Untangled Finance, the London-based fintech, has raised $13.5 million in multi-year strategic funding to accelerate its mission to bring institutional-grade credit with a built-in liquidation mechanism on-chain. Fasanara Capital, the fintech investment platform and lending pioneer, is the lead investor in the round.
Established in 2020, Untangled was founded by professionals with a decade-long background in finance, asset origination, and emerging markets. The platform’s protocol focuses on tokenizing real-world private credit assets, such as invoices and SME loans, into on-chain structured credit pools. These pools, in turn, facilitate the issuance of collateralized debt notes to both DeFi and TradFi investors.
Making Capital accessible and more fairly priced
Large corporations have access to more favourable borrowing terms than many of their suppliers. While creditworthiness is a factor, information asymmetry, which is particularly pronounced for SMEs (especially those in emerging economies), contributes to the significantly higher funding costs borne by these SMEs.
Furthermore, the flow of capital across international boundaries remains inefficient: an investor in New York might face inherent challenges identifying and accessing credit investment opportunities in other regions, such as India.
Tokenization takes advantage of blockchain technology to bring traditional assets (Real World Assets or RWAs) on-chain. Tokenized RWAs offer fractional ownership, allowing for borderless access and reduced investment thresholds. It also offers enhanced transparency and security on the performance of the assets and keeps an immutable record of transaction history.
New yield generation opportunities for decentralised finance (DeFi)
DeFi protocols, since their emergence in 2020, have introduced groundbreaking financial tools, including automated market makers and stablecoins. By December 2021, the capital within DeFi, or the total value locked (TVL), peaked at around $250 billion, propelled by liquidity mining where users earned native tokens as rewards. However, as crypto interest dipped in the 2022/23 bear market and token values decreased, returns diminished. RWAs as collateral represent new investment opportunities, providing uncorrelated and stable returns for DeFi investors at scale.
While the global private credit market surpasses the $1.5 trillion, DeFi’s stake in private credits RWAs currently hovers around $500 million. This massive gap underscores a monumental opportunity for DeFi to penetrate and capture a larger share of this market.
Untangled Protocol concentrates on private credit markets, seeing the most utility for Defi in this area. Through its partnership with Fasanara, the protocol will have access to more than 130 verified asset originators spanning 60 countries, offering investors the opportunity to access institutional-grade assets, traditionally exclusive to major financial institutions. According to an individual investor’s risk appetite, they can choose between originator-specific pools or opt for consistent, passive gains via automated lending pools.
Untangled Finance will be launched on the Celo blockchain in early October, followed by Polygon and Ethereum via Chainlink’s Cross Chain Interoperability Protocol (CCIP), making Untangled among the first multichain and interoperable RWA credit protocols.
Built-in liquidation mechanism
In the DeFi realm, liquidity is paramount. Unlike crypto, RWAs in the private credit sector are typically illiquid. With no secondary market available, trading these assets becomes challenging, limiting investors’ exit options, especially in the event of asset defaults.
The RWA DeFi markets have already witnessed a wave of defaults, with liquidity also drying up. Much of this stems from the early days of DeFi enthusiasm when many RWAs were on boarded without adequate due diligence, robust legal structure and effective on-going monitoring. The absence of a strong legal structure failed to safeguard or ring fence these assets adequately.
To bolster investor confidence, it’s essential to onboard high-quality RWAs backed by sound legal structures, reducing the risk of defaults. Equally important is establishing an effective liquidation mechanism, ensuring that even if issues arise, investors have an exit strategy.
Untangled has developed a RWA liquidation framework coupled with a liquidity safeguard. If the quality of loans in an asset pool deteriorated below set benchmarks, the liquidation process would be triggered. At this point relevant collaterals would be auctioned – either on-chain or off-chain – to revitalise the pool and bring it back up to the right grade. When assets are performing and investors would like to exit for liquidity reasons, the protocol facilitates a on-chain Dutch auction that helps new investors take over the exited portion.
Harnessing machine learning, Untangled is also creating a forward-looking credit assessment model. This evaluates a borrower’s future default risks, factoring in previous loan behaviours, borrower standing, and critical macroeconomic indicators. Investors will have an interactive dashboard at their fingertips, helping them to make better informed investment decisions.
Manrui Tang, Untangled Finance’s co-founder, said: “Since 2017, our focus has been on real-world asset tokenization where we see growing interest. Our partnership with Fasanara is a step towards developing reliable DeFi yield mechanisms, broadening the investment possibilities in crypto but also helping to mitigate its inherent volatilities, all while striving to make finance more accessible around the world.”
Quan Le, Untangled Finance’s co-founder, said: “From the outset it has been important for us to have liquidation as a built-in feature of our protocol, not an afterthought. Together with institutional-grade assets, we hope to contribute to the RWA ecosystem by further developing its liquidation infrastructure that will help this new market to scale.”
Francesco Filia, CEO and CIO of Fasanara Capital, added: “We see an upcoming merging of worlds, on one side, fintech lending which fills the gap in underserved SME and consumer markets and, on the other, the way values are being transferred within the new world of digital assets.
“The Untangled team has a rare combination of being rooted in real world finance and yet has acquired deep expertise in blockchain and DeFi. We are looking forward to working with Untangled to engineer these entirely new financial rails so, for the first time, being able to handle users at scale.”
From global financial crisis to tokenization
Untangled’s co-founders, Quan Le and Manrui Tang, boast diverse expertise spanning strategy, M&A, and asset origination across both developed and emerging markets. They met while advising financial services institutions, particularly those in emerging markets to deal with the aftermath of the 2008 global financial crisis.
They later pioneered work in asset tokenization with Binkabi in 2017. In between, Quan dedicated seven years building an agritech venture to aid international investors in greenfield rice farming projects across 13 African nations, acquiring firsthand knowledge of supply chain complexities and the challenges SMEs face in accessing finance and market.