By Arjun Sethi, Kraken co-CEO
The illusion of liquidity
It happened in September 2019 when overnight repo rates spiked to 10%. It happened in March 2020 when Treasury markets seized and the world’s benchmark “risk free” asset had no bid. It happened again in March 2023 when regional banks failed and the Fed had to create a new emergency facility just to keep collateral circulating.
Each time, the diagnosis is familiar. A sudden shortage of liquidity, collateral or confidence. But those are surface symptoms. The real cause is structural: too few participants, too much concentration and too much dependence on a handful of balance sheets.
We call these markets deep, but they are not distributed. They are highly centralized networks pretending to be decentralized ones. The repo market, the Treasury market and the FX market together make up the operating system of global finance, and that system now runs on a few machines.
We have built a financial supercomputer with a single cooling fan. It works brilliantly until it does not.
The architecture of concentration
Start with the repo market. On paper it is vast, roughly 12 trillion dollars in daily outstanding volume. In practice, it is dominated by four or five dealers. Those same firms intermediate most bilateral trades, supply tri-party liquidity and sit between nearly every large buyer and seller of Treasury collateral. When one dealer hesitates, the whole chain stalls.
In the bond market, the story is the same. A handful of primary dealers stand between the Treasury and the rest of the world. Market making in Treasuries, once distributed among dozens of firms, is now concentrated in less than ten. The buy side is not any more diverse. Five asset managers control over a quarter of global fixed income assets.
The trading venues themselves, from Tradeweb to MarketAxess, have network effects that reinforce the same pattern: a small number of nodes carrying a massive volume of flow.
FX looks global, but it follows the same topology. The Bank for International Settlements estimates that the majority of daily FX turnover, roughly 7.5 trillion dollars, passes through fewer than a dozen global dealers.
The interdealer market is dense, but the customer market depends almost entirely on those same banks for liquidity. Nonbank liquidity providers have grown, but they connect through the same pipes.
In each case, liquidity appears to be a property of the market. In reality, it is a property of dealer balance sheets. When those balance sheets are constrained by regulation, by risk appetite or by fear, liquidity evaporates.
We did not build markets as networks. We built them as star systems, a few massive suns with everyone else orbiting their gravity.
Centralization as a feature, then a bug
This structure was not an accident. It was efficient when computation, trust and capital were expensive. Concentration simplified coordination. A small number of intermediaries made it easier for the Fed to transmit policy, for the Treasury to issue debt and for global investors to access dollar liquidity.
For decades, that efficiency looked like stability. But over time, every stress episode revealed the same fragility. The 2019 repo spike happened because balance sheet capacity was maxed out. The 2020 Treasury selloff happened because the biggest dealers could not warehouse risk. Each time, the Fed stepped in, expanding its role, building new facilities and absorbing more of the market’s load.
That is not policy drift. It is physics. The logic of centralization compounds itself. When liquidity dries up, everyone runs to the only balance sheet big enough to backstop the system. Each rescue reinforces the dependency.
We are now in a regime where the central bank is not just a lender of last resort. It is a dealer of first resort. The Treasury and the Fed together are the two sides of the same balance sheet, one issuing collateral, the other providing leverage against it.
The modern financial system has become a state backed utility, not a distributed market.
Balance sheet capitalism
This is the real definition of our era: balance sheet capitalism.
In balance sheet capitalism, markets do not clear through price discovery. They clear through balance sheet capacity. Liquidity is not the flow of buyers and sellers. It is the willingness of a few intermediaries to expand their books. The plumbing of the global dollar system, repo, Treasuries and FX now depends on the same limited nodes.
The paradox is that every regulation meant to reduce systemic risk has made this concentration worse. Capital rules, liquidity ratios and clearing mandates all push intermediation into fewer, larger hands. The system is safer in isolation but more correlated in aggregate.
When every dollar of liquidity depends on the same two balance sheets, the Fed’s and JPMorgan’s, you no longer have a market. You have a queue.
We have financialized trust into a single counterparty.
In this world, systemic risk does not come from leverage alone. It comes from architecture. A network that looks decentralized on paper but behaves as a single organism in practice.
The more the system grows, the more its stability depends on the political and operational capacity of those core institutions. That is not capitalism. That is infrastructure.
Liquidity as code
The next evolution of markets will not come from regulation. It will come from computation.
When you move markets onchain, you refactor the system. You replace balance sheets with state machines.
Onchain markets change three fundamental properties of liquidity:
- Transparency. Collateral, leverage and exposure are visible in real time. Risk is not a quarterly report. It is a live feed.
- Programmable trust. Margin, clearing and settlement rules are executed by code, not negotiated by dealers. Counterparty risk becomes deterministic.
- Permissionless participation. Anyone with capital can provide or consume liquidity. Market access becomes a function of software, not relationships.
These properties turn liquidity into something structural, not conditional. It is no longer a function of who is willing to take your trade. It is a property of the network itself.
On chain repo markets already exist in prototype form. Tokenized Treasury collateral, automated lending pools and stablecoins acting as cash equivalents. The same mechanics that govern traditional repo, collateral, margin and rollover can be encoded directly into smart contracts. FX swaps, yield curves and derivatives can follow the same logic.
The difference is not ideology. It is physics. It is cheaper, faster and safer to compute trust than to regulate it.
Onchain markets are what finance looks like when liquidity stops being a privilege and becomes a protocol.
The parallel dollar system
The first real version of this world is already here.
Stablecoins are the onchain descendants of repo collateral, dollar denominated liabilities backed by short term assets. Tokenized Treasuries are the first transparent collateral instruments in financial history. And onchain money markets, from protocol-based lending pools to tokenized reverse repo facilities, are beginning to act as the new funding layer for global capital.
Together, these components form a parallel dollar system, one that still references the U.S. Treasury and the Fed but operates with radically different mechanics.
In the traditional system, information is private, leverage is opaque and liquidity is reactive.
In the onchain system, information is public, leverage is observable and liquidity is programmatic.
When stress hits, this transparency changes the entire dynamic. Markets do not have to guess who is solvent. They can see it. Collateral does not disappear into balance sheet black boxes. It can move instantly to where it is needed.
The global dollar system is moving, piece by piece, to a public ledger. Tokenized T-bills now exceed two billion dollars in circulation and are growing faster than most traditional money funds. Onchain stablecoin settlement volumes already rival major card networks. And as institutional adoption accelerates, these numbers will compound.
This is not a fringe system anymore. It is a mirror system; smaller, faster and more transparent than the one it is quietly replacing.
Over time, the line between onchain and offchain will blur. The deepest collateral, the most efficient funding and the most liquid FX will migrate to where transparency and composability are highest. Not because of ideology, but because that is where capital efficiency is greatest.
The architecture of trust
The dollar system is not going away. It is upgrading.
The financial system we built in the twentieth century was centralized because computation was expensive. You needed trust hierarchies, banks, dealers and clearinghouses to coordinate risk and liquidity. The twenty first century system does not need those hierarchies in the same way. Verification is now cheap. Transparency is computational. Coordination can be automated.
Central banks will still exist. Treasury markets will still matter. But the architecture will be different. The Fed will not need to be the single cooling fan of the financial supercomputer. It will be one of many nodes in a network that can self-balance.
Onchain markets do not eliminate risk. They distribute it. They make it visible, auditable and composable. They turn liquidity into code, trust into infrastructure and systemic risk into a design variable rather than a surprise.
For decades, we have been adding complexity to hide fragility, new facilities, new intermediaries and new regulations. The next step is to remove opacity to reveal resilience.
What began as a speculative experiment in crypto is evolving into the next monetary infrastructure, an open, programmable foundation for global finance.
The transition will not be instant. It will happen gradually, then suddenly, the way all systemic upgrades do. One day, most of the world’s collateral will settle on open ledgers, and nobody will call it crypto anymore. It will just be the market.
When that happens, liquidity will stop depending on who owns the biggest balance sheet. It will depend on who runs the best code.
And that is how finance will finally evolve from a hierarchy into a network.
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