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Glossary

Counterparty Risk

The risk that the other party in a financial transaction will fail to meet their obligations, potentially resulting in loss of funds.

What is Counterparty Risk?

The risk that the other party in a financial transaction will fail to meet their obligations, potentially resulting in loss of funds. Lygos eliminates counterparty risk through cryptographic guarantees rather than institutional trust. Because your Bitcoin is locked in a DLC with all outcomes pre-signed, there is no scenario where Lygos's operational status affects your collateral. Even if Lygos ceased operations entirely, the pre-signed transactions would still execute on the Bitcoin blockchain according to the oracle's price attestation.

Full Definition

Counterparty risk is the probability that the other party in a financial agreement (a lender, exchange, or custodian) will default on their obligations. In crypto, counterparty risk is most acute when assets are held custodially. If a platform becomes insolvent (Celsius, FTX, BlockFi), mismanages funds, gets hacked, or faces regulatory seizure, users who deposited assets custodially may lose some or all of their funds. Counterparty risk cannot be diversified away. It is binary: either the counterparty meets its obligations or it doesn't. The only way to eliminate counterparty risk is to remove the counterparty from the equation entirely.

How Lygos Uses This

Lygos eliminates counterparty risk through cryptographic guarantees rather than institutional trust. Because your Bitcoin is locked in a DLC with all outcomes pre-signed, there is no scenario where Lygos's operational status affects your collateral. Even if Lygos ceased operations entirely, the pre-signed transactions would still execute on the Bitcoin blockchain according to the oracle's price attestation.

How Lenders Compare

LygosLednNexoUnchained
CustodyNon-custodial (DLC)CustodialCustodialCollaborative multisig
Rehypothecation0% (impossible by design)100%. Your BTC may be lent outYes, platform re-lends assetsNo
TechnologyDiscreet Log Contracts (Bitcoin-native)Centralized custodyCentralized custody2-of-3 multisig (manual)
Full comparison

Why this matters for borrowers

Understanding Counterparty Risk helps you assess the real risks of Bitcoin lending. The difference between custodial and non-custodial models isn't just marketing. It's the difference between trusting a company and trusting cryptography.

Related Terms

Custodial vs. Non-Custodial LendingRehypothecationNon-Custodial

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