How Does a Smart Contract Relate to a Decentralized Finance (DeFi) Derivative?

A DeFi derivative is a financial contract whose value is derived from an underlying asset, like a token or an index, but is executed and enforced by a smart contract. The smart contract acts as the automated legal agreement, holding collateral, managing margin, and facilitating settlement without the need for intermediaries.

For example, a perpetual futures contract is entirely governed by the code's logic on a decentralized exchange. The contract code defines the derivative's rules, such as liquidation and funding rates.