Collateral Forfeiture

Collateral forfeiture is a mechanism where a party loses their deposited assets due to a failure to meet contractual obligations or protocol requirements. In derivatives, this often occurs if a trader cannot meet a margin call or if a smart contract execution reveals a breach of terms.

Unlike slashing, which is specifically for network validators, forfeiture is a broader concept applied to any user who puts up assets to secure a financial transaction. Once the forfeiture condition is met, the smart contract automatically transfers the assets to the protocol treasury or the counterparty.

This provides security for the system, ensuring that participants fulfill their commitments without needing a court of law. It is a fundamental component of trustless financial architecture.