How do defaults work?

If a borrower does not repay principal and interest by the maturity date, they have a seven day grace period to make the required payments. Borrowers must arrange payment during this time, and are responsible for alerting bondholders the status of their repayment. If the borrower does not make the payment within the grace period, their collateral can be claimed by bondholders. DAOs who default will incur serious reputational damage which would impair their ability to continue operating in the sector as a record of the default will exist on-chain.
Borrowers sign an on-chain agreement promising repayment. This agreement sets out the terms and conditions of their bond issuance.