# No Counterparty Risk

CompliFi's foundational idea is complete elimination of counterparty risk. Every CompliFi derivative is fully collateralised in all possible states of the market, from the time it is bought by a trader and all the way to settlement. As a result, there are no margin calls, no liquidations and no defaults.

All derivatives traded on CompliFi are issued in long-short pairs (one goes to the trader, the other is kept on pool's balance sheet), and these pairs always satisfy the collateral sufficiency equation, where intrinsic (or nominal) value of 1 long + 1 short derivative are equal to a fixed amount of collateral. In other words, if settlement were to occur at any point in the derivative's life, there is enough collateral set aside to pay both sides.

This property is achieved by modifying, where necessary, payoff functions of classical derivatives. Most often, this means setting an upper bound on the maximum payoff either side can receive.

Taking ETHx5 leveraged token as an example, its collateral sufficiency equation is 1 ETHx5 Up + 1 ETHx5 Down = 2 USDC.

Both Up and Down derivatives start out with a nominal value of 1 USDC, and promise to multiply by +/-5 any change in price of ETH within the +/-20% range. This means that, at most, a derivative could settle at 1 + 5*20% = 2 USDC, in which case the other settles at zero.

To make sure the payoff boundaries are minimally intrusive, CompliFi matches each boundary with a timeframe during which it is unlikely to come into play. The ETHx5 derivative in the above example is currently settled & rolled over every 24h, meaning that a price move of >20% must occur in that time for payoffs to me maxed out.

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