How Does the Oracle's Reliability Affect the Counterparty Risk in a Decentralized Derivative? ▴ Learn

How Does the Oracle’s Reliability Affect the Counterparty Risk in a Decentralized Derivative?

The oracle's reliability is paramount in minimizing counterparty risk in a decentralized derivative. In a traditional derivative, counterparty risk is the chance that the other party defaults.

In DeFi, the smart contract is the counterparty, but if the oracle provides faulty data, the contract will execute incorrectly, leading to an unfair outcome. A reliable oracle ensures the contract executes as intended, minimizing the risk of an unfair settlement, which is a form of pseudo-counterparty risk.

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