Realistically, lending in DeFi and CeFi tends to have binary outcomes - you profit or you’re zeroed out as the lender. Catastrophe has to be treated as a normal variable rather than an anomaly. This is because technical exploits onchain (e.g. infinite mint or oracle manipulation) and fraud offchain mean the collateral is good or it isn’t, with little in between. This is not dissimilar from an old branch of collateralized lending called bottomry. Bottomry is a lending structure where a ship would be pledged as collateral for a trade voyage. Ships have always been valuable, so it served as a way for captains and companies to access working capital. What differentiates bottomry is that the loan is cancelled if the collateral sinks or is destroyed on the voyage. The loans were nonrecourse as long as the ship didn’t survive. This is obviously more risky for the lender, since it exposes them to losses borne by piracy, natural disasters, or even moral hazard of sinking one’s own ship. That’s not unlike a lender on Aave or Morpho or Euler being exposed to losses stemming from protocol exploits, blockchain halts, or rugs. A keen reader will wonder, “What happens if the ship returns but the voyage was just not financially successful?” In that case, the captain was personally liable. The ship would be seized and sold, and if that didn’t cover the debt then the captain was heading towards indenture, debtors’ prison, or at least financial ruin. This introduces a major moral hazard into bottomry. If your sailing is fine but the trading is bad, you have a strong incentive to wreck your ship to remove personal liability. Coming back to DeFi lending, this moral hazard (or a close cousin) still exists. If your (legitimate) project just doesn’t work out, there’s often an (illegitimate) exit possible through pledging your token as collateral and just walking away or even dumping post-borrow. Degens would probably enjoy bottomry lending. Rates varied in place and time but in the ancient, medieval, and early modern world, 30-50% rates were not uncommon. Now imagine yourself borrowing money to ape into such loans for huge spreads. Truly nothing new under the blockchain sun!