CDO (Collateralized Debt Obligation) in DeFi: a form of harakiri?

A few days ago I read an article about the possibilities of inserting new financial products in the crypto landscape.

This would give DeFi greater investment flexibility and above all, the risks would be passed on to investors, who, being "volpones", would derive advantages in terms of volatility by diversifying the basket.

All good?

But let's proceed straight: the product would be the inclusion of bonds, but in particular of a specific type, the Collateralized Debt Obligation CDOs.

As we know, bonds are debt securities issued by companies or public bodies: with the purchase of a bond, the capital is immobilized for a certain period; at the end of which it is returned in full. The interest accrued by this capital, on the other hand, is paid at a set frequency of 3-6-12 months.

If the company issuing these bonds does not pay the interest rate, then legal action can be taken by filing a bankruptcy suit.

As mentioned, the Collateralized Debt Obligation is a particular type of bond that groups together a series of bonds called ABS Asset-Backed-Security.

ABSs are nothing more than the transformation of a debt into liquidity; to offset the risk entitlements, these bonds contain a multitude of debts classified according to solvency.

The type of risk is divided into 3 classes: Senior, Mezzanine and Junior.

Seniors have limited risk as the creditor has a certain reliability as a solvent, gradually moving to mezzanines and juniors where the risk of insolvency increases.

Obviously, the first to be liquidated are the Seniors as they are less risky.

By doing so, the investor has under control the risk target he takes on.

I hope I was clear enough in the presentation of these financial products as they are complex enough to understand.

Now let's go deeper with a little historical digression.

This liquidity methodology was proposed in 1657 by a great Dutch merchant Johan Palmstruch.

After becoming general manager of the Stockholm bank, he had a vision: granting loans to people using the funds deposited. This operation immediately proved its cumbersome as the periods of deposits were much shorter than loans, so if a person accessed the bank to withdraw his money and these were unavailable, the loan had to be revoked.

To overcome this impasse, in 1661, he invented the Kreditivsedlar, literally Credit Card.

This piece of sheet (with a double “e” pronounced very shortly) had the possibility of being exchanged at any time for gold or silver coins. The first rudimentary form of banknote.

With this artifice, he was able to solve the problem of the unavailability of the coins given on credit, but the bank printed too many banknotes compared to the collateral, leading to the collapse of the whole system.

Having established how this process works, let's move on to imagine a transposition of this financial product on DeFi.

In practice, a strategy very similar to that of Palmstruch could be implemented: using deposits to refinance new loans.

Let me explain better, a credit in cryptocurrencies is disbursed only and exclusively if, together with the credit portion, the guarantee part is accompanied - and immobilized - therefore the subsequent credit could be disbursed using the relevant portion of the guarantees.

To ensure that this system, however, does not implode, subsequent loans must also have collateral as a guarantee.

Honestly, I don't really look favorably on this situation, in fact we could find ourselves in the same situation as traditional finance that there are thousands and thousands of NPLs (Non Performing Loans) also called non-performing loans.

These unpaid credits are sinking the economies of various countries.

A good opportunity could be the tokenization of these NPLs, where a multitude of investors can participate, clearly it will be necessary to place an entry threshold, in such a way as to give weight to the type of investment and not fall back into the previous situation.

As we can see, the interference of classical finance is "contaminating" DeFi and I do not see this event willingly, especially for the consequences it could bring with it.

What do you think about it?