Startup Adapts Credit Default Swap Model to Unsecured Crypto Lending

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Carapace Raises $2.5M in NFX Led Round

Credit default swaps are part of the financial tradition. These complex instruments played a role in the 2008 subprime mortgage crash and featured in the famous account of that cataclysm, “The Big Short.”

Now, a variant of credit default swaps has come to crypto.

$2.5M round

A new protocol called Shell provides default risk protection on under-collateralized crypto loans. And while this blend of Wall Street alchemy and blockchain funding may raise some eyebrows, it’s backed by a prestigious venture capital firm in digital assets: NFX.

NFX, which focuses on early-stage and pre-seed companies, led a $2.5 million funding round for Carapace, the company announced today. NFX has invested in crypto and non-crypto businesses, including Ribbon and Lyft.

Carapace operates much like an insurance company, but it insures debt, not property or automobiles. Selling default protection against unsecured assets is a high risk proposition.

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He works closely with Goldfinch, a credit protocol with $99 million in active loans. Carapace will sell Goldfinch protection on their loans to lenders. In the event of default by a Goldfinch borrower, Carapace will repay the principal of the loan.

Funding comes from a pool and contributors can earn a return on their investments.

Default risk

“What we’re essentially doing is a protection service where we match these lenders who are providing liquidity in these under-secured loan protocols with other investors who are willing to take on some of that default risk,” Rohit Sabnis, co-founder of Carapace, says The Defiant.

Most crypto loans are overcollateralized largely because blockchain users are pseudonymous – no one necessarily knows anything about each other except what is visible on the chain, and how much wealth a person has. order is much easier to establish than a person’s overall creditworthiness.

This has made the unsecured lending space something of a holy grail in crypto. There are few options for lenders to get protection on unsecured loans.

“I saw under-collateralized protocols like Goldfinch, Maple Finance, and TrueFi growing, but the problem was that there was no reliable way to protect against default risk,” said Taisuke Mino, the other co-founder of Carapace, to The Defiant.

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