How Do Decentralized Options Protocols Handle Delivery Risk without a Central Clearing House?
Decentralized protocols typically handle delivery risk through over-collateralization and escrow mechanisms enforced by smart contracts. The option writer must lock up more collateral than the maximum potential payout in the smart contract.
If the option is exercised, the smart contract automatically transfers the collateral to the buyer, guaranteeing the payout without a central counterparty.
Glossar
Delivery Risk
Hazard ⎊ Delivery Risk represents the potential for a counterparty in a physically-settled cryptocurrency derivative contract to fail in providing the underlying digital asset at the agreed-upon settlement date.
Decentralized Options Protocols
Protocol ⎊ Decentralized options protocols represent a paradigm shift in derivatives trading, leveraging blockchain technology to disintermediate traditional exchanges and clearinghouses.
Smart Contract
Code ⎊ The contract is fundamentally self-executing code deployed on a distributed ledger, embodying the terms of the agreement in an immutable format.
Central Clearing
Mitigation ⎊ Central clearing, within cryptocurrency derivatives and options, functions as a financial intermediary establishing itself between counterparties to reduce systemic risk.