Net settlement Meaning

Net settlement is a traditional banking process where transactions are accumulated over a period (e.g., one business day), and only the "Net Difference" is transferred between banks at the end of that period. If Bank A owes Bank B $10 million, and Bank B owes Bank A $8 million, they don't swap both amounts. Instead, Bank A simply sends $2 million to Bank B at the end of the day.

This system is highly efficient for liquidity, as banks don't need to have cash on hand for every single transaction instantly. However, it introduces Counterparty Risk.

If Bank A goes bankrupt at 2:00 PM, Bank B might never receive the settlement due at 5:00 PM. Crypto operates differently, typically using Gross Settlement.

In Bitcoin, every transaction is settled individually and finally as soon as it is confirmed. There is no "End of Day" batching.

While this requires more immediate liquidity, it eliminates the credit risk found in net settlement systems. However, some Layer 2 scaling solutions utilize a form of net settlement by bundling thousands of transactions off-chain and only settling the final state on the main chain.