I’ve been reflecting a lot recently on the idea of liquidity. More like trying to get my head around it, its importance, and how the sizes of liquidity pools will impact the winning platforms within Web 3.

I know, kind of geeky, but where I struggle with the Ethereum model of roll ups is that liquidity (assets) gets moved out of the L1 and into disparate L2s, which sets up barriers to the free flow of capital from one point to another.

In the “Internet of Value” world, the idea is that capital moves as quickly and effortlessly as information.

Think about sending a text or email.

Now, think about transferring stock from one brokerage to another.

Or, let’s say you have a share of a company listed on the London Stock Exchange and you want to exchange it for a share listed in New York.

There are about 7 different steps you have to take, not to mention the time associated with it. That’s a liquidity problem/challenge.

This is why Web3, or more specifically, DeFi, is going to rip out the foundations of the Traditional Finance (TradFi) system.

Is Liquidity Bandwidth?

This is on my mind today because of a recent article in Bankless, Liquidity is bandwidth, by the CEO of Tokemak who explains that:

“In this new “internet of value”, liquidity is needed to do fundamentally anything. Therefore, in this world, liquidity serves the role of bandwidth.

Recall that with the internet of data, additional bandwidth is needed to do more things and move more data. Low data bandwidth meant participants could not move more data. You simply could not create Netflix until you had sufficient data bandwidth to reliably stream movies across the network.

In the internet of value, greater amounts of liquidity are necessary to do more things and move additional value. Thin liquidity means participants will not move greater value, because the value loss to them is too high. Imagine an economy where value cannot flow freely because every time it moves, exchanges, or transfers; it loses value.  This is the current state of DeFi and Web3.

Value transfer has replaced data transfer, and liquidity is the new bandwidth of the Web3 network. The issue is that the liquidity bandwidth is currently thin and unreliable. Take a look at how many tokens are currently sidelined, rather than being used as liquidity. The answer is a majority.“

I found the analogy interesting, but there was something that didn’t sit exactly right with me, so I pinged Piers, the CEO of Radix to get his thought.

He wrote:

“No, that is wrong. Liquidity is users, not bandwidth Liquidity (capital) is the network effect that is created on these platforms, but it isn’t bandwidth, that’s the wrong analogy

Interesting analogy but the liqudity is the RESULT of the “bandwidth” upgrade, where the bandwidth upgrade is anything that allows more users to bring more captial to the system. He is confusing bandwidth with data consumption.“

So, by that logic, “anything” that allows more users to bring more capital into the system has many components, including speed of consensus, execution environment, and atomic composability of “DeFi money legos.”

And having all core/base layer assets in one capital pool, as opposed to fragmented pools, falls within the category of “anything.”

Honestly, I think I’m more confused now than I was at the beginning of the post, but I suppose that’s part of the reason I blog. Write these things out, struggle with the concepts, and hopefully flush out over time.

Today, however, all I know is liquidity matters a lot. What I need to think more about is why and to identify the causal vs. the correlative elements that impact liquidity.

Sorry for being so disjointed today. You win some, you lose some.