How Are Smart Contracts Used in Financial Derivatives?
Smart contracts can define the terms, collateral, and settlement logic for derivative instruments like options or futures. They automatically manage the margin requirements and execute the settlement when the contract expires or is exercised.
This automation removes counterparty risk and the need for a clearing house.
Glossar
Automated Market Maker
Architecture ⎊ Automated Market Makers (AMMs) represent a paradigm shift in decentralized exchange, employing mathematical formulas to determine asset prices and facilitate trading without traditional order books.
Decentralized Exchange
Exchange ⎊ A decentralized exchange (DEX) facilitates peer-to-peer cryptocurrency trading without intermediaries, operating autonomously on blockchain networks.
Counterparty Risk
Exposure ⎊ Counterparty risk represents the potential loss incurred when a trading partner defaults on their contractual obligations.
Derivative Instruments
Valuation ⎊ Derivative instruments, within cryptocurrency markets, represent agreements whose value is derived from an underlying asset ⎊ typically a digital asset, index, or interest rate ⎊ and facilitate risk transfer or price discovery beyond spot markets.
Margin Requirements
Collateral ⎊ Margin requirements represent the equity a trader must deposit with a broker or exchange as a good faith measure, securing potential losses arising from leveraged positions within cryptocurrency, options, and derivative markets.
Smart Contracts for Derivatives
Automation ⎊ via self-executing code replaces manual intervention in the lifecycle management of options and futures contracts.