Gordon Liao

The future of trading for all asset classes could migrate on-chain as a result of market structure innovations in defi. 9/n

Adverse selection is also less problematic in the AMM market structure. Short-term informational advantages of traders matters a lot less in the time frame of days and weeks, as opposed to seconds, as asset prices resemble random walks in mid-frequency. 8/

Liquidity providers with longer holding periods have very different risk profile. They have lower return hurdles and thus the capital base is much larger, enabling deeper liquidity. 7/

How do automated market makers like Uniswap protocol incentivize more liquidity provision? By allocating trading fees on a pro rata basis, market making is no longer a race for speed. 6/

To avoid adverse selection, market makers are unwilling to supply too much liquidity. This is why market makers prefer to pay for order flow on retail trades that have little informational advantage. 5/

In this high-frequency setting, informed trades are dangerous to market makers as information asymmetry creates adverse selection on limit orders. 4/

These high-frequency market makers have no long-term risk bear capacity given their capital is geared toward short-term trading with extremely high Sharpe ratios. 3/

What are the liquidity challenges in traditional central limit order book design? Market makers are typically rewarded based on speed, so only highly sophisticated firms can participate in the speed arms race. 2/

Delighted to share this research on Uniswap protocol’s liquidity with @danrobinson. Besides highlighting the deep liquidity on-chain, we hope that the code and data will help to bring more transparency to defi. 1/https://twitter.com/Uniswap/status/1522267434517860352 …

Delighted to share thoughts with bright minds @Columbia_Biz. Much appreciate the opportunity to back in an academic environmenthttps://twitter.com/OgulcanSelcuk/status/1509547644514881548 …

Central banking -> decentralized finance is now a trend Welcome @nycbrandonnhttps://twitter.com/nycbrandonn/status/1504106651204218881 …

An economist asked me for an example of real world market failure that blockchain can solve. Margin call fail is one. Real-time margining is defi native. No trade cancellation/halting because of someone else over levered, as occurred this week with LME Nickelhttps://twitter.com/zachdex/status/1501942537598091269 …

Non-crypto: Discussing a paper on market frictions in international bonds in ~30 mins @nberpubs https://www.nber.org/conferences/ifm-program-meeting-spring-2022 … https://www.youtube.com/watch?v=rg1wQn8LfOE …

Partnering with international allies is critical both for addressing illicit digital asset use and for exploring CBDC and understanding systemic risks. The former could mean better coordinated framework through FATF and the latter through the BIS and its innovation hubs. 8/

The Federal Reserve is still very much in R&D phase on CBDC, and if it develops at all, CBDC will likely be on focused on wholesale and unlikely to compete with stablecoins or tokenized deposits 7/

No explicit call to build CBDC, only further exploration. This is aligned with the understanding that innovations should be led by private sector with governments providing guardrails when necessary. 6/

Treasury as the lead on digital asset policies gives me confidence as it has a balanced understandings of both risks (via FinCen, FSOC) and opportunities (via its mission to support the economy and financial infrastructure). 5/

Treasury is called out to lead policy recommendations around protecting consumers, investors, and businesses, bypassing the fight between the SEC and the CFTC. 4/

Developing new frameworks around stress testing, capital requirements, etc is likely in the mix for managing systemic risk down the road. This marks a departure of force-fitting digital assets into existing regulatory framework and an opportunity to shape future policies. 3/