The Alchemy of Debt: Why Settlement Is Never Without Exposure
I’ve always found liquidation events a little uncomfortable to watch. A market drops quickly, collateral gets sold, and suddenly a position that looked manageable can turn into a much bigger problem. The strange part is that the liquidation itself can sometimes make the situation worse.
That got me thinking about TermMax and a different way of dealing with default.
Instead of relying entirely on a secondary-market auction to get rid of distressed collateral, TermMax’s design can move toward physical delivery. If a default remains unresolved beyond the liquidation period, the pledged collateral can ultimately be distributed to Fixed-Rate Token (FT) holders at maturity.
At first glance, that sounds like a way around liquidation-driven slippage. And in some situations, it could be useful, especially when the collateral isn’t something that can be sold easily without moving the market.
But there’s an important catch.
The risk hasn’t disappeared. It has simply moved.
With an auction, lenders face execution and slippage risk. With physical delivery, they may end up holding the underlying asset itself—and therefore its price risk.
That’s probably the more interesting lesson here. DeFi can change how default is handled, but it can’t make economic exposure disappear.
When liquidity dries up, someone still has to hold the asset.
who should bear that exposure when the market stops cooperating?
@TermMax #TermMax
I’ve always found liquidation events a little uncomfortable to watch. A market drops quickly, collateral gets sold, and suddenly a position that looked manageable can turn into a much bigger problem. The strange part is that the liquidation itself can sometimes make the situation worse.
That got me thinking about TermMax and a different way of dealing with default.
Instead of relying entirely on a secondary-market auction to get rid of distressed collateral, TermMax’s design can move toward physical delivery. If a default remains unresolved beyond the liquidation period, the pledged collateral can ultimately be distributed to Fixed-Rate Token (FT) holders at maturity.
At first glance, that sounds like a way around liquidation-driven slippage. And in some situations, it could be useful, especially when the collateral isn’t something that can be sold easily without moving the market.
But there’s an important catch.
The risk hasn’t disappeared. It has simply moved.
With an auction, lenders face execution and slippage risk. With physical delivery, they may end up holding the underlying asset itself—and therefore its price risk.
That’s probably the more interesting lesson here. DeFi can change how default is handled, but it can’t make economic exposure disappear.
When liquidity dries up, someone still has to hold the asset.
who should bear that exposure when the market stops cooperating?
@TermMax #TermMax