June 2024

Settling the Unsettled

by Natasha Vasan

Table of Contents

$ Introductio)
$ Why is this a problem? Examining the “worst case” scenari5,$ Solutions: Technical, legal, & market-base+$ Conclusion

Regulators,

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academics,

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and others

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often argue that public blockchains can never be used to settle importantfinancial transactions because they do not provide for deterministic settlement finality. We argue that this is notnecessarily the case, while highlighting the risk vectors which may create settlement vulnerabilities given the current
state of technical and legal infrastructure surrounding public blockchain transactions. We find that settlement risk ismost salient in interactions between public blockchains and other (e.g., offchain) settlement systems. Focusing on the
Ethereum ecosystem, we present technical, legal, and market-based solutions which can mitigate (and, in many cases,
eliminate) the problem of principal settlement risks for financial transactions involving public blockchains.

1. Introduction
Financial primitives are technology neutral, and public blockchains are use-case agnostic. A regulatory framework has
been developed to address the operational and financial (e.g., settlement) risks associated with financial primitives andtheir underlying market infrastructures.

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While originally developed in the traditional finance context, the high-level

tenets of this framework apply regardless of the specific technological makeup of a financial market infrastructure.

5Insome (but not all) cases, public blockchains are used as the means to track, manage, and facilitate the operation offinancial primitives, and it is here where we need to think about risk management frameworks and legal protections thatexist outside of the technology itself. 

In traditional finance, securities trades are generally settled on a “delivery v. payment” (DvP) basis, wherein one leg of atransaction (delivery) is made conditional on the completion of the other (payment) (See Figure 1).

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When both legs(delivery and payment) of the transaction are complete, which usually (in the US) takes 2 days following the trade’s
execution and clearing, the transaction is deemed legally and irrevocably settled.

The underlying purpose of DvP settlement in inextricably linking both legs of a transaction is to mitigate principal risk –the risk that a seller may “deliver” without ever receiving payment from the buyer, or vice versa, that the buyer may
provide payment without ever receiving delivery. 7 Still, principal risk is not totally eliminated unless DvP settlement
occurs on a simultaneous basis, such that a seller provides delivery if and only if and at exactly the same time that a buyer
makes payment. In other words, where there is a time lag between two legs of a transaction, the risk of DvP settlement
fails increases – it remains possible for the first leg to irrevocably deliver value, but never receive payment in return. In
the foreign exchange context, this is referred to as Herstatt risk. 8 In traditional finance, DvP settlement is usuallyattained through centralized intermediaries (e.g., NSCC, the central counterparty for securities trades) who step in to
shift the burden of principal settlement risks off the shoulders of individual market participants.

Figure 1

For certain crypto trades – which we call “single-chain transactions” – where both legs of a transaction occur on thesame blockchain (say, Ethereum), simultaneous DvP settlement is the norm. Many DeFi protocols – like Uniswap andother DEXs – utilize noncustodial, pre-funded liquidity pool smart contracts to execute transactions. Consider an ETH
for PEPE swap on Uniswap – once the payment of ETH is made to the prefunded liquidity pool smart-contract, thesmart-contract immediately and deterministically executes delivery of PEPE to the trader (see Figure 2). If something
goes wrong (i.e., the trader has insufficient funds in their wallet account to make complete payment, or the pool contains

insufficient PEPE to fully deliver on the trader’s payment), both legs of the transaction will revert because thetransaction is atomic. Further, smart-contract enabled innovations like flash loans allow more sophisticated financial
activities like margin trading to occur on a simultaneous DvP basis within an atomic, single-chain transaction. For
transactional arrangements like these, there is no principal risk.

Figure 2

Single-chain transactions should be differentiated from “hybrid transactions,” a term coined by Soubhik Deb et. al.
which refers to transactions that “result in both onchain and offchain state changes.”

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Hybrid transactions may involve

settlement of each leg on different public blockchains (e.g., a NFT transfer from Ethereum to Solana, see Figure 3), or
settlement of one leg onchain and the other totally offchain (e.g., subscription to a tokenized U.S. treasury fund on
Ethereum by wire transfer payment, see Figure 4; or a fiat-to-crypto on-ramp transaction on a CEX). Because hybridtransactions involve different systems – with different settlement timelines, security considerations, safety guarantees,
etc. –, we generally cannot enable simultaneous DvP settlement for these transactions. In what follows, we explain why
this is a problem and propose some potential solutions.

Figure 3

Figure 4

2. Why is this a problem? Addressing the“worst case” scenario
At the outset, it is important to note that trade settlement is a fundamentally legal construct. In the Ethereum context,
the word “settlement” is often used in reference to the technical and economic notion of transaction or block “finality” –a moment (e.g., the next finalized checkpoint) after which it becomes economically irrational for any malicious actor to
try and remove a transaction from the blockchain ledger. However, even the strong technical finality guarantee provided
by Ethereum under the CASPER-GHOST consensus protocol is not enough to satisfy financial regulators, who demand
deterministic settlement finality. 10 This is because even such “finalized” Ethereum transactions are theoretically subject
to reversion in the “worst case” scenario. 

The law is concerned about this worst case scenario because legal settlement finality is heavily relied upon by market
participants, such that disruptions to transactions following settlement cause widespread market distress. While thelaw does not purport to totally eliminate the possibility of settlement failures or disruptions, it must be prepared withtools to provide redress for those harmed in the case that such settlement problems occur. In practice, this effectively
means that individual market participants should never be subject to principal risk. 

Established settlement systems in traditional finance exemplify this dynamic. Clearing and settlement for mosttraditional securities occurs through a central counterparty (CCP) that acts as a middleman, engaging in a process
called novation to replace the original contract between buyer and seller with two contracts interposing the CCP as
buyer to every seller and seller to every buyer. In so doing, the CCP shifts the burden of counterparty credit risk (which
can be a form of principal risk) from individual traders to itself. The CCP engages in legally mandated risk-management
practices, like collecting margins from its institutional clearing members and keeping a minimum capital buffer in orderto mitigate the chances of its failure, given the fact that it absorbs and concentrates all counterparty risk in the system.
Still, the risk of a CCP’s failure is present and widely known, so legal and institutional mechanisms (e.g. the CCP’s accessto emergency central bank liquidity facilities) exist so that market participants can trust that their personal balance11
sheets will not be harmed by any black swan event interfering with the CCP’s settlement function.

By contrast, under the status quo, DeFi market participants have no guarantee that transactions they view as “final”
would continue to be recognized (by the protocol, the law, or other network participants) following a black swan event.
It is common that the likelihood of a malicious validator acquiring 67% of the network and engaging in a long-term
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blockchain reorganization is brushed off as infeasible due to the exorbitant expense of such an attack, but such aremote but possible contingency is exactly what is meant by a “worst case” scenario or “black swan event”. Somewhat
more likely is the potential for a consensus or execution client used by a supermajority of validators to contain some
software bug (either unintentional or intentional) causing finalized transactions to be disrupted. In either of these cases,

DeFi market participants whose transactions are reversed have no recourse – there is a discrepancy between the recordof transactions they reasonably viewed as final and, accordingly, may have relied on, and the actual state of theblockchain ledger. 

This doesn’t pose too much of an issue for single-chain transactions. Given that both (delivery and payment) legs ofsingle-chain transactions settle simultaneously, a blockchain reorganization would either reverse both legs of the tradeor neither. The worst that could happen is that traders suffer the “replacement-cost” of having to replace theirtransaction at current – potentially less favorable – market prices. 13 Again, there's no principal risk for single-chain
DeFi transactions.

However, things are not so simple for hybrid transactions. In any case where one leg of a transaction is on Ethereum andanother is not (whether it be on a different blockchain, or offchain entirely), the possibility remains that one leg of atransaction will settle irrevocably elsewhere but the Ethereum leg will become reversed following confirmation(because of a blockchain reorganization). On the other hand, for certain hybrid transactions involving an onchain leg
and an offchain (i.e., traditional finance) counterpart, issues with offchain confirmation also pose settlement risks. The
2021 Gamestop incident exemplifies this dynamic – as Gamestop’s stock price experienced a rapid, Reddit fervorinduced spike, NSCC significantly increased its collateral requirement on Robinhood’s clearing account, causing
Robinhood to halt trades between execution and settlement. Where a token (RWA or DeFi-native) is traded in
exchange for offchain consideration (e.g., fiat wire transfer), the token transfer could be finally executed onchain – andseveral subsequent onchain actions could be made reliant on its validity – before clearing and settlement take place forthe corresponding leg on the “real world” ledger. This leaves open the possibility that in the time between onchain andoffchain settlement, something (like the Gamestop incident) can go wrong such that offchain settlement never actuallyoccurs. Both of these realities create a source of principal risk in public blockchain-based infrastructure for financial
primitives, which global financial regulators, financial institutions, and general public sentiment will not tolerate if left
unaddressed.

Implications
q Institutional adoption of DeFi: For large financial institutions engaging in high-value transactions, theprobabilistic settlement guarantee of public blockchains like Ethereum may be a significant deterrent, absent
additional safeguards. These institutions are most likely to place value on extremely strong settlement guarantees
for blockchain-related activities, particularly as they are sometimes required to do so by regulation. 14 Accordingly,
the uncertainty surrounding legal settlement on Ethereum may push such institutions to favor (by launching and/or
participating in) tokenization projects on private permissioned blockchains, rather than public permissionless
blockchains like EthereumJ
q Cross-chain MEV: Asynchronous settlement cycles across public blockchains are inherent to most cross-chain
MEV extraction opportunities. For instance, CEX-DEX arbitrage opportunities expose traders to principal risk inboth legs of the transaction - a transfer on an Ethereum DEX may be reversed following irrevocable payment to the
CEX due to a blockchain reorganization, or the CEX may become insolvent and therefore unable to honor trade
instructions after the corresponding leg is settled via the Ethereum blockchain. Akin to inventory risk, this

this heightened principal risk may mean that profitable cross-chain MEV opportunities are only available to highly
resourced market participants, creating a distinct centralization vector.

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F Limitations on interoperability with a tokenized world: Outside of the DeFi context, tokenization projects on
permissioned blockchains – by private institutions and national governments alike – have seen significant advancesin popularity and sophistication. While a legitimate criticism of these projects thus far has been their siloed anddisconnected nature, we are seeing significant movement towards better integration and interoperability between
permissioned blockchain networks in terms of not only technology, but regulatory, governance, and operational
standards.

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The lack of a strong and legally recognized guarantee of settlement finality for transactions involving

public blockchains could stand in the way of DeFi becoming an integrated part of the future of finance thesedevelopments represent, causing DeFi to become its own “walled garden” inconveniently segregated from the rest of
the tokenized world. Without matching the legal and technical protections for settlement attained (or required) byother tokenized systems, DeFi will be unable to successfully interoperate with those systems. This would give
regulators one more reason to exclude DeFi from their vision of a tokenized future of finance?
F Public confidence in the system: Market participants – institutional and retail – want certainty that thetransactions they view as final will always be recognized as such. The mere possibility of an attack on transaction
finality occurring, in conjunction with the reality that there really is currently no recourse for market participants inthe event that their transactions are reverted, may deter participation in the network. Even for single-chaintransactions, replacement-cost risk following an attack on finality may itself constitute a significant deterrent for
DeFi market participants given the time-sensitive nature of many trading strategies and high degrees of token-pricevolatility. This is not to say that the goal should be to eliminate any and all possibility of such an attack, but theburden should not be on individual traders to bear the costs of settlement risks. With increasingly significant
centralization vectors on Ethereum,

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more value flowing through all public blockchain ecosystems (creating more

incentives to exploit the blockchain record, potentially to capture various forms of MEV), and omnipresent threatsof cybersecurity exploits and hacks, promoting public trust in the integrity and credibility of DeFi markets should behighly prioritized.

3. Solutions: Technical, legal, & market-based
As noted, hybrid transactions are no homogenous beast – both legs might be on different blockchains, or one leg might
be onchain and the other totally offchain (e.g., recorded on a bank’s internal ledger). What’s more, in either case, theassets transacted may be digitally native or tokenized representations of real-world assets (RWAs). These details should inform the range of solutions we consider when addressing the question of how to deal with principal risk forhybrid transactions– different solutions make sense in different transactional contexts. While external legal
intervention through public law mandates may be appropriate where there are offchain dependencies, crypto-nativetechnical interventions are likely more effective when transactions are confined to the public blockchain ecosystem.

This notion – that different risk management frameworks are appropriate in different contexts – is also a core principleof traditional finance. For instance, retail traders who purchase securities via the public capital markets are provided
more robust legal protections than institutional market participants who purchase securities in private placements
directly from an issuer/ their intermediary. Likewise, the settlement systems for different traditional asset classes – likesecurities, derivatives, and bank liabilities (i.e., funds transfers) – have different settlement timelines (T+2 v. RTGS), 18
settlement methods (DvP v. PvP),19 and operational mechanics (CCP novation v. electronic interbank payment
systems, like ACH). These settlement systems carry different risk profiles, reflecting the nature of the transactions theyfacilitate and preferences of the market participants they serve. This is to say, there are multiple ways to transact, all ofwhich come with different tradeoffs in terms of safety and efficiency. The same idea applies when we talk about
managing risks for hybrid transactions on public blockchains .

Additionally, different approaches to solving for principal risk – technical, legal (public law and private contracts),
market-based – can be composable, rather than mutually exclusive. Industry self-regulation is exemplary here. Baseline
standards and best practices to ensure strong and interoperable finality guarantees across systems can be developed
through industry collaboration, and these standards/practices can be normalized through public law mandates, privateagreements, and/or market incentives. 

Technical^ Cross-chain messaging: We are seeing a lot of innovation working to enable seamless transfers across publicblockchains. Cross-chain messaging protocols like Wormhole 20 and bridges are the starting point. Bridges enable
messages (transactions) to be transferred across public blockchain networks with varying degrees of security,
decentralization, and ecosystem compatibility. However, while bridges make possible cross-chain transactions,they do not address the asynchronicity in settlement cycles and varying settlement guarantees across blockchains.
Bridges can mitigate principal risk by waiting until a transfer on the source chain is confirmed according to theconsensus rules of the source chain prior to executing the corresponding leg of the transaction on the destination
chain – effectively, this is non-simultaneous DvP. In addition to adding latency to cross-chain communications, thisdoes not totally eliminate principal risk for transactions involving transfers on public blockchains like Ethereum
where finality can be disrupted even after “confirmation” as defined by the protocol. 21 The Crosschain Risk  Framework labels “network consensus risk” a key category of risk associated with cross-chain communication
technologies, noting that “such risks are often beyond the control boundary of cross-chain infrastructure and likely
represent a fundamental security limitation to bridging across independent sovereign chains.” 22 Still, it is worth
noting that settlement disruptions following protocol-defined finality on Ethereum are highly unlikely given the
exorbitant expense they entail. Accordingly, non-institutional market participants may view the benefits of crosschain trading opportunities to justify potential risks arising from the, admittedly remote, possibility of settlement
disruptions.

 Public-private blockchain communication: Most bridges address cross-chain communications between publicblockchains, but, as we move towards an increasingly tokenized future, a solution is needed to enable public andprivate blockchains to communicate with each other. Public-private blockchain communications constitute a
different type of hybrid transaction, with different considerations involved in addressing associated risks.
Specifically, private blockchains are primarily used and managed by highly regulated financial institutions or evennational governments, who may demand greater settlement guarantees and legal protections.

Chainlink’s Cross-Chain Interoperability Protocol (CCIP) is currently being used in a collaboration between SWIFT
and several major financial institutions (including DTCC, Euroclear, BNP Paribas, BNY Mellon, and more) to test
the feasibility of such private-public blockchain communications. 23 In its Report discussing the findings of thiscollaboration, SWIFT noted that regulatory compliance would require a “designated depository” (a central account keeper or bookkeeper) to confirm settlement finality in a transfer system involving public-private blockchaincommunications. 24 This underscores the fact that, for certain transactions, an overlay of rules and practices
external to the technological system itself (that is, offchain) may be necessary for regulatory compliance. 

Similarly, hashed time-lock contracts (HTLCs) have been explored by Central Banks – specifically, the Monetary
Authority of Singapore and the Bank of Canada– as an experimental technical solution to facilitate atomic (thoughnon-simultaneous) swaps across permissioned blockchain networks. 25 However, HTLCs have not seen widespread
adoption as a vehicle for interoperability across private blockchains, potentially given certain fundamental
economic and technical problems associated with HTLCs.

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LegalTechnological innovations can go a long way in providing the settlement guarantees and risk mitigation we seek forhybrid transactions. However, particularly for hybrid transactions involving transfers wholly outside of the blockchain
context and/or on private blockchains, they may not go far enough. For public blockchains which lack deterministic
settlement finality on a technical level, external legal intervention may be necessary to generate institutional adoption,
public trust, and regulatory acceptance where such blockchains are used as a settlement layer for financial primitives.
Likewise, legal mandates on specific actors may be more feasible and effective where a centralized manager (of an
offchain ledger, or private blockchain) is involved in one - or both - legs of a transaction and is easily identifiable. There
are a number of avenues for such legal intervention, which vary in their degree of intrusiveness on public blockchain
infrastructure. As highlighted above, different avenues may be appropriate depending on the nature of the transaction
at issue and preferences of the transacting parties. 

Legal requirements applicable to settlement infrastructures supporting certain types of financial transactions – likethose by regulated financial institutions, 27 and/or on financial market infrastructures deemed “systemicallyimportant” 28 – mandate certain and legally enforceable settlement finality. That is, no amount of technical innovation
will be adequate without an external legal basis for settlement finality. 29 This suggests that, in order to maximize thepotential for public blockchains to be used as settlement layer for a diverse array of financial activities, a moment ofsettlement finality following which transactions are perpetually recognized as final should be defined and consistently
recognized by DeFi market participants, institutional players, and the law. For instance, settlement finality on
Ethereum could be legally defined as the moment when a transaction is followed by a finalized checkpoint.
Alternatively, settlement finality could also be defined as some later point where the finality guarantee is even higher.

Such a legal basis for settlement finality could be codified by contract between, for instance, an offchain issuer of a RWA
token and purchasers of the token, providing that the offchain issuer will recreate any transactions reversed following
the contractually defined moment of settlement finality at original prices or reimburse the purchaser for any amount
lost. In this way, the costs of principal settlement risks for hybrid transactions involving an offchain transfer could beallocated ex-ante by contract, enhancing certainty for market participants that their transactions will be recognizedeconomic effect following the moment of settlement finality, even if the network ceases to recognize their transaction.

Additionally, a defined moment of settlement finality could become incorporated in public law or industry selfregulation. This could provide a legal cause of action for a trader financially harmed by a settlement disruption
following legal settlement finality against the misbehaving actor (byzantine validator, or negligent / intentionallymalicious client software developer) whose conduct caused the blockchain reorganization. Further, technologicalsolutions like protocol-enshrined insurance mechanisms (e.g., slashing insurance 30 ) could work in concert with such
legal rules to provide for certain recompensation for victims of blockchain reorganizations whose “reasonable
expectations” of settlement finality (as legally defined) are breached. 

 We have yet to discuss the risks associated with settlement delays (rather than reorganizations) resulting from network
latency, congestion, or inefficient gas pricing. This can be classified as an operational risk affecting transaction
execution, in contrast to principal risk which - as we have discussed - affects trade settlement. Still, in the context of
hybrid transactions involving Ethereum transfers, settlement delays pose significant problems – in addition to making
trade processing slower, by increasing the time between trade execution and settlement, settlement delays increase thelikelihood that a transacting party will face a total loss of principal. To address this problem, the law could impose
obligations on an offchain agent involved in a hybrid transaction (e.g., a transfer agent or “designated depository” 31 ) to
“do their best” to ensure timely inclusion of transfers they instruct on a public blockchain – this might look like gas fee
minimums, privately negotiated agreements with block-builders or relay providers (e.g., purchasing blockspace
futures),32

and/or trade limitations in periods of high network congestion.

Market-based
According to the Bank of International Settlements (BIS), one of the main drawbacks of public blockchains is that theylack the “settlement finality that comes from central bank money residing in the same venue as other claims.” 33 It
 appears that this is a criticism of the fact that in a decentralized financial environment, there is no clear analogue to the“full faith and credit” of the government that underlies public trust in traditional financial markets. 

Should NSCC fail tomorrow, there is a general acknowledgment that the U.S. government would probably bail them out(or create a monetary situation wherein they are very likely to be bailed out by private actors), which creates a general
sense of confidence that securities will continue to be settled without principal risk borne by individual market
participants even in the event of a huge market shock. The security of a government backstop is even more explicit in
the traditional banking sector, where the Federal Deposit Insurance Corporation (FDIC) – created after the Great
Depression, the most infamous black swan event – automatically insures all bank deposits up to $250,000. However, it
is unclear what would happen if a malicious validator acquired 67% control of Ethereum’s network tomorrow, and choseto rewrite the history of the blockchain. There is a chance that the Ethereum community, through social governance,
would decide to hard fork the blockchain (see the DAO) to restore any reversed transactions, but this is far from aforegone conclusion. In effect, there remains some likelihood that individual market participants would have to bear
the principal risk of settlement failures in the event that they occur, which is a source of uncertainty that the entire DeFi
industry shares an interest in putting to rest.

To conclude, we consider some ways in which DeFi markets could evolve to provide stronger guarantees of settlement
finality and protection in the case of a “black swan” event, without losing the potential for true decentralization6
5_ Decentralized settlement insurance – In their recent paper, Soubhik Deb, Robert Raynor, and Sreeram Kannan of
Eigenlayer proposed a mechanism to utilize slashed funds (which are currently burned) as a means to compensate
victims of settlement disruptions.

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A settlement insurance mechanism could also operate in a manner somewhat

analogous to the depository insurance scheme for banks in the traditional financial system, wherein participants pay
regulator assessments to the insurance fund in exchange for coverage. An important difference, however, could be  that the settlement insurance treasury is held in smart contracts and managed through a system of decentralized
governance. 

A decentralized settlement insurance framework, however structured, could operate in conjunction with external
legal requirements in the context of financial transactions– for instance, the law could require regulated financial
institutions to purchase coverage before engaging in financial transactions involving public blockchains. 

 Central counterparty for hybrid transactions – While “centralized” in traditional financial markets, central
counterparties (CCPs) do not inherently require centralized management and operation. The core function of a
CCP is to pool resources and risk exposure into one entity, so that individual market participants do not have toworry about things like the credit risk posed by their counterparty (who may be a complete stranger given the
anonymous nature of today’s trading markets). In the case of U.S. securities clearing, that “entity” is the DepositoryTrust
  Corporation (DTC), a centralized financial institution. But, it is worth considering whether that “entity”
could be, say, a DAO.

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For single-chain transactions, automated market makers (AMMs) serve a functionally similar role to a CCP,
providing a pre-funded pool of assets against which market participants can trade without credit risk. However,credit risk may remain for hybrid transactions like those involving centralized cryptocurrency exchanges or
traditional financial institutions, who may default on their obligations in the event, for instance, of insolvency. Insuch cases, a system of central clearing (which could be governed by a decentralized network) could work to spreadlosses from counterparty default across many market participants. Likewise, this CCP could also be obligated(contractually or by public law) to provide compensation to participants harmed by a settlement disruption,
thereby addressing the problem of principal settlement risk in these transactions. 

One implication of this arrangement could be that certain transactions – like fiat-to-crypto onramp transactions –would no longer need to be cleared and settled in-house at the individual centralized exchange where they are
executed. Such a shift to central clearing, where exchange execution is separated from clearing/ settlement, could
enable efficiencies like the economies of scale associated with CCP netting and enhanced competition among
centralized exchanges. 

Æ Standardized legal contracts – While this may sound like it belongs in the “legal” solutions section, thedevelopment of a standardized contractual framework to govern certain categories of hybrid transactions is bothwithin the ambit of private sector action and carries significant implications that are not purely legal but economic,
technical, and transactional. The ISDA Master Agreement for over-the-counter derivatives transactions, first
introduced in 1985, transformed OTC derivatives markets – decreasing transaction costs and enhancing market
integrity – by providing a consistent, predictable, and legally enforceable foundation for derivatives transactions. A
similar approach may offer significant benefits in the context of certain hybrid transactions – a standardized
 contractual
framework could define the moment of settlement finality for both legs of a transaction, specify how
parties should behave and remedies available in the event of settlement disruptions (potentially eliminating
principal risk for traders), and even integrate certain aspects of contract logic into the operations of smart contracts. 

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With enough adoption, a standardized contractual framework to govern certain hybrid transactions – like those
involving tokenized RWAs, stablecoins, etc. – could provide greater legal certainty, institutional credibility, andtransactional efficiencies to the use of public blockchains as a settlement medium in these markets and for highvalue finance generally. 

,& Conclusion
In sum, while the settlement concerns surrounding public blockchains like Ethereum voiced by regulators and the likeare often far overstated, there remains a benefit to thinking deeply about systemic vulnerabilities and risk-vectors
which 

 could arise before they actually do. Much of traditional finance has been shaped by a patchwork of reactionary
responses to “black swan” events – like the great depression, the back office crisis of 1968, the global financial crisis, toname a few. This is like putting bandaids on cracking pipes. By taking a proactive, rather than reactive, approach toenshrining resiliency (through technological, as well as legal and market-based adjustments) in the plumbing offinancial markets built on public blockchains, we can build a stronger foundation for a robust, trustworthy, and efficientnext-generation financial system. 

In this paper, we have identified settlement discrepancies and the resulting principal risks in certain hybridtransactions as a potential systemic vulnerability, and have noted various potential mitigants to this problem. We hopethat future technical, legal, and economic research further investigates these (and, hopefully, others in addition to thoseoutlined here) solutions.

 Appendix - Table of transaction settlement
characteristics