Composable clearing: how blockchain reconciles efficiency and safety in intermediated markets

Nicolas Zhang

Abstract

Clearing sits between trading and settlement and must reconcile two goals that existing designs trade off against one another: efficiency, which requires letting participants trade on privately known preferences, and safety, which requires prefunded collateral and final settlement. We show that neither pooled mechanisms, such as automated market makers, nor purely bilateral ones, such as uncleared over-the-counter markets, can achieve both, whereas a composable two-layer framework – an aggregative trading and price-allocation layer, composed with a prefunded clearing layer through an atomic settlement map – can. Blockchain does not change the economics of clearing; it lowers the cost of implementing this atomic, multilateral composition, expanding the attainable safety–efficiency–prefunding frontier. The framework reinterprets the singleness of money: settling in central bank money is one implementation of the atomic settlement map, but tokenization allows the same finality to be obtained over high-quality collateral such as tokenized Treasury bills, without central bank money necessarily being the settlement asset. Applications to Treasury repo and to thinly traded foreign-exchange pairs show how tokenization is reshaping the structure of financial markets.