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.