Collateral instead of prefunding

Atomic settlement asks both sides to hold the entire asset at the instant of the trade. That is a guarantee bought with idle money.

Indent Layer grants the right to move volume against collateral instead. Capital works rather than guarding a position.

Position limits

A participant's limit is a function of the collateral it has staked. More collateral, more volume. The limit is checked at the moment an obligation is accepted, so an obligation that would breach it is never novated in the first place.

Properties

• Collateral is posted in the settlement asset, so its value does not have to be marked against a second market during a stress event.
• Collateral is not lent out. It exists to absorb a default, not to earn a carry.
• A participant that defaults is slashed, in the order described in the default waterfall.

The trade-off, stated plainly

Prefunding removes credit risk by freezing money. Collateral converts credit risk into a sizing problem: how much can this participant move before its collateral stops covering it. That is a question with a numeric answer, which is what makes clearing possible at all.