Instant Settlement Is Strangling Crypto's Capital Efficiency

Crypto's obsession with instant settlement is creating a massive capital inefficiency problem that could become a real bottleneck as trading volumes scale. The issue: trading firms can't offset what they owe against what they're owed, forcing them to move far more capital than necessary to settle trades.

Ethan Buchman, founder of Cycles Protocol and Cosmos co-founder, laid out the problem in blunt terms. Crypto markets are "asset-brained," he told us—they treat the financial system like a global stock market where value constantly moves and swaps. But this misses half the equation: liabilities. "Every movement of assets is in service of discharging a liability," Buchman explained.

Here's the core issue: crypto stripped out the batching and netting mechanisms that let traditional finance conserve liquidity. At the base layer, that design choice creates pressure to reintroduce clearing systems if the industry wants to scale further.

Why Traditional Finance Delayed Settlement in the First Place

Clearing is the reconciliation process that lets participants offset what they owe against what they are owed—so only the net difference needs to move. Take a simple example: if Alice owes Bob $100 and Bob owes Alice $90, clearing means Alice pays just $10 instead of both amounts moving.

Traditional financial systems intentionally delay settlement to create time for batching and netting trades before final payment. "A lot of people look at T+2 settlement and think it's inefficient and should be instant — that misses the point. Some of that delay exists to give time for batching and clearing," Buchman said.

Clearinghouses like the Depository Trust & Clearing Corporation act as central counterparties, netting obligations and managing settlement risk. The result: financial systems compress large volumes of transactions into much smaller net flows. According to data from the Depository Trust & Clearing Corporation, multilateral netting reduces trillions in trades to tens of billions in settlement.

The historical precedent is compelling. Medieval merchants at European trade fairs settled debts by netting obligations across multiple parties, reducing the need to move physical money. These practices formalized over centuries into modern clearing systems.

Buchman also highlighted Slovenia's early 1990s crisis as a powerful case study. Following independence in 1991, as inflation surged and output contracted, authorities deployed multilateral set-off systems to manage liquidity. The centralized payment infrastructure coordinated obligations across firms, using software called "TETRIS" to net debts before settlement. According to research from Fleischman, Dini and Littera (2020), multilateral netting cleared up to 7% to 8% of GDP in obligations—enabling businesses to operate despite severe payment constraints.