A group of VC heavyweights and crypto entrepreneurs, including Blockfolio founder Ed Moncada, are backing a new risk management tool for the exploding decentralized finance (DeFi) space.
Announced Thursday, Cozy Finance has raised a $2 million seed round, led by Electric Capital and including Variant Fund, Dragonfly Capital, Robot Ventures, Slow Ventures, Volt Capital, Spencer Noon, Moncada and others.
The team attempting to bring some order to the creative chaos that is DeFi consists of Cozy co-founders Tony Sheng, formerly of Multicoin Capital, and Payom Dousti, co-founder of Rare Bits, a peer-to-peer marketplace for crypto goods.
The value of assets deposited in Ethereum-based DeFi dapps has soared from $1 billion to over $8 billion in the span of six months. Developers have unlocked massive value for crypto investors by creating useful ways for them to manage their assets. However, these users face new forms of risk, like irreversible technical vulnerabilities.
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“As DeFi has grown, a clear and important hole are tools for people to be able to manage their risk appropriately,” Electric Capital co-founder Avichal Garg told CoinDesk. “Tony and Payom have deep experience in crypto and novel ideas on how to build risk management tools. We are thrilled to be working with them.”
DeFi hedging options
At the current moment, the transformative potential of DeFi is being hindered by a lack of appropriate risk management tools, the firms said in a Medium post.
“Today, the most common method of managing risk is ‘position sizing’ – even the most active users and funds aren’t deploying as much capital into the ecosystem as they’d like to,” Sheng told CoinDesk via email. “Part of this is that demand for risk management tools currently outstrips supply. The other part is that we have yet to see a truly ‘DeFi native’ ways to manage the risk.”
Other players trying to make DeFi safer include London-based Nexus Mutual, which runs a decentralized risk pool designed to hedge against DeFi smart contracts blowing up – something which appears more and more to be an acceptable risk of late.
But Sheng disagreed that blow-ups are simply part and parcel of the nascent DeFi economy.
“I don’t think anybody believes we should learn by making mistakes with user deposits,” he said. “Major blow-ups set the entire industry back. Better risk management is a key enabler of more experimentation.”
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Asked how Cozy Finance compared with risk management in traditional finance, Sheng said the unique risks of DeFi require unique solutions.
“We’re building something that is – to our knowledge – quite new. What we plan to launch will not look like anything on the market today,” he said.