Arjun Sethi, Co-CEO, Kraken
illusion of liquidity
That happened in September 2019 when overnight repo rates spiked to 10%. It happened in March 2020, when the U.S. Treasury market was occupied and there were no bids for the global benchmark “risk-free” asset. The same thing happened again in March 2023, when a local bank failed and the Fed had to create a new emergency facility just to keep collateral in circulation.
It’s a familiar diagnosis every time. A sudden lack of liquidity, collateral, or credit. However, these are superficial symptoms. The real cause is structural. Too few participants, too much focus, too much reliance on a small number of balance sheets.
These markets are called deep markets and are not decentralized. These are highly centralized networks disguised as decentralized networks. Together, the repo market, the government bond market, and the foreign exchange market make up the operating system of global finance, which currently runs on a few machines.
We built a financial supercomputer with one cooling fan. It works great until it stops working.
architecture of concentration
Let’s start with the repo market. On paper, the amount is huge: about $12 trillion is outstanding each day. In reality, it is dominated by four or five dealers. These same companies broker most bilateral transactions, provide three-party liquidity, and stand between nearly all large buyers and sellers of Treasury collateral. If one dealer hesitates, the entire chain stalls.
The same goes for the bond market. A small number of primary dealers stand between the Treasury and the world. Market making in U.S. Treasuries, once spread over dozens of companies, is now concentrated in fewer than 10 companies. The buy side is no longer diverse. Five asset managers manage a quarter of the world’s fixed income assets.
The trading venues themselves, from Tradeweb to MarketAxess, have network effects that reinforce the same pattern. That is, a small number of nodes carry a large amount of flows.
FX appears global but follows the same topology. The Bank for International Settlements estimates that the vast majority of daily foreign exchange trading volume, about $7.5 trillion, passes through fewer than a dozen dealers around the world.
Although the inter-dealer market is dense, the customer market relies almost entirely on the same banks for liquidity. Non-bank liquidity providers are growing, but they are connected through the same pipes.
In both cases, liquidity seems to be a property of the market. In reality, this is a property of a dealer’s balance sheet. When these balance sheets are constrained by regulation, risk appetite, or fear, liquidity evaporates.
We didn’t build the market as a network. We build them as star systems, with several giant suns and all the others orbiting around their gravity.
Centralization as a feature, then bugs
This structure was no accident. It was efficient when calculation, trust, and capital were expensive. Focusing simplifies coordination. A small number of intermediaries made it easier for the Fed to communicate policy, the Treasury to issue bonds, and global investors to access dollar liquidity.
For decades, that efficiency looked like stability. But over time, every stress episode revealed the same vulnerability. The surge in repos in 2019 occurred as balance sheet capacity was stretched to the limit. The 2020 sell-off in U.S. Treasuries occurred because the largest dealers were unable to take on the risk. Each time, the Fed has stepped in, expanding its role, building new facilities, and absorbing more of the market burden.
It’s not a policy shift. That’s physics. The logic of centralization is complicated. When liquidity dries up, everyone runs to the only large balance sheet that can backstop the system. Each rescue strengthens the dependency.
We are now in a system where central banks are no longer simply lenders of last resort. This is a First Resort store. Both the Treasury and the Fed are two sides of the same balance sheet, one issuing collateral and the other providing leverage against the collateral.
The modern financial system is no longer a decentralized market, but a state-backed public utility.
balance sheet capitalism
This is the true definition of our time: balance sheet capitalism.
In balance sheet capitalism, markets are not cleared by price discovery. Clear capacity on balance sheet. Liquidity is not a flow of buyers and sellers. That’s due to the willingness of several intermediaries to expand their books. The global dollar system, repos, government bonds, and exchange plumbing currently relies on the same limited nodes.
The paradox is that all regulations aimed at mitigating systemic risk are exacerbating this concentration. Capital controls, liquidity ratios, and clearing obligations all force intermediaries into fewer, larger hands. Systems are more secure individually, but they are more interrelated as a whole.
If all your liquidity depended on the same two balance sheets, the Fed and JPMorgan, there would no longer be a market. There is a queue.
We financialize trust into a single counterparty.
In this world, systemic risk doesn’t just come from leverage. It comes from architecture. A network that appears distributed on paper but actually operates as a single organism.
The more a system grows, the more its stability depends on the political and operational capacity of its core institutions. That’s not capitalism. That’s infrastructure.
Fluidity as code
The next evolution of the market will not come from regulation. It comes from calculations.
Moving the market on-chain refactors the system. Replace the balance sheet with a state machine.
On-chain markets change three fundamental characteristics of liquidity.
- transparency. See your collateral, leverage, and exposure in real time. Risk is not a quarterly report. This is a live feed.
- programmable trust. Margin, clearing, and settlement rules are enforced by code and are not negotiated by dealers. Counterparty risk becomes deterministic.
- Participation without permission. Anyone with capital can provide or consume liquidity. Market access becomes a function of software rather than relationships.
These characteristics make liquidity structural rather than conditional. It’s no longer a function of who will do your business. This is a property of the network itself.
It already exists in the chain repo market in the form of a prototype. Stablecoins that act as tokenized Treasury collateral, automated loan pools, and cash equivalents. The same mechanisms that manage traditional repos, collateral, margins, and rollovers can be encoded directly into smart contracts. FX swaps, yield curves, and derivatives can follow the same logic.
The difference is not ideological. That’s physics. It is cheaper, faster, and safer to calculate trust than to regulate it.
On-chain markets are what finance will look like when liquidity ceases to be a privilege and becomes a protocol.
parallel dollar system
The first real version of this world is already here.
Stablecoins are the on-chain offspring of repo collateral, which is dollar-denominated debt backed by short-term assets. Tokenized government bonds are the first transparent collateral product in financial history. And on-chain money markets, from protocol-based lending pools to tokenized reverse repo facilities, are beginning to serve as a new funding layer for global capital.
Together these components form a parallel dollar system. The system still references the U.S. Treasury and the Federal Reserve, but operates in a fundamentally different way.
In traditional systems, information is private, leverage is opaque, and liquidity is reactive.
In on-chain systems, information is public, leverage is observable, and liquidity is programmatic.
Under stress, this transparency changes the whole dynamic. The market doesn’t have to guess who will be able to pay. They can see it. Collateral does not disappear into a black box on your balance sheet. You can instantly move to where you need to be.
The global dollar system is gradually transitioning to a public ledger. Tokenized Treasury bills currently have over $2 billion in circulation and are growing faster than most traditional money funds. On-chain stablecoin payment volume is already comparable to major card networks. And as institutional adoption accelerates, these numbers will increase further.
This is no longer a fringe system. It’s a mirror system. It is smaller, faster, and more transparent than what it is silently replacing.
Over time, the line between on-chain and off-chain becomes blurred. The thickest collateral, most efficient financing, and most liquid exchange will go where there is the most transparency and configurability. Not because of ideology, but because that’s where the most capital efficiency is.
Trust architecture
The dollar system will not disappear. Upgrading in progress.
The financial system we built in the 20th century was centralized because calculations were expensive. A trust hierarchy, banks, dealers, and clearinghouses were needed to coordinate risk and liquidity. 21st century systems don’t need these hierarchies in the same way. Verification is now cheaper. Transparency is calculated. Adjustments can be automated.
Central banks will continue to exist. The government bond market will continue to be important. However, the architecture is different. The Fed doesn’t have to be the single cooling fan of a financial supercomputer. This will be one of many nodes in the network that can self-balance.
On-chain markets do not eliminate risk. they distribute it. These make it visual, auditable, and configurable. They turn liquidity into code, trust into infrastructure, and systemic risk into a design variable rather than a surprise.
Over the decades, we have added complexity, new facilities, new intermediaries, and new regulations to hide vulnerabilities. The next step is to remove the opacity to reveal elasticity.
What began as a speculative experiment in cryptocurrencies is evolving into the next financial infrastructure: an open, programmable foundation for global finance.
Migration is not instantaneous. Like all system upgrades, it happens gradually and suddenly. One day, most of the world’s collateral will be settled on an open ledger, and no one will call it a cryptocurrency. It will just be a market.
If that happens, liquidity will come to a standstill depending on who owns the largest balance sheet. It depends on who runs the best code.
In this way, finance will eventually evolve from a hierarchical structure to a network.
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