How Do Decentralized Exchanges (DEXs) Handle the Clearing Function without a CCP?
DEXs handle the clearing function through smart contracts and automated market makers (AMMs) or order book protocols. The smart contract acts as a transparent, automated clearing mechanism, holding collateral and executing settlement based on pre-programmed rules.
Risk is managed by over-collateralization and on-chain liquidation mechanisms, replacing the centralized counterparty guarantee with cryptographic and economic incentives.
Glossar
Automated Clearing
Clearing ⎊ Automated Clearing, within the context of cryptocurrency derivatives, options trading, and financial derivatives, represents a streamlined process for the net settlement of obligations arising from trades.
Decentralized Exchanges
Access ⎊ These platforms offer permissionless entry to cryptocurrency and tokenized asset markets, democratizing capital deployment into novel financial structures.
Counterparty Risk
Exposure ⎊ Counterparty risk represents the potential loss incurred when a trading partner defaults on their contractual obligations.
Automated Market Makers
SystemArchitecture ⎊ Automated Market Makers represent decentralized trading protocols that utilize algorithmic functions, rather than traditional bid-ask order books, to facilitate peer-to-contract asset exchange.