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Smart contracts on public blockchains solve this by committing coins to the contract. In effect the contract is an escrow facility in which the coins are locked

Smart contracts on public blockchains solve this by committing coins to the contract. In effect the contract is an escrow facility in which the coins are locked up until the contract terminates. The advantage of e.g. Ethereum blockchains is that defaults don't happen the assets are held by the contract. The drawback is that your assets are locked up for the duration of the contract, which is completely incompatible with how wholesale finance operates. DAML's genesis was in solving this problem on private ledgers used for mediating inter-party value exchange of off-ledger assets (like dollars). To do that, rather than having an account or asset focus, it's built around the notion of rights, obligations, and enforcing a legally-compatible approach to contractual consent. That is so that, when a "workflow" (e.g. your LIBOR swap) terminates, DAML provides a fully audited record of all the parties' agreement to be bound by the terms and consequences of the workflow itself. All being well there's an exchange of assets off-ledger. If things turn out badly, you go to court and the default is worked out with the backing of a rock-solid audit trail of affirmation (instead of a loose-leaf binder of printed emails and a dog-eared ISDA agreement.) (I work for DA.)

jgalt212 8y ago
> Smart contracts on public blockchains solve this by committing coins to the contract. In effect the contract is an escrow facility in which the coins are locked up until the contract terminates. So if this is true, one could never write a call option on Ethereum because the downside risk for the writer is unbounded and you cannot put infinite coins in escrow. As an aside, given the escrow component, there seems to be no credit/counterparty risk in any ETH smart contract, but for the most part if there is not risk transfer or sharing is there really any commerce to do?
- malberto 8y ago
  Smart contract languages look still in infancy as practical applications are audit trails with stronger guarantees and lower operating costs. What you are thinking of sounds like a far more advanced deal management system. Besides, is it even possible to invent a way to trade risk in such a way that if one party hold unbounded exposure before the trade then after the trade both parties have bounded exposure? does it even make sense to have unbounded risks in system that is inescapably formal and will hold a bounded amount of money at each time? One could argue that risks that look unbounded are usually (as in without a ledger) handled less formally (ie: state bailout, https://www.forbes.com/sites/jamesconca/2016/03/10/after-five-years-what-is-the-cost-of-fukushima/ https://www.forbes.com/sites/jamesconca/2016/03/10/after-fiv...) (Disclaimer: I work for Bloomberg on DLIB BLAN that is a contract language for structuring, pricing and managing exotic derivatives, no block-chains involved)

jgalt212 8y ago

> Smart contracts on public blockchains solve this by committing coins to the contract. In effect the contract is an escrow facility in which the coins are locked up until the contract terminates. So if this is true, one could never write a call option on Ethereum because the downside risk for the writer is unbounded and you cannot put infinite coins in escrow. As an aside, given the escrow component, there seems to be no credit/counterparty risk in any ETH smart contract, but for the most part if there is not risk transfer or sharing is there really any commerce to do?

malberto 8y ago
Smart contract languages look still in infancy as practical applications are audit trails with stronger guarantees and lower operating costs. What you are thinking of sounds like a far more advanced deal management system. Besides, is it even possible to invent a way to trade risk in such a way that if one party hold unbounded exposure before the trade then after the trade both parties have bounded exposure? does it even make sense to have unbounded risks in system that is inescapably formal and will hold a bounded amount of money at each time? One could argue that risks that look unbounded are usually (as in without a ledger) handled less formally (ie: state bailout, https://www.forbes.com/sites/jamesconca/2016/03/10/after-five-years-what-is-the-cost-of-fukushima/ https://www.forbes.com/sites/jamesconca/2016/03/10/after-fiv...) (Disclaimer: I work for Bloomberg on DLIB BLAN that is a contract language for structuring, pricing and managing exotic derivatives, no block-chains involved)