Can a Smart Contract Eliminate Counterparty Risk Entirely, or Does It Just Transform It?

A smart contract does not eliminate counterparty risk entirely; it transforms it. It significantly reduces the traditional risk of a party defaulting on their payment obligation by locking collateral and automating settlement.

However, it introduces new risks, primarily "smart contract risk" or "technical risk." This is the risk that a bug, exploit, or flaw in the smart contract's code, or the oracle it relies on, could lead to a failure in execution and a loss of funds. So, trust is shifted from the counterparty's creditworthiness to the correctness and security of the underlying code.