Blockchain & Cryptocurrency Glossary

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Settlement Risk

1 min read
Pronunciation
[set-l-muhnt risk]
Analogy
Like the risk of a check bouncing after you’ve already credited your account.
Definition
The danger that a transaction will not settle as expected due to counterparty default, network reorgs, or operational failures.
Key Points Intro
Settlement risk encompasses on-chain and off-chain failure modes affecting transaction completion.
Key Points

Counterparty default: borrower or bridge may fail to deliver

Reorg risk: deep reorganizations can invalidate transactions

Operational outages: node downtime delaying settlement

Liquidity risk: insufficient funds at settlement time

Example
A user bridges tokens to another chain and faces loss when the bridge operator goes offline before finalizing the transfer.
Technical Deep Dive
Atomic swaps use hash timelock contracts (HTLCs) to mitigate counterparty risk. Bridges implement challenge periods and multi-signature vaults for recovery. Monitoring services track reorg depths, and slashing conditions penalize misbehaving operators.
Security Warning
Incomplete oracles and unsafeguarded bridges can amplify settlement risks, leading to asset loss.
Caveat
No mechanism can fully eliminate settlement risk; risk management strategies and insurance products are often needed.
Related Terms
Atomic Swap
Slashing

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