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.