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How Do Decentralized Finance (DeFi) Protocols Attempt to Eliminate Counterparty Risk?

DeFi uses smart contracts to automatically enforce agreements, eliminating traditional human counterparty risk and shifting the focus to smart contract security.
Greeks.Live12.11.25

How Do Decentralized Finance (DeFi) Protocols Attempt to Eliminate Counterparty Risk?

DeFi protocols eliminate traditional counterparty risk by replacing human intermediaries and bilateral agreements with smart contracts. These contracts automatically enforce the terms of the agreement without relying on trust or a third party.

The risk shifts from counterparty default to smart contract security vulnerabilities, but the traditional human element of risk is removed.

Can Smart Contracts Completely Replace Traditional Legal Agreements?
What Are ‘Smart Contracts’ and How Do They Enforce the Peg?
What Is the Risk of a Bug in a Smart Contract Compared to a Clause in a Traditional Contract?
Can a Smart Contract Execute a Financial Derivative Trade Automatically?

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