How Do Smart Contracts Facilitate the Creation and Trading of Financial Derivatives on a Blockchain?

Smart contracts define the terms, conditions, and settlement logic of a derivative agreement directly in code. This allows for the creation of tokenized assets that represent the derivative, which can then be traded on decentralized exchanges.

The contract automatically handles margin calls, collateral adjustments, and final settlement based on triggers from external data sources. By automating these processes, smart contracts reduce the need for intermediaries and lower counterparty risk.

This creates a more transparent and efficient market for derivatives.