Explain the Concept of ‘Collateralization’ in a Decentralized Options Protocol.
Collateralization ensures that the obligations of the option seller (writer) are met if the option is exercised. The seller must lock up an asset (the collateral) in the smart contract.
For a call option, this is often the underlying asset; for a put, it's the stablecoin needed to buy the asset. This removes counterparty risk, as the collateral is held trustlessly on-chain.
Glossar
Decentralized Autonomous Organization
Governance ⎊ Decentralized Autonomous Organizations represent a novel framework for coordinating collective action, particularly relevant within cryptocurrency ecosystems and increasingly, financial derivatives markets.
Collateralization
Security Deposit ⎊ Collateralization is the process of securing a financial obligation, particularly in margin trading or lending protocols, by locking up an asset of greater value than the liability being assumed, thereby providing a buffer against potential loss.
Decentralized Options
Architecture ⎊ Decentralized options represent a paradigm shift in options trading, moving away from centralized exchange reliance towards blockchain-based smart contracts for execution and settlement.
Smart Contracts
Function ⎊ Smart contracts are self-executing agreements with the terms of the agreement directly written into lines of code, residing on a decentralized ledger.
DeFi
Sector ⎊ DeFi Decentralized Finance represents the ecosystem of financial applications built atop public blockchains, encompassing lending, decentralized exchanges, and structured products like crypto options and perpetual swaps that operate without traditional intermediaries.