Code Is Law Principle

The code is law principle posits that the rules governing a decentralized system are entirely defined by the software code itself, rather than by human interpretation or legal systems. In financial derivatives, this means the execution of trades, liquidations, and settlements occurs automatically based on predefined code logic, regardless of external events.

This removes the need for trusted intermediaries but makes the correctness of the code paramount. If the code contains a flaw that is exploited, the outcome is technically valid according to the protocol rules, even if it causes financial ruin.

This principle shifts the burden of risk entirely to the users and developers, necessitating extreme caution in protocol architecture.