Former Federal Reserve (Fed) economist Gordon Liao is moving to the decentralized exchange Uniswap. He explains why in a Twitter thread bringing warmth in this cold bear winter.
Of course, Gordon Liao is not the President of the Fed. He is not on the board of directors, nor is he a manager or director.
The young, Asian-American self-described as “an economist in the Department of International Finance on the Federal Reserve Board. He serves as a policy advisor and conducts research on institutional frictions in financial markets and digital innovations.”
Not a director, then, but an ambitious, still young economist who dealt intensively with the international money markets and financial flows. Gordon Liao is one of the young economists who in the old, classical world would aspire to a career that takes place between the central bank and financial institutions.
But this old world is – old. It is unattractive to young, ambitious, hungry, aspiring minds. They are increasingly drawn to the new world of finance – to DeFi and web3.
But why exactly? In a Twitter thread, Gordon explains what drives him.
Frictions at the Fed and in world finance
When someone moves, it says something about where they come from. After all, he has reasons to leave the old place.
"I have a background in TradFi and CeFi," explains Gordon, "and I am particularly passionate about the innovations that have the potential to create a better, safer and more accessible financial system."
TradFi means traditional finance, CeFi means centralized financial institutions. As Gordon explains, there is something wrong with them. For example, he was repeatedly surprised "to what extent the world economy depends on a few middlemen." Some examples:
There are 24 dealers who do the vast majority of bidding at the Fed's auctions. The Fed finances the US government, among other things, with the auctions for various types of bonds.
8 Systemically Important Banks (GSIBs) provide most of the dollar liquidity. This dollar liquidity is currently still indispensable for any kind of international trade.
A single bank, BNY, handles all tri-party repos. This means a special financial product in which all post-trade processes – payment, delivery, escrow and more – are entrusted to a third party by both parties.
There are many thousands of banks in the world. But when it comes to the nitty-gritty, global financial flows, the system focuses on relatively few actors. Years ago, several bitcoin exchanges felt the unpleasant sensation that a small number of dollar banks are the bottleneck in the global financial system . This should also be one of the reasons for the great success of stablecoins like Tether-Dollar.
"When things go well, these established juggernauts move trillions of dollars every day," explains Gordon Liao. "However, a combination of balance sheet frictions after the financial crisis and increased asset inventories are causing frequent disruptions in the current financial architecture."
Even in the central arteries of the financial system, according to Gordon, the financial frictions are “enormous.” This is shown, for example, by the regular short-term interest rate spikes for the Fed's financing rounds. Such frictions are so significant that economics has founded an entire subdiscipline to study them.
Of course, the economist only touches on the problems of the world financial system in brief, and of course much more could be said about them. Rather, the point here is this: someone who must have deep insights into the system knows how much it crunches under the shiny surface.
Why DeFi and Blockchain are the solution
But how does Gordon hope to improve the global financial system through DeFi (decentralized finance)?
“In short, by making finance non-intermediary, composable and more transparent.”
First, DeFi is transparent. "Everyone can not only check the code of the smart contract, but also the entire history of the transactions." This level of transparency promotes innovation and reduces risks in the long term.
Second, “Web3 reduces the concentration of economic power to single points of failure.” As a former fixed income trader, Gordon said, “I am still shocked at how often the well-being of even large markets depends on a handful of traders. "
Third: “Web3 breaks down various boundaries. It reduces segmentation and enables a truly efficient global financial system.”
Fourth, the transparency of blockchain transactions can reduce the risks of money laundering and "enable the secure global transport and exchange of value."
The superior technology
One could also abbreviate what Gordon writes with a few simple formulas: Otto engine beats horse. Computer beats calculator. Machine gun tops sword.
Blockchain technology is light years ahead of traditional finance. Nobody who has ever transferred Bitcoins or exchanged or lent coins via DeFi will doubt that. Blockchain is a technological breakthrough that is sometimes difficult to spot because the handling of value is less obviously related to technology than, say, killing or transporting people.
In DeFi, not only Gordon Liao sees the future of finance. There will no longer be cartels of big banks dominating global financial flows, no black boxes within which anything happens, no middlemen standing between two actors in a transaction or switch, and no platforms to which access is reserved for elite bankers.
Instead, there will be Decentralized Autonomous Organizations (DAOs). These will form purely virtual financial platforms that anyone can participate in and use. The rules of these financial platforms will be completely transparent, as well as the history of their transactions.
The transformation of the financial system that the blockchain is enforcing has only just begun. There can be no doubt that it is happening. However, its concrete form is still uncertain. More and more insiders of the traditional financial system, like Gordon Liao, understand this and choose to help shape the future of finance rather than palliatively manage the old.
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