Rapid Settlement Stresses Crypto Capital Efficiency: Ethan Buchman
Crypto's push for faster settlement is creating capital inefficiencies, forcing businesses to fully fund each transaction and raising concerns about how the market will scale as volume grows.
In practice, this means that firms cannot repay their debts to borrowers, forcing them to mobilize more capital than is necessary to resolve businesses.
Ethan Buchman, founder of Cycle Protocol and co-founder of Cosmos, says crypto markets are “asset-based.” He argues that he sees the financial system as a global stock market, where value constantly moves and changes.
“But that completely destroys the rest of the balance, which is the liabilities, and every asset movement is used to charge the liability,” Buchman told Cointelegraph.
Crypto is optimized for rapid settlement, allowing traditional finance to conserve liquidity by releasing the bulk and net. At the base layer, that design creates pressure for the industry to restart cleaning to expand even further.
The logic behind TradFi's delayed settlement
Clearing is the process of reconciling and verifying obligations before an agreement, which allows the participants to pay what they owe, so only the difference should be moved.
For example, if Alice owes Bob $100 and Bob owes Alice $90, clearing means she only pays $10 instead of moving the entire amount both ways.
In traditional financial systems, settlement delays provide time for group and net transactions before final payment is made.
“A lot of people look at T+2 settlement and think it's supposed to be inefficient and fast — that misses the point. Some of the delays are created to allow time for interception and cleanup,” Buchman said.
This is done through clearinghouses such as the Depository Trust & Clearing Corporation, which act as central counterparties that clear obligations and manage settlement risk. As a result, financial systems can compress large volumes of transactions into very small net flows.
Before central banks, traders at European trade fairs would settle their debts by checking on multiple parties, reducing the need to move physical money. Over time, these practices evolved into regular cleaning systems.
Buchman also points to experiments in Yugoslavia and Slovenia as examples of multilateral networks on a smaller scale.
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In the year After independence in 1991, Slovenia switched to multilateral settlement systems to manage liquidity in times of economic stress. As inflation soared and output contracted, officials used a centralized payment infrastructure to coordinate obligations to corporations before defaulting on debt.
The system, later standardized through software known as “TETRIS,” implemented liquidity-saving techniques to reduce how much capital was needed to operate, helping businesses continue to operate despite extensive payment constraints.
Rapid settlement of crypto locks in liquidity
Rather than designing systems that open and issue obligations, most crypto markets are built around fast atomic settlements, where each transaction is completed independently.
For example, in simple terms, if Alice sends 10 ETH to Bob for a trade, that transfer is verified on-chain at the time of execution. If Bob later owes Alice 9 ETH, this is treated as a separate transaction rather than connected to the first one. Instead of adjusting the difference of 1 ETH, the system processes 19 ETH transfers in two transactions.
In many trades, this forces participants to constantly move and pay capital up front, even though their net exposure is close to flat.
“That means you need more capital in the system than you need,” Buchman said.
Instant settlement eliminates collateral risk, but also eliminates the ability to offset positions within a wider network of participants. That layer of compression is largely missing in crypto, meaning more capital is needed to support the same level of activity.
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“There's a ceiling on how much you can trade, how much real assets and capital you have to meet,” Buchman said.
“Many organizations are doing a lot of business with each other on loans, but when settlement time comes, they have to scramble to get the assets,” he said.
That forces crypto companies to leverage their space on exchanges and lending platforms, tying up capital that could otherwise be deployed elsewhere. In times of stress, the problem becomes more acute as firms struggle to meet settlement obligations and liquidity becomes tighter.
The lost ancient is being cleared, now being rebuilt without intermediaries.
In the traditional form, replication of purification requires the construction of a central counterpart. The model can easily be placed with the industry to replace financial intermediaries with a decentralized infrastructure.
The clearinghouses are among the most tightly regulated and trusted institutions in finance, Buchman said. They carry default risk, stand between participants and require deep coordination to operate.
Crypto has done away with that model and replaced it with decentralized clearing. Bilateral arrangements and off-exchange settlements have introduced a limited network, but in largely closed trust networks, the underlying problem remains unsolved.
Buchman and Cycles propose a coordination layer that checks obligations on participants without acting as a central counterparty or controlling funds.
But its effectiveness depends on broad participation and mandatory visibility, which can be difficult to achieve in a fragmented market where companies operate everywhere and are reluctant to share vulnerabilities. Without a central peer, the system also does not absorb default risk, leaving participants to self-manage peer exposure.
Coordination of multilateral networks across independent actors can also introduce operational complexity, particularly during periods of market stress when liquidity is limited.
Buchman argues that this can be solved using cryptographic techniques, where obligations are posted on a private onchain, encrypted in software and verified using zero-knowledge proofs.
In this sense, the crypto trade-off is to replace trust in an institution with trust in protocol design.
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