Counterparty Risk Management

Definition ∞ Counterparty risk management involves identifying, assessing, and mitigating the potential for a party in a financial transaction to default on its obligations. This practice aims to protect participants from financial losses arising from a trading partner’s failure to perform as agreed. Effective strategies include collateral requirements, netting agreements, and robust legal frameworks. In digital asset markets, these mechanisms adapt to the unique characteristics of blockchain-based systems.
Context ∞ Counterparty risk management is a significant discussion point in decentralized finance (DeFi) and over-the-counter digital asset trading, where traditional intermediaries are often absent. News reports frequently highlight protocol designs and regulatory efforts seeking to minimize this risk through automated smart contract execution and transparent on-chain collateralization. The industry continues to refine methods for evaluating and reducing counterparty exposure, which is crucial for increasing institutional participation and overall market stability in the crypto space.