How Does a Smart Contract Handle the Clearing and Settlement Process on a DEX?
The smart contract handles clearing and settlement simultaneously and instantaneously upon trade execution. Since the contract holds the liquidity, it debits the input token from the user's wallet and credits the output token, all within the same atomic transaction.
This eliminates the need for a separate clearing house or settlement period, drastically reducing counterparty risk and time delays.
Glossar
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.
Instantaneous Settlement
Finality ⎊ The concept of instantaneous settlement, particularly within cryptocurrency derivatives and options trading, hinges on achieving near-immediate confirmation and irrevocable completion of transactions, a stark contrast to traditional settlement cycles that can span days.
Clearing and Settlement
Finality ⎊ Clearing and settlement, within cryptocurrency, options, and derivatives, represents the process ensuring the irreversible transfer of assets and associated risk mitigation.
Counterparty Risk
Exposure ⎊ Counterparty risk represents the potential loss incurred when a trading partner defaults on their contractual obligations.
Settlement Lag
Latency ⎊ Settlement Lag refers to the time delay between the moment a derivative contract is contractually due for resolution and the actual final confirmation and transfer of assets or cash settlement on the blockchain ledger.
Clearing and Settlement Process
Finality ⎊ Clearing and settlement in cryptocurrency necessitates a robust finality mechanism, differing significantly from traditional finance due to the decentralized nature of blockchain technology.