Clear DefinitionsHerstatt Risk
1 min read
Pronunciation
[her-shtaat risk]
Analogy
Like handing over cash for a package before the delivery arrives, risking loss if the courier disappears.
Definition
The settlement risk arising when one party pays out funds in a cross‑border transaction before receiving the corresponding funds, named after the 1974 Herstatt Bank failure.
Key Points Intro
Herstatt risk in blockchain emerges when bridged assets are transferred before final settlement.
Key Points
Time gap: Delay between debit on one chain and credit on another.
Counterparty risk: Relayer or bridge operator may default.
Atomic settlement: Mitigates risk via HTLCs or atomic swaps.
Liquidity risk: Funding shortfalls during settlement window.
Example
A cross‑chain transfer debits BTC on Bitcoin network and queues mint on Ethereum; if the relayer fails mid‑process, recipient may never receive wBTC.
Technical Deep Dive
Bridges implement HTLC or atomic VAA confirmations to ensure either both sides settle or funds refund. Monitoring services track event confirmations and trigger refunds on timeout.
Security Warning
Long settlement windows increase risk; minimize delays and enforce time‑outs.
Caveat
Perfect atomicity is hard across heterogeneous chains; design conservative timeouts.
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