Counterparty Credit Risk

Definition ∞ Counterparty credit risk denotes the potential for financial loss arising from a counterparty’s failure to meet its contractual obligations in a transaction. In traditional markets, this risk is managed through collateral and legal agreements. Within the digital asset space, particularly in decentralized finance, this risk can arise from smart contract vulnerabilities or the failure of off-chain entities involved in hybrid transactions. It represents a significant concern when dealing with unsecured or undercollateralized arrangements.
Context ∞ Counterparty credit risk remains a persistent discussion point in crypto news, especially following events involving centralized exchanges or lending platforms. Decentralized protocols aim to minimize this risk through over-collateralization and transparent on-chain mechanisms. However, concerns persist regarding oracle manipulation and smart contract exploits, which can introduce new forms of counterparty risk within these systems.