What is Counterparty Risk?
Counterparty risk is the probability that the other party in a financial agreement will default on their contractual obligations. In DeFi and RWAs, this includes issuers, custodians, and protocol operators.
Types of Counterparty Risk
- Credit risk: Counterparty lacks funds to pay
- Settlement risk: Failure to deliver assets
- Operational risk: Technical or process failures
Managing Counterparty Risk in DeFi
- Use overcollateralized protocols
- Verify counterparty creditworthiness and audits
- Diversify across multiple counterparties
- Prefer bankruptcy-remote structures