Counterparty Risk
The risk that the other party in a financial arrangement fails to meet their obligations, independent of how the underlying asset itself performs.
Counterparty risk is the risk that the other party in a financial arrangement — a lending platform, an exchange, a trading counterparty — fails to meet their obligations, entirely independent of how the underlying asset itself performs.
Counterparty risk is a recurring theme across much of crypto's documented custody and lending risk: holding an asset on a centralized exchange, lending it through a platform, or trading a derivative all introduce counterparty risk specific to that particular platform or party, on top of the asset's own ordinary market risk (see Kaavon's "Custody Risk" glossary definition for the related custody-specific framing).
Examples
- Holding an asset on a centralized exchange introduces counterparty risk specific to that exchange, on top of the asset's own ordinary price risk.
- A non-custodial wallet structurally removes counterparty risk from a single provider, replacing it with personal key-management risk instead.