How Does a Decentralized Exchange (DEX) Utilize Smart Contracts for Trading Financial Derivatives?

DEXs use smart contracts to create automated market makers (AMMs) and manage the trading logic. These contracts handle order matching, collateral management, and settlement without a central authority.

For derivatives, they define the terms, leverage, and liquidation rules. The smart contract essentially becomes the exchange, holding funds and executing trades trustlessly.

This enables peer-to-peer derivative trading.