Former Federal Reserve Economist: The Journey of Joining Uniswap Labs
On January 22, Gordon Liao, a former Fed economist, joined Uniswap Labs and wrote about his journey on Twitter.
Coming from a background in centralized finance, I am most excited about innovations that have the potential to build better, safer, and more accessible financial systems.
At the Fed, I'm amazed that so much of the world economy relies on so few intermediaries, e.g. 24 primary dealers handle all Treasury auctions, 8 US intergovernmental banks provide most of the world's dollar-based liquidity, 1 A single bank (Bank of New York) clears all tripartite repo.
When functioning well, these established financial giants move trillions of dollars in transactions every day, but balance sheet friction and increased asset holdings in the wake of the global financial crisis have led to frequent problems with the current financial architecture.
Even in the central arteries of the financial system, financial frictions are high. A prime example is the cyclical and sporadic funding rate spikes, the largest of which in September 2019 led to an early end to the Fed's last round of balance sheet reduction.
Financial frictions are not just a matter of market access, so important that economists have created an entire subfield, mediated asset pricing, to study frictions in mediated finance.
How will web3/DeFi improve the intermediary problem of traditional finance? In short, by making finance disintermediated, composable and more transparent, I can write about these ideas individually below if the need arises:
First, DeFi is transparent. Anyone can audit not only the smart contract code, but also the entire transaction history. This level of transparency fosters innovation and reduces risk in the long run.
Second, web3 reduces the concentration of economic power and single points of failure. As a former FICC trader, I'm still appalled at how often the largest interest rate markets are at the mercy of a handful of traders.
Third, web3 breaks down different boundaries, reduces segmentation, and realizes a truly efficient global financial system.
Fourth, the transparency of blockchain transactions can ultimately reduce the risk of money laundering and facilitate the safe flow and exchange of value on a global scale.
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