Prime brokerage firm Arkis has closed a $2.2 million pre-seed round to accelerate DeFi adoption in large institutions. The round included prominent Web3 investor gumi Cryptos Capital, which launched a fund in 2022 to back 50 crypto startups.

It will offer undercollateralized loans to DeFi hedge funds, asset valuations, custom leveraged positions, and on-chain margin accounts.

“We are selling capital efficiency,” said Serhii Tyshchenko, co-founder of Arkis. In other words, the ability to provide undercollateralized leverage results that maximize capital efficiency for each portfolio.

Tyschenko told The Defiant his company wants to accelerate the maturation of the DeFi industry, which today is overly risky and has too many “YOLO” connotations.

DeFi has been slow to make it into the broader financial ecosystem, especially into the portfolios of larger institutions. Arkis aims to introduce larger entities – it is targeting funds with $50 million or more in assets under management – with ERC-20 tokens, LP positions, and other smart contracts.

However, undercollateralized lending is a risky business in the cryptocurrency space. In November 2022, as the FTX collapse unfolded, platforms offering unsecured lending came under fire. Alameda Research was indebted to several undercollateralized DeFi lenders, although to a somewhat minor number, $13 million.

And even though those platforms didn’t fall, larger companies that also dabbled in undercollateralized loans did. Voyager delivered a suffered lesson in counterparty risk amid the crypto banking crisis in mid 2022. Celsius fell in tandem, also speeding up the arrival of the bear market, and although payouts have begun, most investors are still waiting.

First principles from Traditional Finance

According to the team at Arkis, the product they are building comes from first principles in the TradFi space.

This includes low-latency DeFi exchanges, prime brokers, privacy solutions, and strong building blocks on the custodial level.

Tyschenko said Arkis will be able to handle under-collateralized transactions between borrowers and lenders just like traditional asset managers do. In fact, he told The Defiant, the architecture has been honed and tested for generations and is a common tool in a traditional asset manager’s arsenal.

Risk Management

Arkis’s solution is not bulletproof, however.

Were systemic risks to strike, Tyschenko pointed out, such as a sudden drop in the price of traded assets or a failure of the margin engine infrastructure, the firm might not be able to liquidate the portfolio efficiently.

He also acknowledged a common threat in the crypto industry: hacks, claiming that their architecture mitigates the danger by isolating collateral and leverage accounts.

Arkis has been conducting private beta transactions since Oct. 2023 and is set for public launch this month. The firm is focused on Ethereum, aiming to expand into a multi-chain solution that would include Arbitrum and Polygon in the future.