Forced Buy-In Protocols

Forced buy-in protocols are mechanisms in trading platforms that automatically execute purchases of an asset on behalf of a seller who has failed to deliver the asset. This is a standard procedure in traditional finance and is increasingly relevant in decentralized finance protocols that deal with tokenized assets.

When a naked seller fails to deliver the underlying asset upon option exercise, the protocol initiates a buy-in to settle the obligation. This process can be extremely costly for the seller, as they are often charged fees and must pay the market price at the time of the forced purchase, regardless of how high it has risen.