One of the reasons is that many financial contracts have provisions to seize assets under certain circumstances. This is not possible with DeFi because DeFi is built around "unconfiscatable" digital assets.
I believe it is possible to write in provisions for some actor or set of actors to seize assets in a smart contract. This doesn't seem common either because of immaturity or just culture, but I don't think it is impossible.
No, that's not it. An actor must be able to seize assets from another actor, under certain circumstances. That can't be done with smart contracts because of the security model of blockchains.
No, a smart contract cannot seize assets from another wallet. A key feature of distributed ledgers is that only the person who has the private key to a wallet can move assets from that wallet. If you don't understand this there's no point continuing this conversation.
I think you are thinking too narrowly. It is true that a simple transfer from one wallet to another can't be reversed through technical means (though I'm interested in seeing how the law on this develops, for instance whether the legal system will compel wallet owners to pay back assets under threat of real-world non-crypto consequences if they don't), but you certainly can set up an escrow system where the keys to the escrow account are held by a "court" which can come to consensus on one participant retrieving funds from another participant under some set of rules and circumstances. This is more complex and fraught to get right than just direct wallet transfers, which I'm sure is why it isn't common (or maybe doesn't exist at all, I'm not sure), but it's also not impossible.
Sure, but that's not a smart contract, it's a "court system" (except much worse, because it's unaccountable), whereas the whole purpose of smart contracts was to replace courts. The other problem is the assets still need be deposited somewhere in advance, which defeats the purpose of a whole lot of financial operations including most types of loans.
I'm talking about implementing a "court" inside a smart contract. That is, the "court" is just one or more entities that control the private keys necessary to govern the funds locked in the contract.
I'm not sure I understand your last sentence, escrow is a common mechanism in traditional finance, which seems to work for financial operations including loans. But you may well be right on this point, I just don't really understand what you mean.
Well, there are different types of loans. What you're describing is a collateralised loan which is the only type of loan that is feasible to implement with smart contract. Such a loan isn't very useful because the borrower has to post a sum equivalent to the amount borrowed as collateral, which means the borrower isn't really borrowing anything. Undercollateralised loans are more useful, because they can be used to actually finance projects, but these loans can only work if the lender has the ability to seize the lender's assets in the event of default, otherwise the lender would take the money and never pay the loan back. Such loans are not possible with cryptocurrencies because cryptocurrencies are "unconfiscatable", they cannot be seized. The escrow mechanism that you mention doesn't work because because it requires the lender to post collateral and then it's no longer an undercollateralised loan.
Ah I see the miscommunication, I wasn't really talking about loans but just more like settlements between parties which can use escrow. I definitely see your point about most loans being unimplementable purely as smart contracts. I guess I'm not quite as convinced as you that there can't be a useful role for smart contracts as one portion of a system that also includes legal contracts and traditional liability. It seems to me that it's harder to take out and especially to underwrite loans than it needs to be and I think there's some room for improvement there, though I'm certainly not completely convinced that this will come to fruition.
Thanks for your patience in making me see what you meant!
