Collateralized Debt Obligations Make Their Way Into DeFi Lending

Opium Finance has released collateralized debt obligation products (CDOs) for Compound Finance’s automated lending markets, Opium Protocol founder Andrey Belyakov told CoinDesk in a phone interview Friday.

Investors can put up the Compound debt token cDai – and soon Uniswap LP tokens – to diversify exposure to DeFi lending markets. Opium’s product pays out structured returns to both a senior and junior risk tranche in exchange. The former tranche offers a 7% fixed return on dai (a collateral-backed stablecoin) at maturity, while the latter pool offers a variable rate paid out after filling up the senior tranche’s return, a blog post shared with CoinDesk states.

As depicted in Michael Lewis’ “The Big Short,” CDOs are infamous for their role in monetizing the subprime mortgage crisis that spurred the 2008 financial crisis. Warren Buffet even went as far to call CDOs and other derivatives “financial weapons of mass destruction” years before the financial downturn. CDO holders lost out on expected payments when mortgage holders defaulted en masse. Banks that were over leveraged on the then-worthless debt obligations began to default themselves, such as failed financial giant Bear Stearns.

It’s thought the transparent nature of blockchain-based financial applications could limit the downside of using these complex derivatives. Moreover, the risk profile of the average DeFi lending app is vastly different than the reasons CDOs became a household name over a decade ago. DeFi apps have little chance of becoming insolvent due to programmatic liquidation settings. Rather, the risk mostly comes down to software exploits which

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