Moving US Stock and Bond Settlement to the Blockchain for Instant Settlement: Is Wall Street Cheering for Zero Risk? I Ran the Numbers and the Conclusion is the Opposite: Removing the Sponge of Netting Shrinks Capital Capacity by a Hundredfold, Sentencing Market Makers to a Liquidity Death—In That Most Panic-Stricken Second, the Entire Market Will Cancel Orders En Masse

The video analyzes DTCC's plan to move U.S. stock and Treasury settlements onto the blockchain, comparing traditional net settlement with real-time on-chain settlement. It argues that while second-level settlement can reduce certain counterparty risks, it may amplify market maker capital peaks, margin calls, liquidity depletion, and cascading liquidation risks, while discussing the mismatches brought by stablecoins, tokenized U.S. Treasuries, 24/7 trading, and cross-system arbitrage.

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The risks haven't decreased at all; they have simply been hammered into a different shape, and they will become even more difficult.

Today we are talking about something happening right now that will reshape the entire trading ecosystem in the future: DTCC, Wall Street's oldest clearing house, recently received regulatory approval and plans to move U.S. stock and Treasury settlements onto the blockchain in the second half of this year. In other words, the two forms of the same security code—the old ledger and the on-chain version—can be swapped at any time. Some friends say this is Wall Street's incorporation of the crypto space, because the original ledger remains in DTCC's own hands, meaning the atomic settlement layer is still on Wall Street, with only the entire trading method transformed into second-level settlement.

Against this backdrop, market consensus erupted in celebration, claiming that this would eliminate counterparty default risk, instantly take capital turnover to new heights, and render middlemen and market makers completely obsolete. I calculated this ledger from start to finish, but my conclusion is the exact opposite: the risks haven't decreased at all; they have simply been hammered into a different shape, and they will become even more difficult.

Why say this? Because this compresses credit risk, measured in days, into liquidity risk calculated in minutes or even seconds. And who is the first to face this risk? Precisely the market makers providing liquidity to the entire market. As we've discussed before, market makers are covered and held hostage, chasing the rise and selling the fall. Today's episode is the foundation version of the same story, looking at how the current system forces this trading ecosystem.

How are U.S. stocks currently settled? Frankly, it relies entirely on bookkeeping. Throughout the day, the entire market buys and sells tens of millions of transactions back and forth, and the clearing house does not make everyone pay each other transaction by transaction. The current system nets all accounts together and calculates only the net difference at the close of the day. How much can this netting reduce? 98% of the gross payment obligations for the entire day can be directly offset against each other, leaving only 2% that requires real money for delivery.

This is why high-frequency market makers can use 1 million dollars in capital to generate hundreds of millions of dollars in intraday dual-sided turnover. The time difference in the middle is essentially a sponge. No matter how bumpy the market is, let this sponge absorb it first, and settle the final accounts after the show is over.

Moreover, the clearinghouse does much more than netting; it also acts as the universal guarantor for the entire market. Regardless of who defaults, it must advance the funds first and then proceed with the default disposition process. The essence of this system is to dilute an individual's liquidation risk into small losses shared among all members. Therefore, what this old system provides to everyone are two things: an absorbing sponge that trades time for space, and a mutual insurance policy. In fact, the current settlement system is precisely this thing.

So how much is this sponge worth now? There is a ready-made empirical test. In May 2024, U.S. stock clearing transitioned from T+2 to T+1. Actually, despite everyone buying and selling stocks completing transactions on a T+0 basis, settlement does not work that way. Let me share something few people know: how are U.S. stocks actually cleared and settled? For example, when you press a buy button in a stock trading app, the order is matched instantly in a fraction of a second, but at this point, the underlying stock certificates and cash have not undergone a substantial transfer. The actual delivery versus payment (DVP) is centrally processed in the background by the Depository Trust & Clearing Corporation, known as DTCC.

Before May 28, 2024, this cycle was T+2, and it was only adjusted to T+1 after May 28. This is actually highly consistent with the settlement risk management logic of repurchase agreements in the fixed-income market; they are identical. The longer the delivery time, the greater the counterparty default risk and market volatility exposure faced by both buyers and sellers during the waiting period.

To cover these unsettled exposures, DTCC charges high margin requirements to various broker-dealers and market makers. This is the fundamental reason why it is actually possible to trade a volume of hundreds of millions of dollars using a principal of just one million dollars. On the very first day of the U.S. stock clearing transition from T+2 to T+1, the total margin collected by the clearinghouse plummeted directly from $12.8 billion to $9.1 billion. Merely shortening the delivery time by one day directly saved 29% in margin. Not only that, but the settlement failure rate also dropped from just over 2% on average per month to 1.9%.

This set of data demonstrates that shortening the time lag of trade settlement can indeed substantially revitalize funds and simultaneously improve market efficiency and safety, because the default rate is trending downward. However, a major precondition must be made clear here: the U.S. stock market successfully shortened its delivery time because the underlying retained a net settlement mechanism, and the overall payment and clearing system has already become very mature. Under these two preconditions, shortening the delivery time can save money for the market.

Yet what actually prevents massive trading volumes from crushing the system? It is precisely this underlying net settlement mechanism. Therefore, we cannot simply draw a naive conclusion from this world that all financial assets in the future should adopt real-time second-level settlement.

If the clearinghouse abolishes the net settlement mechanism and replaces it entirely with real-time settlement on the blockchain, what would happen? The most core consequence is that the fund turnover logic of market makers would be completely subverted. Under the traditional net settlement model, market makers only need to prepare funds that can cover the net difference at the end of each trading day.

Let us take a specific example to make it understandable. Suppose an options market maker accepts an order of $100 million from a client today and immediately hedges it in the market for $100 million. By the end of the day, the net risk position finally remaining in hand might be only a few million. In other words, they only need to prepare this principal of a few million to keep a liquidity pool of hundreds of millions operating.

However, if this is replaced by full-amount real-time on-chain trading, this high-leverage playbook becomes completely unfeasible. Because under the rule of trade-by-trade delivery, you must cough up actual cash for every single buy order; as long as the money you should receive from just selling an asset has not completely arrived on the clearing chain, it absolutely cannot be used to pay for the next buy order. Unless all transactions are completed in the exact same instant and within the exact same ledger, which is simply impossible in practical operations across different exchanges and systems.

This leads to a problem that makes the market extremely fragile: the funds that market makers need to prepare are no longer the net difference after the market closes each day, but rather the peak of cumulative trading volume throughout the entire day. For instance, however much money worth of orders you place simultaneously in a given second is precisely how much hard cash must be actively moving in your account.

If it is the same trading principle and the same trade, once net settlement is replaced by real-time delivery, the capital carrying pressure of the entire financial system will shrink by nearly 100 times. That is why I say that switching to real-time settlement does not eliminate risk; instead, it makes the entire capital chain extremely inelastic. Previously, when capital turnover encountered friction, there was still room for a buffer, but once on-chain, if cash flow cannot keep up, the entire trading chain will snap immediately, so its volatility will be greater. At the very least, the volatility of newly on-chain assets requires a gradual convergence process.

This is not even the worst part. What is worse is that the mechanism triggering chain reactions in extreme market conditions will also be amplified, which is this self-excitation process. We have previously introduced the VIP indicator, which is specifically used to measure the probability of trade execution in the order flow, i.e., toxic order flow. Once this indicator spikes, it means that institutions or internal funds are entering the market unilaterally in large quantities, and this kind of entry will derive new orders within the micro-order structure.

For example, if an extremely aggressive toxic large order smashes through the strike price of a certain option, then in order to maintain risk neutrality, the market makers' dynamic hedging algorithms will instantly generate corresponding hedging market orders in the spot market or at other strike prices, which forms a statistical capital reaction.

As long as the order volume generated by hedging exceeds the absorption capacity of the current order book, it will trigger new price penetration, which in turn triggers the next round of algorithmic hedging. Once this self-reinforcing cycle is established, liquidity depletion will spread automatically and cannot be stopped at all. I am talking about the situation based on this liquidity ecosystem.

If under the traditional net settlement system, how would market makers handle this kind of unilateral shock? Usually, the first tactic used is to widen the bid-ask spread, because there is still a net settlement mechanism at the bottom as a capital buffer. As long as they hold out until the intraday post-market clearing, the large amount of long and short positions throughout the day can offset each other, and they only need to make up the final net difference.

However, if you switch to on-chain real-time settlement, the margin system of the options clearing house will change from calculating accounts once a day after the market closes to clearing in real-time by block. Once the market experiences violent fluctuations leading to book losses on positions, this clearing system will instantly issue a margin call.

In reality, on-chain transfers take time. Even in the absolutely rigid code logic of smart contracts, even if the margin is replenished just one second late, it will be judged by the system as a substantive default. The system will automatically trigger a forced liquidation.

This creates a very expensive new cost: under extreme market conditions, in order to survive those few minutes to obtain emergency funds, short-term capital lending rates will show pulse-like spikes. This cost can be directly defined as a real-time default premium. Market makers will inevitably write this extreme tail risk cost directly into their quoting models.

When the algorithmic model calculates this account clearly, faced with an extreme capital gap and second-level forced liquidation, the only rational action for a market maker is one: directly withdraw all pending orders and stop providing liquidity.

Look, this forms a dilemma. In the very second when the market is most panicked and most in need of liquidity to absorb selling pressure, the absolutely rigid real-time clearing system is precisely forcing all market makers to withdraw orders collectively. This is exactly the same as the options negative gamma squeeze we discussed in depth before; it is the exact same micro-logic. At that time, there might be no one in the market maliciously smashing the market; it is just that liquidity evaporated instantly, causing a chain stampede, purely the most rational risk-aversion action taken by quantitative algorithms under clearing rules.

Some people will say that this problem has long been seen in the industry and is being patched. That is correct. The clearing circle has already started installing intraday high-frequency netting outside the atomic ledger; to put it bluntly, it is changing the original once-a-day account settlement to once an hour or once a minute, a bit like calculus, cutting this sponge into small pieces.

DTCC's own plan never intended to throw away netting at all, it only changed a part of it. What was changed? It was changed to programmable batch netting as a foundation, meaning that only truly critical trades follow the atomic settlement path; in the middle, an intraday repo blood transfusion line was built. This direction is correct, but I must also speak the ugly truth: patches can reduce the frequency of occurrence, but they cannot change the mathematical principles when it occurs.

As long as settlement is locked by code at the second level and proper rollovers are not allowed, the static capital of market makers must cover the peak exposure at the moment of a funding burst during the window between two clearing cycles. No matter how frequently you clear, a peak is a peak, and it won't be discounted by even a microsecond.

Therefore, the real debate in this transformation has never been about whether to go on-chain, but rather how small the units of the net settlement sponge can be broken down into.

On-chain trading has another fatal hidden danger: the disguise of underlying assets. Don't be fooled by the trading software screen showing everything as if it were one dollar; the waters run very deep behind this. For instance, fiat currency issued by central banks, credit money from banks, and tokenized money market funds are not assets of the same magnitude or the same tier.

The most fatal difference between them lies in the elasticity of liquidity. If a traditional banking system faces a bank run or a cash shortage, the central bank can print money and inject liquidity out of thin air to save it. However, stablecoins absolutely cannot do this, because the mechanism of a stablecoin is a rigid, inflexible redemption: for every 1 dollar issued, there must be 1 dollar of actual assets held as collateral behind it.

Once a panic sell-off occurs, the issuer cannot conjure money out of thin air to save the market; the only thing they can do is frantically sell off the U.S. Treasury bonds in their reserve assets. Therefore, stablecoins can only provide you with the speed of book-entry transfers, but they cannot provide the liquidity elasticity that the system needs in times of crisis.

In recent years, the scale of stablecoins has skyrocketed from a mere few billion dollars to over a hundred billion dollars, reaching a massive volume. Once they are forced to liquidate the Treasury bonds in their hands, the impact on the entire fixed-income market will be absolutely catastrophic.

Tokenized money market funds are even more troublesome. Usually, they provide you with leverage and collect overnight interest, which seems quite safe. But once the market crashes and you need to redeem them urgently for cash, what they sell off from the underlying assets is precisely those Treasury bonds. This is equivalent to the money you use to save your life being locked in the same asset pool as the assets you pledged; once it drops, it triggers a chain reaction of defaults.

Speaking of collateral, the leverage multiplier involved is simply insane. I don't know if the crypto world has always been this crazy, or if it wasn't this crazy before and is now, or if it's just crazier now than it was before? The same U.S. Treasury bond can actually be pledged repeatedly countless times on-chain.

I come from a debt background, as everyone knows. In the real world, when hedge funds engage in bilateral repo transactions, more than half don't even have haircut limits, which leads to extremely high leverage being propped up entirely by internal credit lines between major institutions.

So, on the surface, the blockchain is completely transparent, and everyone sees these tokens moving around, but the debt relationships behind this are too complex—so complex that no one can figure out who owes whom money, and how much is owed.

The most terrifying systemic risk in the on-chain market is not that a specific token is definitely a scam, but that in calm times, people naively treat them as absolutely equivalent to fiat currency. When the extreme moment of a crash and liquidity exhaustion arrives, people will desperately discover that the priority for redeeming these assets, the level of legal protection, and even the business settlement hours of various institutions are not in the same dimension at all. This kind of extreme mismatch is the core reason for the chain-reaction stampede in the market.

Finally, we must puncture an extremely absurd market illusion. Many people think that 7x24-hour continuous trading means the market always has abundant liquidity, which couldn't be more wrong. You have forcibly stretched the weekly trading time from 60 hours to over 160 hours, but the real money in the hands of market makers will absolutely not triple out of thin air.

The truth is that the limited amount of risk capital that existed originally has been forcibly diluted across a triple time span. Those institutional funds that can truly provide massive liquidity, central bank money, and brokerage securities lending channels all only work during core trading hours. In the middle of the night, the order book is very thin, and it can be pierced with a single poke.

Therefore, that kind of continuous trading that seemingly never stops actually masks an extremely dangerous liquidity gap. At such times, liquidity prices are highly correlated, and it is very easy to bluff.

Then there is time, and this system also involves a dead knot. On a smaller scale, high-frequency trading execution operates at the microsecond level. No matter how fast on-chain settlement is, it still takes tens of milliseconds to several seconds because blocks require consensus, transactions require confirmation, and cross-chain operations require locking. Not a single one of these procedures can be skipped, and there is a gap of 5 to 6 orders of magnitude in between. Your bookkeeping hand is dozens of times faster than the ledger itself; this is a physical dead knot, not an engineering problem. No matter how many servers you pile up, you cannot bridge this time difference.

Looking at it on a larger scale, the on-chain market runs continuously 365 days a year, but the wholesale dollar channel Fedwire is only open 110 hours a week, closing on Friday night and reopening on Sunday night. The Federal Reserve's expansion plan only shifts things by one day to Saturday, and that won't happen until after 2028.

So you see, isn't this temporal misalignment massive? If something goes wrong with this system in the future, it will most likely not be due to downtime or any fundamental shock, but because the system runs too fast while settlement cannot keep up with this pipeline.

People might think that with a total of less than 10 billion US dollars of tokenized US Treasuries on-chain compared to the 12.6 trillion US dollars daily traditional repo market, there is a gap of a full three orders of magnitude. If we only look at position selling pressure from this amount of funds, it wouldn't make waves at all.

However, where is the vulnerability in this matter? It is that on Monday morning when Wall Street opens, the first things to start are not humans, but quantitative algorithms. These risk control models will automatically capture extreme discounts, massive open interest records, and massive liquidation records that appeared on-chain over the weekend. The program cannot distinguish at all whether this is a liquidity fault caused by stagnant on-chain clearing or whether US Treasuries are truly experiencing a credit crisis.

Based on the principle of risk aversion, the algorithms will then automatically tighten liquidity in the repo market. There is an even more serious problem: traditional clearinghouse risk control can only monitor on-balance-sheet positions and cannot see the hidden, nested leveraged collateral on-chain. If risk exposure is still calculated according to the old system, the risk will definitely be severely underestimated.

So the conclusion is that the contagion of position selling pressure does require a huge volume, but if the data is polluted, it becomes very difficult.

Everyone remembers the flash crash of 2013, right? People in a small room in London created a high-frequency order placement system and then intentionally left orders unexecuted to make a spoofing trade, resulting in one person's orders crashing the entire market. The principle on-chain is the same: no matter how small the capital amount is, as long as extreme abnormal quotation data is fed into Wall Street's pricing models, it is very likely to directly trigger panic-driven risk aversion across the entire system.

Therefore, we must see through the truth of this infrastructure upgrade: the intermediate clearing institutions have not been eliminated. DTCC has simply rewritten the permissions for asset minting, account freezing, and forced withdrawal directly into code.

What traditional financial institutions really want has never been an open, one-off deal, nor is it absolutely irreversible transactions; what they need is a console that allows manual intervention and ledger rollback when something goes wrong. So do not say that centralized power has been devolved; it has not been devolved at all, it has simply been codified.

Based on this trading ecosystem, let's make an inference: who will be able to make money in this market in the future? I believe that the top tier of the most profitable entities in the future market will be the infrastructure that monopolizes core clearing nodes. Whoever can control cross-ledger identity authentication, choke the channels for free exchange of assets on-chain and off-chain, or master the upper limit of collateral reuse, is equivalent to building a toll booth for next-generation liquidity.

Why say this? Because beneath this battle for victory and defeat, there will still be a batch of capital lurking specifically to exploit system design faults. For example, if a market maker is hit with a real-time margin call and pushed to within one minute of forced liquidation, and you happen to have idle on-chain funds on hand, even if you just issue a minute-level bridge loan, according to the market maker's risk premium, the annualized return on this money can easily exceed triple digits.

For another example, when panic runs happen over the weekend, you can use stablecoins to buy the dip on tokenized treasury bonds and dump them directly as soon as the traditional market opens on Monday.

The above are my thoughts and do not constitute investment advice. However, those of us who trade know very well that this kind of return must be discounted because there is a premise to doing this: the system must not collapse or fall apart. Therefore, it only holds true when you ignore the probability of extreme systemic failure.

However, once there is a code vulnerability in the smart contract itself, or the stablecoin depegs, or the counterparty goes bankrupt resulting in frozen funds, then all that money is completely trapped in your hands. Strictly speaking, this is not alpha yield at all; essentially, you are buying an unprotected tail-risk insurance for the entire system.

Therefore, for frontline trading, more realistic opportunities are actually hidden in the basis. Future new arbitrage space will certainly not only be reflected on K-line charts, but in the gap between the on-chain share of the same government bond and its traditional share.

There might even appear several tokenized US dollars on the market with completely different settlement times. As long as your account can simultaneously span both traditional and on-chain ends, and you can use models to calculate how long this cross-system conversion will take and how high the probability of getting stuck midway is, once you figure out these risks clearly, you can steadily collect this toll. This is arbitrage, transformed into arbitrage.

So I am not opposed to asset tokenization; on the contrary, I am quite supportive. But before tokenization, I think it is very necessary for everyone to know how this system operates, because only when you know how it operates will you know where the opportunities are and where huge risks are hidden. I believe this is also what everyone cares about.