How Does the Transparency of the Blockchain Help in Assessing Counterparty Risk?
The transparency of the blockchain allows anyone to verify the state of a smart contract and the collateral locked within it in real-time. All transactions and collateralization ratios are publicly recorded and auditable.
This means that a user can independently verify that a protocol or a specific loan is sufficiently collateralized, without needing to trust a third-party report. This radical transparency reduces information asymmetry and allows market participants to make more informed decisions about the risks they are taking, thereby reducing overall systemic risk.
Glossar
Collateralization Ratios
Coverage ⎊ Collateralization ratios, within cryptocurrency derivatives, options trading, and broader financial derivatives, represent a crucial risk management metric quantifying the extent to which an asset's value exceeds the outstanding obligations secured by it.
Transparency
Principle ⎊ Transparency in a public blockchain context means that all transactions, contract code, and network activity are openly recorded and auditable by any participant.
Transparency in DeFi
Visibility ⎊ This refers to the degree to which the activities, collateral positions, and risk exposures within decentralized finance protocols are publicly verifiable on the underlying blockchain.