How Do Netting Mechanisms Function in a Decentralized Finance (DeFi) Derivatives Protocol?

DeFi derivatives protocols typically use smart contracts to automate and enforce netting. All obligations are recorded on-chain, and the protocol's code automatically calculates the net position and collateral requirement for each user.

This is a form of continuous, automated multilateral netting, which is trustless and executed in real-time without the need for a centralized clearing house.