What Is ‘Counterparty Risk’ in Derivatives Trading?

Counterparty risk is the risk that the other party to a financial contract, such as an options or futures contract, will fail to fulfill their obligations. In traditional finance, this is mitigated by central clearing houses (CCPs).

In decentralized finance (DeFi), it is mitigated by collateralization and smart contract logic. Consensus finality is crucial because it ensures the collateral and settlement mechanics are secure and irreversible.