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LeoGlossary: Atomic Settlements

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4 months ago - 2 minutes read

It might also be known as atomic swap when dealing mainly with currency.

An atomic settlement is a trade that takes place on distributed ledger technology. Under these conditions, the trade and settlement occur at the same time. This is an major advancement as the present financial system handles trades and settlement as two separate set of circumstances. In fact, they often happen at different intervals. For example, with stocks, the trade will happen immediately yet settlement takes two days.

By utilizing blockchain technology, we can see how the settlement risk can be eliminated. This occurs when one party settles one leg of the transaction but there is a delay in the other. In between resides risk of default before settlement.

The drawback, at least at the moment, is very little can be settled in this manner. If we are using atomic settlement, only digital assets of this nature are affected. If a transactions involved equities, obviously that cannot be settled instantly.

Atomic settlements also seek to Delivery vs Payment (DvP) functionality. It does so by offering "simultaneous" settlement for all legs of the transaction, involved all parties. This also negates the counterparty risk that can exist due to the time lag.

Once again, this only works with digital assets. Cryptocurrency, token and coins, along with NFTs can represent different asset classes. However, since few are converted over, we are largely dealing with assets outside the existing financial system.

One idea is to have bank deposits tokenized. This could serve as another means of payment that can be instantly settled.

Atomic settlements do requires all aspect of the trade to be settled. This can be limiting due to a variety of factors.

Therefore, it might be best to use this technology for those trades which require simultaneous settlement.

To ensure Delivery vs Payment (DvP) or Payment vs Payment (PvP) in the FOREX market, smart contracts are used to link to two assets. A PvP is what is typically known as an atomic swap since it involved currency.

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