⚓ Liquidity Transmission Framework
Liquidity Isn’t Gone. It Just Stopped Absorbing Risk.
Mapping the Transmission from Treasury Markets to Crypto Collateral
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As Lighthouse rolls out its Advisory Offerings, we’re publishing the backbone of our liquidity architecture — a model that tracks how stress flows through the system, from Federal Reserve plumbing to crypto collateral capacity.
This is not a funding crisis.
It’s a transmission regime.
For over a year, markets were cushioned by a passive shock absorber:
Ample reserves
A $2.5T Reverse Repo Facility (RRP)
Stable dealer balance sheets
That cushion is gone.
As of November 6th, the RRP balance sits at just $10.75B — placing the system in a Critical State, with no meaningful capacity left to absorb risk.
Liquidity still exists.
But it’s no longer passive, no longer cheap, and no longer absorbing risk.
It’s transmitting it.
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🔄 Liquidity Transmission Flow
Stress is now propagating through the system instead of being neutralized by it.
1. RRP Depletion → Reserve Drainage
Sub-$50B RRP confirms no remaining liquidity buffer.
2. SRF Usage Surge → Collateral Stress
$50.35B in SRF usage (Oct 31) marks acute dealer constraint.
3.Stablecoin Treasury Flows Stall → Plumbing Saturation
Collateral loop stalls, breaking the cash–collateral feedback circuit.
4.Perp Basis Collapse → Crypto Leverage Transmission
October’s $19.16B liquidation cascade was 93% larger than 2021’s QE-era equivalents, despite 9% lower leverage.
Result:
Crypto’s stress is mechanical, not narrative.
When upstream liquidity absorption fails, digital-asset markets are the first to fracture.
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📊 The Dashboard: System Liquidity in Motion
Summarizes the aggregate liquidity picture — connecting RRP depletion, T-bill arbitrage normalization, and financial-stress propagation.
This visual set shows:
RRP decline mapping one-for-one with the Liquidity Composite
• T-bill vs RRP rate convergence signaling arbitrage exhaustion
• FSI components diverging as safe-asset preference re-emerges
Together, they confirm a systemic pivot: liquidity hasn’t vanished — it has changed function.
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⚙️ Leverage Capacity Matrix
Liquidity quantity ≠ Liquidity capacity.
Defines how system state translates into usable leverage — and what that means for positioning.
At $10.75B, we’re deep inside Crisis Mode.
Leverage is now constrained by plumbing, not policy.
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🧠 Validation Check
October’s market behavior confirmed the model’s predictive logic:
The Treasury/RRP arbitrage window collapsed → 15–20 days later,
$19.16B crypto liquidation cascade followed.
Despite a smaller aggregate leverage base, the deleveraging was nearly twice the amplitude of the 2021 QE analog. The model called it. The market validated it.
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🧭 What’s Next?
This is not 2008. The pipes aren’t dry — they’re full.
Liquidity remains in the system, but it has lost its absorptive capacity.
The Fed is no longer absorbing risk.
That risk now flows downstream. As the cushion dissolves, the system doesn’t fail — it transmits. Liquidity remains, but its leverage capacity is gone.
And in markets like crypto, where leverage is the market, that structural shift creates mechanical stress events.
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This framework will evolve, just as liquidity itself does. We update our models and our minds.
That’s all for now from The Watch. We’ll be sure to leave the light on.