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What Is ‘Collateralization’ in the Context of Smart Contract-Based Derivatives?

The act of locking assets within the smart contract to secure the potential financial obligations of the derivative trade.
Greeks.Live05.11.25

What Is ‘Collateralization’ in the Context of Smart Contract-Based Derivatives?

Collateralization refers to locking up assets within the smart contract as security to cover potential losses. This is a mechanism to ensure that the obligations of the derivative contract can be met upon settlement.

For a short option position, the seller must post collateral to cover the maximum potential loss. It is held on-chain and automatically used for settlement, guaranteeing payment.

What Is the Purpose of a “Locking Script” (scriptPubKey) in a UTXO?
How Does the Concept of “Staked Capital” Act as Collateral against Malicious Behavior?
How Is the Collateral for a Derivative Smart Contract Managed?
How Does a Lost Private Key Affect a User’s Assets Managed by a Smart Contract?

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