How Does the Collateralization Mechanism in a Smart Contract-Based Options Protocol Ensure Solvency?

The protocol ensures solvency by requiring option writers to lock sufficient collateral into the smart contract to cover their potential obligations. The contract's logic continuously monitors the value of the collateral relative to the risk of the written options.

If the collateral value drops too low, the contract may trigger a liquidation or margin call, ensuring the system remains fully backed and able to pay out option holders.