What Is the Role of ‘Collateral’ in Reducing OTC Counterparty Risk?

Collateral is an asset (e.g. stablecoins or major crypto) pledged by both parties to an OTC derivatives trade to cover potential losses. By requiring collateral, the DAO treasury ensures that if the counterparty defaults, the treasury can seize the collateral to offset its loss.

This pre-funding mechanism significantly reduces the financial exposure to counterparty failure.