge, yields that can't cover premiums, too much correlation) and pull out their stakes early, causing capacity to shrink. This is essentially the market voting with its feet, not a reaction after the fact.
What to Do Next
If you notice a protocol's available underwriting capacity falling steadily, you can check the exact Available Capacity number on Nexus Mutual's app. If it's near zero, staked funds are leaving in droves. At that point, trying to buy coverage for that protocol may mean you can't get full protection, or premiums have already been pushed sky-high. It's better to stick with protocols where capacity is stable and premiums haven't spiked suddenly. Also keep an eye on the compliance-friendly insurance syndication and reinsurance integration that insurance protocols like Nexus Mutual are working on—these could bring in external capacity to support underwriting in the future.
