What Are the Mechanics of a Credit Default Swap (CDS) in the Context of Crypto? ▴ Learn

What Are the Mechanics of a Credit Default Swap (CDS) in the Context of Crypto?

A credit default swap (CDS) in crypto is a financial derivative that allows a buyer to hedge against the risk of a specific credit event, such as a DeFi protocol getting hacked or a stablecoin de-pegging. The buyer makes periodic payments to a seller, who agrees to compensate the buyer if the credit event occurs.

In DeFi, these agreements are managed by smart contracts, which hold the collateral and automatically trigger a payout if the predefined credit event is verified by an oracle. This creates a decentralized way to transfer and price credit risk.

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