How Does Finality Impact the Settlement Risk in Financial Derivatives?
Finality is crucial as it eliminates counterparty settlement risk. In traditional finance, there is a time lag (T+2) where a trade could theoretically fail.
Blockchain finality ensures that the underlying asset transfer or derivative contract execution is irreversible and settled almost instantly, significantly reducing the risk of non-delivery or non-payment.
Glossar
Settlement Risk
Exposure ⎊ Settlement risk in cryptocurrency, options, and derivatives arises from the failure of a counterparty to fulfill contractual obligations post-trade, specifically during the settlement period.
Decentralized Exchange
Exchange ⎊ A decentralized exchange (DEX) facilitates peer-to-peer cryptocurrency trading without intermediaries, operating autonomously on blockchain networks.
Derivative Contract Execution
Execution ⎊ Derivative contract execution within cryptocurrency markets represents the automated or manual settlement of pre-agreed terms outlined in a derivative agreement, often facilitated through centralized exchanges or decentralized protocols.
Atomic Swap Technology
Mechanism ⎊ Atomic swap technology represents a peer-to-peer exchange of cryptocurrencies from different blockchains, eliminating the need for centralized intermediaries like exchanges.
Blockchain Finality
Attestation ⎊ Blockchain finality, within the context of cryptocurrency, options trading, and financial derivatives, signifies the point at which a transaction or state change is considered irreversible and guaranteed, irrespective of subsequent forks or attempts at manipulation.