6.3. Counterparty Risk

It is possibility that a counterparty will default on its obligations to a financial instrument. This might involve failing to repay a loan (credit risk) or failing to settle a transaction by providing the specified asset (settlement risk). Though some credit risk is mitigated through interest rates for loans, this might be a particular problem in DeFi, where the volatility of underlying digital assets produces undercollateralization, the ease of credit creation leads to excessive leverage, or the algorithmic determination of interest produces inaccuracies. This risk is managed by NFT collateralization and accurate evaluation by the NFT Evaluating Machine.