What Is the Significance of Collateralization in a Smart Contract-Based Derivatives Platform?

Collateralization is crucial as it acts as the decentralized substitute for a central clearing house's guarantee. Users must post collateral (usually cryptocurrency) to cover potential losses.

The smart contract automatically manages this collateral, liquidating it if a user's position falls below a maintenance margin level. This ensures that the counterparty to the trade is protected, mitigating default risk in a trustless environment.