Challenges in the Lifecycle of Collateralized Debt Obligation Development

In this section, we explore the inefficiencies of the CDOs generation lifecycle in the legacy financial markets. When it comes to the modernization of the CDO development infrastructure the blockchain technology and cutting-edge cryptography can provide efficient solutions for mitigating the current deficiencies. In this work, on one hand, we are aiming to bring the CDOs to the DeFi space to further contribute to the sophistication level of DeFi ecosystem, and on the other hand, we are establishing the necessary infrastructure required to enable efficient migration of the legacy financial CDOs (contracts) to the blockchain.

The Deficiencies of Data Infrastructures Supporting Development of CDOs

The current securitization lifecycle applied for the composition of the collateralized debt obligations has several deficiencies, such as big time lags, costs, and opacity. Furthermore, the overall loan underwriting is not standardized between loan originators, there is no common repository for the effective accumulation of the loan-specific data in a standardized manner and effective fetching of the real-time analytics and insight over the collected data. The data silos do not contribute to the development of global view and verifications on the quality of the loan obligations pools which have been originated by the different parties. Though, the segregated storage of loan-specific data is important considering the data security & privacy requirements, the lack of tools to enable reconciliation creates risk of inconsistencies between issuers, investors, rating agencies, regulators, etc.

Overall the information asymmetry in the space negatively impacts the development of the effective auditing and verification mechanism both for the investors as well as for the regulator. Furthermore, it increasingly limits the possibility to conduct automation on the CDO products. The trust-based infrastructure and contractual arrangement between institutions involved in the CDO development lifecycle and investors (there is significant conflict of interest) creates the potential of misconduct and human-related errors.

Lack of Real-Time Data for Efficient Risk Assessment

Currently, there are no available solutions on the market that enable investors to get near-real-time performance data. Investors have to perform cumbersome data standardization and offline analysis to price risk and perform benchmarking for this type of securities.

In addition, they do not get asset pool performance updates in a timely manner, which can result in suboptimal investment decisions and a lack of liquidity in the secondary market.

In general, the information regarding of underlying loan pool of CDOs is highly sensitive and issuers may not have the incentive to disclose such data at individual loan-level in near-real time to investors. Further, investors may not want to see the loan-level data points and consumer information in clear form as they would become subject to data privacy regulations. There is currently no solution in the market that would enable issuers to provide publicly verifiable timely information at pool level, without revealing loan-level information.