Counterparty risk refers to the potential for one party involved in a financial transaction to default or fail to fulfill their obligations. This risk can be assumed when any investor does not have full-control over their assets, such as: - Uninsured funds in a FDIC-insured bank - Digital assets on a centralized exchange or yield platform - Digital assets locked up via [[Smart Contracts]] - Users engaging in other various [[Yield Farming]] methods When participating in yield farming, for example, fund owners assume counterparty risk by directly engaging with these smart contracts. While designed to be trustless and eliminate intermediaries, smart contracts can still carry inherent risks such as coding errors or vulnerabilities that could lead to fund loss or theft.