Could Smart Contracts Save Credit Default Swaps?

By Patrick Tan on ALTCOIN MAGAZINE

In Shakespeare’s play The Merchant of Venice, the Venetian merchant Antonio enters into a loan contract, interest free, that should he be unable to repay the loan, he will need to forgo “a pound of flesh” (essentially his life, because the human anatomy cannot cope with such large losses of flesh) in return.

Unfortunately, Antonio is indeed unable to repay his debt and as the moneylender Shylock comes to claim his “pound of flesh,” Antonio is saved by Portia, who on a reading of the contract discovers that while Shylock is indeed entitled to Antonio’s flesh, there is nothing stated with regards to Antonio’s blood.

Shylock is thus thwarted and Antonio’s life is saved, on the back of a legal, contractual, technicality.

As so often happens, life it seems, imitates art.

Credit default swaps (CDSs), the oft maligned instruments that contributed to the 2008 Financial Crisis, are in many ways similar to Shylock’s contract with Antonio.

Chest hair removal during the Renaissance was not for the fainthearted.

CDSs are insurance-like derivatives designed to compensate creditors when a debtor…