Default Game Theory

One of Ethereum’s superpowers is around the idea of game warping — the ability to alter the game theory equilibrium by ensuring perpetual credible commitments onchain through code. Turns out, unsecured lending is the perfect application for this — by creating (1) perpetual credible commitments of triggering off-chain collections and (2) creating an immutable record of the default we significantly alter the game theory payoff for strategically defaulting. Essentially, the ledger creates both certainty of enforcement and an undeniable evidence trail that makes traditional legal remedies more effective and increases the opportunity cost of attempting to strategically default compared to traditional off- chain lenders. This increases lending market efficiencies, tightens the spreads, and minimizes credit rationing.

Initially, any defaults that do occur will be strategic in that the borrower can repay but does not want to. This type of borrower maps high on ”ability to repay” and extremely low on ”willingness to repay”, and short of fraud, credit furnishing and collections is historically effective particularly for mass-affluent/high-net worth individuals.