Counterparty Risk Mitigation

Definition ∞ Counterparty risk mitigation involves strategies and mechanisms designed to reduce the potential financial loss from a trading partner failing to fulfill their contractual obligations. In digital asset markets, this includes measures to secure transactions against default or non-performance. It aims to protect participants from adverse outcomes due to a counterparty’s insolvency or malicious actions. Techniques often involve collateralization or trusted intermediaries.
Context ∞ Counterparty risk mitigation remains a prominent topic in cryptocurrency markets, especially following events involving centralized exchanges or lending platforms. Debates often center on the trade-offs between custodial solutions, which introduce third-party risk, and decentralized protocols that minimize it through smart contracts and over-collateralization. Regulatory bodies are increasingly scrutinizing existing mitigation practices to enhance investor protection and market stability.