Does a Principal Trade Structure Eliminate the Need for an Escrow Service?
While a principal desk provides the counterparty, it does not entirely eliminate the need for an escrow or custody solution. For high-value crypto trades, an independent third-party custodian is still often used to ensure Delivery Versus Payment (DVP).
This mitigates the risk of the principal desk failing to deliver the asset or the buyer failing to deliver the payment, adding an extra layer of security beyond the desk's capital.
Glossar
Trustless Escrow
Mechanism ⎊ Trustless Escrow is a Mechanism where a smart contract, deployed on a blockchain, automatically holds and manages assets or collateral for a financial transaction, such as a derivative trade, without requiring a human intermediary.
Escrow
Custody ⎊ Escrow functions as a conditional custody arrangement within cryptocurrency, options trading, and financial derivatives, mitigating counterparty risk by holding assets until predefined contractual obligations are met.
Principal Trade Structure
Framework ⎊ Principal Trade Structure denotes a pre-defined set of standardized components and protocols governing the execution of derivative transactions, particularly within cryptocurrency markets, aiming to reduce counterparty risk and enhance operational efficiency.