Former Fed Economist Gordon: Why I Left the Fed to Join Uniswap?
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Former Fed Economist Gordon: Why I Left the Fed to Join Uniswap?
Financial frictions are more than just market access issues; they are so important that economists have created an entire subfield—intermediary asset pricing—to study frictions in intermediary finance.
Navigating Web3 tides with focused insightsOn January 22, former Federal Reserve economist Gordon Liao joined Uniswap Labs and shared his personal journey on Twitter.
Coming from a centralized finance background, I'm most excited about innovations that have the potential to build financial systems that are better, safer, and more accessible.
At the Federal Reserve, I was struck by how much of the global economy relies on such a small number of intermediaries—for example, 24 primary dealers handle all Treasury auctions, 8 U.S. government-sponsored banks provide most dollar-based liquidity worldwide, and a single bank (The Bank of New York) settles all tri-party repurchase agreements.
When functioning well, these established financial giants transfer trillions of dollars daily. However, post-global-financial-crisis balance sheet frictions and increased asset holdings have caused today’s financial architecture to frequently malfunction.
Even at the central arteries of the financial system, financial frictions remain significant. A typical example is the periodic and sporadic spikes in funding rates—the largest in September 2019 forced the Fed to end its balance sheet reduction program earlier than planned.
Financial frictions are not merely market access issues; they’re so important that economists have created an entire subfield—intermediary asset pricing—to study them.
How can web3/DeFi improve upon traditional finance's intermediation problems? In short, by disintermediating, composable-izing, and increasing transparency in finance. If there’s interest, I can write separately about each of these ideas below:
First, DeFi is transparent. Anyone can audit not only smart contract code but also the entire transaction history. This level of transparency fosters innovation and reduces risk over time.
Second, web3 reduces concentration of economic power and single points of failure. As a former FICC trader, I remain shocked that the largest interest rate markets are often at the mercy of just a few dealers.
Third, web3 breaks down boundaries, reduces fragmentation, and enables a truly efficient global financial system.
Fourth, the transparency of blockchain transactions could ultimately reduce money laundering risks and promote secure movement and exchange of value globally.
Building a safer, more inclusive, and more efficient financial system requires collaboration among technologists, economists, and policymakers.
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