Definition ∞ Counterparty risk is the potential for financial loss if another party in a transaction defaults on its obligations. This risk arises when the fulfillment of a contract or agreement depends on the solvency and performance of the opposing party. It applies across various financial dealings, from derivatives trading to lending arrangements. Assessing this risk involves evaluating a counterparty’s creditworthiness and operational reliability.
Context ∞ In decentralized finance DeFi, counterparty risk often pertains to the reliability of smart contracts or the solvency of centralized entities facilitating transactions. Users must consider the possibility of platform failures or malicious actors when interacting with protocols. Mitigating this risk in crypto involves due diligence on project audits and understanding the underlying protocol mechanisms.
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