Collateral Escrow

Collateral escrow is a mechanism where assets are locked in a smart contract to guarantee the fulfillment of a financial obligation. When a user opens a derivative position, they must deposit collateral into this escrow.

The smart contract holds these funds securely and only releases them according to the rules of the agreement. This prevents the user from withdrawing their collateral before the position is closed or liquidated.

It is the primary method for ensuring that the protocol is always fully backed. Because the assets are held in a contract, there is no risk of a central entity mismanaging the funds.

It is a fundamental component of trustless derivative markets.