Crypto's Instant Settlement Paradox: Capital Inefficiency Hinders Scalability

The push for instant settlement in cryptocurrency markets may be creating a structural bottleneck that hinders the industry's ability to scale. Ethan Buchman, co-founder of Cosmos and founder of Cycles Protocol, suggests that the current 'asset-brained' approach ignores the critical role of liabilities and clearing in a functioning financial system. Unlike traditional finance (TradFi), which utilizes settlement delays—such as T+2—to batch and net obligations, crypto markets typically rely on atomic settlement. This design ensures that every transaction is finalized independently, which removes counterparty risk but requires participants to fund each trade in full, regardless of their net exposure across the network. Buchman illustrates this inefficiency with a simple scenario: if one party owes $100 and the other owes $90, a clearing system would only move the $10 difference. In contrast, a crypto-native system processes both transactions separately, moving $190 in total. This lack of multilateral netting forces trading firms to move far more capital than is strictly necessary to settle their net obligations. This requirement for constant pre-funding and overcollateralization increases the total amount of capital needed to sustain market activity. Buchman argues that for the industry to reach institutional scale and handle growing volumes, it must reintroduce clearing mechanisms—similar to those used by the Depository Trust & Clearing Corporation—to compress large transaction volumes into smaller, more efficient net flows.