How Does Using Stablecoins Reduce Counterparty Risk in Derivatives?
Counterparty risk is the risk that the other party in a contract will default on their obligation. In decentralized derivatives, stablecoins are often held in smart contracts as collateral, which are automatically released upon contract settlement.
This trustless, automated settlement process, using a non-volatile asset, minimizes the chance of one party failing to deliver the agreed-upon payment or collateral due to price volatility or solvency issues.
Glossar
Volatility
Measurement ⎊ Volatility, in quantitative finance, is the statistical measurement of the dispersion of returns for a given financial asset, typically quantified by the annualized standard deviation of its price movements.
Counterparty Risk
Exposure ⎊ Counterparty risk represents the potential loss incurred when a trading partner defaults on their contractual obligations.
Derivatives
Instrument ⎊ Derivatives are financial instruments whose value is intrinsically linked to, or "derived" from, an underlying asset, benchmark, or rate.
Stablecoins
Peg ⎊ Stablecoins represent a class of cryptocurrencies engineered to maintain a stable value relative to a specified asset, typically a fiat currency like the US dollar.
Smart Contracts
Function ⎊ Smart contracts are self-executing agreements with the terms of the agreement directly written into lines of code, residing on a decentralized ledger.
Automated Settlement
Settlement ⎊ Automated settlement, within cryptocurrency, options, and derivatives markets, represents the culmination of a trade lifecycle, transitioning from order execution to final ledger updates.