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Risk associated with another party in a investment, credit or trade that fails to meet its obligations under a financial contract either by default or via an incident.

Satoshi Nakamoto invented Bitcoin as a peer to peer cash system to remove intermediaries and remove counterparty risk in financial transactions. Blockchain projects that provide interest in exchange for holding a users Bitcoin (or other tokens) expose that user to the solvency and security of the blockchain project (such as those that provide loans). That scenario is trust based because they hold the keys (of the token) that previously belonged to the user. Other cryptocurrency businesses – like exchanges, also expose their users to counterparty risk because they are custodians of the user’s tokens while they are on the exchange platform.

DEXs (decentralized exchanges) are trustless and non-custodial thus allowing users to trade without holding a users tokens directly.

 

REFERENCES:
https://www.cryptovantage.com/guides/counterparty-risk/
https://www.math.kth.se/matstat/seminarier/reports/M-exjobb17/171013d.pdf

 

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