The Pari Passu Principle, Latin for “on equal footing,” is a fundamental legal and financial concept asserting that all creditors or investors within a specific class should be treated equally without preference in the event of default or liquidation. In crypto finance, it governs the equal ranking of claims or distribution of assets among participants holding identical tokens or debt instruments.
Mechanism
This principle operates through contractual clauses in debt agreements or, in the case of crypto, through smart contract logic that dictates how assets are distributed. If a protocol or entity defaults, the mechanism ensures that no single holder of a particular class of tokenized debt or claim receives preferential treatment over others in that same class during asset recovery or liquidation. It prevents junior claims from being satisfied before senior claims, or equally ranked claims from being unequally satisfied.
Methodology
Adherence to the pari passu principle in crypto finance requires robust legal frameworks for on-chain and off-chain agreements, coupled with transparent smart contract designs that encode this equality of treatment. The methodology involves clear delineation of asset classes and claim seniority, precise legal language in terms of service, and auditable smart contract implementations. This approach reinforces trust and fairness, which are essential for institutional participation in decentralized lending and collateral management systems.
A creditor initiates a challenge by systematically gathering evidence, securing the cooperation of an insolvency practitioner, and funding a formal court application.
Close-out netting is a contractual protocol that preemptively collapses bilateral exposures into a single obligation upon insolvency, securing financial stability across borders.
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