What is Counterparty Risk?

Counterparty risk is used to determine the probability of another party not fulfilling their predefined obligations in an agreement. In cryptocurrency, this could be a trade, loan, or other similar transaction. This type of risk is most prevalent with centralized crypto infrastructure such as exchanges and lending platforms, which require an intermediary. On the other hand, blockchains aim to eliminate counterparty risk through decentralization and replacing middle men with smart contracts.