How Does Netting on a Blockchain Improve Capital Efficiency in Derivatives Trading?
Netting is the process of offsetting mutual obligations to determine a single, final settlement amount. By recording all trades on a shared blockchain, netting can be performed continuously and automatically across all counterparties.
This reduces the total gross exposure and the collateral required to cover potential default. Lower collateral requirements mean less capital is tied up, significantly improving capital efficiency for market participants.
Glossar
Capital Efficiency in Derivatives
Leverage ⎊ Capital efficiency in derivatives, particularly within cryptocurrency markets, centers on maximizing potential returns relative to the capital at risk, a critical consideration given the volatile nature of these instruments.
Improving Capital Efficiency
Allocation ⎊ Improving capital efficiency within cryptocurrency derivatives necessitates a rigorous reassessment of portfolio allocation strategies.
Netting
Calculation ⎊ This is the mathematical process of offsetting mutual obligations between two counterparties across a portfolio of derivative contracts to determine a single net liability or asset position.
Blockchain Netting
Protocol ⎊ Blockchain Netting refers to the implementation of a netting mechanism directly onto a distributed ledger technology, utilizing smart contracts to automate the process.