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Big institutions make the loans because small ones can’t bear the risk. A small investor might only have the capital to make a handful of mortgages, and so hav

Big institutions make the loans because small ones can’t bear the risk. A small investor might only have the capital to make a handful of mortgages, and so have a much higher variance in her outcome. A single default might eat all her return and then some. So the small investor might instead contribute to a much larger pool and earn a lower return with a much lower variance. We could imagine mediating that transaction through blockchain something something, but degree of risk pooling - centralization - is the essential feature of the transaction

NoPicklez 6y ago
Agreed regarding the reasons behind big institutions with large amounts of capital to bear the risk associated with lending compared to a small investor. So if someone wanted a loan for say 300k, other small investors may choose to lend/service a portion or as much of that loan as they wish with interest?
- kristjansson 6y ago
  I suppose small investors could realize the same diversification by lending in very small amounts to a very large number of borrowers, such that only a small fraction of their wealth is exposed to any individual borrower. Obviously given m lenders and n borrowers, a system would need to manage O(m*n) streams of payments vs O(m+n) for a centralized party. In a traditional finance/legal framework, the former is an overwhelming amount of overhead for all but the largest loans, which are syndicated across lenders. For realistic sizes of m and n though, it’s probably not unreasonable for a single smart contact (per borrower?) to manage them. That starts to look ‘centralized’ though, and a contract per borrower/lender probably starts to get expensive? I don’t have a good enough sense for the practicalities to know for sure. It would weird to borrow a 300k $10 at time though, like you’re a BigCo borrowing $10m from each of 20 banks...

NoPicklez 6y ago

Agreed regarding the reasons behind big institutions with large amounts of capital to bear the risk associated with lending compared to a small investor. So if someone wanted a loan for say 300k, other small investors may choose to lend/service a portion or as much of that loan as they wish with interest?

kristjansson 6y ago
I suppose small investors could realize the same diversification by lending in very small amounts to a very large number of borrowers, such that only a small fraction of their wealth is exposed to any individual borrower. Obviously given m lenders and n borrowers, a system would need to manage O(m*n) streams of payments vs O(m+n) for a centralized party. In a traditional finance/legal framework, the former is an overwhelming amount of overhead for all but the largest loans, which are syndicated across lenders. For realistic sizes of m and n though, it’s probably not unreasonable for a single smart contact (per borrower?) to manage them. That starts to look ‘centralized’ though, and a contract per borrower/lender probably starts to get expensive? I don’t have a good enough sense for the practicalities to know for sure. It would weird to borrow a 300k $10 at time though, like you’re a BigCo borrowing $10m from each of 20 banks...