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They're guaranteeing it in the same way that when you buy a corporate bond with a 4% yield, you're guaranteed to get the money[0]. A bond is still a security.

They're guaranteeing it in the same way that when you buy a corporate bond with a 4% yield, you're guaranteed to get the money[0]. A bond is still a security. [0] Right? Counterparty risk!

modeless 5y ago
Not all loans are bonds though. How does the law define the difference?
- JumpCrisscross 5y ago
  > Not all loans are bonds though. How does the law define the difference? Bonds are raised from a diverse set of investors. Loans, in securities parlance, are raised from (and syndicated by) regulated banks.
  - alasdair_ 5y ago
    Individuals can loan money to other individuals, no? They can even agree to pay interest if they want, or am I missing something?
    - eru 5y ago
      When you are giving a loan to your friend or a business partner, you are not engaging with the general public. Similar, you can sell shares in your business to your friend or business partner, but if you want to sell to the general public, the SEC is interested. (I have no clue whether this distinction is the important legal one here.)
  - throwaway2037 5y ago
    Bonds are also registered investments which strict regulations about marketing (IPO), trading, and settlement. In some markets, "private placement" bonds are possible, but there are still many rules to follow created by financial regulators. A cursory search of "loan vs bond" yields many interesting results. I am sure the variance matters from market to market.
rjknight 5y ago
But all contracts have some element of counterparty risk. Contractual guarantees are just contractual, nobody can give absolute guarantees of anything.
- kybernetikos 5y ago
  Lots of defi has no counterparty risk. Much of it is over collateralised and managed by smart contacts. There is of course software risk in the smart contract (although I think people underestimate that in conventional finance too).
  - quickthrower2 5y ago
    The security of the Ethereum network is the counterparty
    - Dylan16807 5y ago
      The network itself? That seems pretty safe to me. Even if other nodes get hacked, you can run your own.
  - arisAlexis 5y ago
    What you are saying is totally debunked by the sheer number of Defi hacks,rug pulls and exoloits the previous year resulting in billions of lost money. That defi has no counterparty risk is probably one of thr all time wrong sentences on HN.
    - kybernetikos 5y ago
      > That defi has no counterparty risk is probably one of thr all time wrong sentences on HN Which is why I didn't say it. One of the nice features of smart contract platforms is that any two people can quickly set up a transaction where they swap a basket of assets for another basket of assets atomically and without counterparty risk. To get similar guarantees in tradfi requires either an underwriter (that we assume can't go bust) or escrow (with a party we both completely trust). Smart contract systems are of course infinitely flexible, and some of the most useful kinds of systems you might want to build are not overcollateralized, but those that are can liquidate automatically with no counterparty risk. Your comment seems to treat 'defi' as just one thing. It's not. There're a huge range of products offered, with risk ranging from lower than lots of traditional products to crazy high.

They're guaranteeing it in the same way that when you buy a corporate bond with a 4% yield, you're guaranteed to get the money[0]. A bond is still a security. [0] Right? Counterparty risk!

modeless 5y ago

Not all loans are bonds though. How does the law define the difference?

JumpCrisscross 5y ago
> Not all loans are bonds though. How does the law define the difference? Bonds are raised from a diverse set of investors. Loans, in securities parlance, are raised from (and syndicated by) regulated banks.
- alasdair_ 5y ago
  Individuals can loan money to other individuals, no? They can even agree to pay interest if they want, or am I missing something?
  - eru 5y ago
    When you are giving a loan to your friend or a business partner, you are not engaging with the general public. Similar, you can sell shares in your business to your friend or business partner, but if you want to sell to the general public, the SEC is interested. (I have no clue whether this distinction is the important legal one here.)
- throwaway2037 5y ago
  Bonds are also registered investments which strict regulations about marketing (IPO), trading, and settlement. In some markets, "private placement" bonds are possible, but there are still many rules to follow created by financial regulators. A cursory search of "loan vs bond" yields many interesting results. I am sure the variance matters from market to market.

rjknight 5y ago

But all contracts have some element of counterparty risk. Contractual guarantees are just contractual, nobody can give absolute guarantees of anything.

kybernetikos 5y ago
Lots of defi has no counterparty risk. Much of it is over collateralised and managed by smart contacts. There is of course software risk in the smart contract (although I think people underestimate that in conventional finance too).
- quickthrower2 5y ago
  The security of the Ethereum network is the counterparty
  - Dylan16807 5y ago
    The network itself? That seems pretty safe to me. Even if other nodes get hacked, you can run your own.
- arisAlexis 5y ago
  What you are saying is totally debunked by the sheer number of Defi hacks,rug pulls and exoloits the previous year resulting in billions of lost money. That defi has no counterparty risk is probably one of thr all time wrong sentences on HN.
  - kybernetikos 5y ago
    > That defi has no counterparty risk is probably one of thr all time wrong sentences on HN Which is why I didn't say it. One of the nice features of smart contract platforms is that any two people can quickly set up a transaction where they swap a basket of assets for another basket of assets atomically and without counterparty risk. To get similar guarantees in tradfi requires either an underwriter (that we assume can't go bust) or escrow (with a party we both completely trust). Smart contract systems are of course infinitely flexible, and some of the most useful kinds of systems you might want to build are not overcollateralized, but those that are can liquidate automatically with no counterparty risk. Your comment seems to treat 'defi' as just one thing. It's not. There're a huge range of products offered, with risk ranging from lower than lots of traditional products to crazy high.