The GameStop — Robinhood Fiasco Shows the Need for Decentralized Finance
The financial revolution is just starting.
If you haven’t been living under a rock, you’ve surely heard by now about what happened with the GameStop (GME) stock in the last days, with the price skyrocketing to the moon due to retail users massively buying up a company (that is not really doing that well…) to fight the massive short selling of some hedge funds.
If you want to get more details, you can read some related stories.
In this article, I won’t talk aboutwhat happened or why, but rather the measures that Wall Street took to protect some hedge funds from the small retail investors, often called “dumb money” in comparison to the “smart money” of the big players of Wall Street.
Shortly after the big pump, when GME was around $300, some popular trading apps, including Robinhood, blocked the possibility to buy GME stocks, giving users only the possibility to sell it. The results of this action was predictable. It went from $475 to $122 in an hour or so:
…but GME started soaring again shortly after since the retail investors didn’t gave up and maybe moved to other brokers.
But why did Robinhood and some other brokers halt these trades? Officially, it was “to protect their users from volatile stocks”, like these retail investors are kids that need supervision when trading. There are so many theories about the real reason this happened, the most accredited being that Citadel, the market maker that Robinhood uses, and allows them to interface with, has a huge position in Melvin Capital, the hedge fund that is losing billions of dollars due to their short positions in GameStop. They obviously wanted to prevent this from continuing to happen.
Preventing a retail user from buying a stock for whatever reason is pure market manipulation, and this has been happening since Wall Street was founded: the big players want to make the rules and never be punished for their wrongdoing while the small players have to follow them and they can be used as the sacrificial lambs at anytime.
Everything is just a theory and I’m not here to seek the truth, rather I’d like to show you an alternative, maybe THE alternative to a market that is owned by the big names of Wall Street, where they make the rules and can change them at anytime if they don’t win.
We need Decentralized Finance, now more than ever. What is Decentralized Finance? you might ask. Well, according to Wikipedia:
Decentralized finance (commonly referred to as DeFi) is an experimental form of finance that does not rely on central financial intermediaries such as brokerages, exchanges, or banks, and instead utilizes smart contracts on blockchains.
According to Binance Academy:
The term Decentralized Finance may refer to a movement that aims to create an open-source, permissionless, and transparent financial service ecosystem that is available to everyone and operates without any central authority. The users would maintain full control over their assets and interact with this ecosystem through peer-to-peer (P2P), decentralized applications (dapps).
Basically, the tasks that these brokers such as Robinhood or the market makers such as Citadel are doing now will be replaced by smart contracts, basically digital contracts, programmed by some developer whose job is to replace what a human intermediary would do. The code in the smart contract contains the terms of the agreement and enforces the rules all within the same program, no humans required.
I already wrote an article on how DeFi can replace banks and most of their services as we know them:
This is utopy, you might think. This might happen in a distant future, you might argue.
I’m excited to break through your assumptions and let you know that smart contracts are already here. In fact, they have already reached a level of maturity that has allowed them to be adopted by many people and trusted by people who have deposited a grand total of $26.98 Billion at the time of this writing (Source https://defipulse.com/)
In the DeFi world, there are already completely decentralized exchanges, where you can buy and sell cryptocurrencies. There are also derivative products that follow the price of real world products such as currencies, oil, gold, and stocks.
Wait, stocks? Are you telling me that it is possible to buy a tokenized version of the stocks?
Definitely. You can buy these tokens that follow the price of a real world asset and they live in a blockchain so they can’t be stopped or seized by any authorities. You can carry out pretty much every operation you can do in real finance including margin trading, as long as you have the collateral to do it.
You can even lend these stocks to another user for whatever reason and earn interest on it, maybe even to somebody who might want to short the underlining stock.
Did you say SHORT? This is bad!
Think twice. By lending a token, let’s assume the GME token, the other user has to deposit collateral. If the price spikes up and there is not enough collateral, the borrower has to deposit more collateral or will get his position automatically liquidated. As this is managed by a smart contract that can’t be stopped (or corrupted!), there is no way you can find a way around like in the normal, centralized financial world. Nobody can stop you from trading whatever asset you have as you will not be interacting with a central authority but rather with a smart contract.
DeFi is here to stay. Finance shouldn’t be controlled by anyone and should be in the hands of everyone.
Last but not least, if you want to explore the tokenized stocks, and start looking at them in alternative to your Robinhood app or other standard broker, you might want to consider checking out FTX. They didn’t stop GME from being traded, and they even added an index fund for the most traded WSB stocks.
Disclaimer: When users sign up with my affiliate link, they will receive a 5% fee discount for all their trades and I will get a small commission as well.
If cryptocurrencies and Decentralized Finance are what you are interested in, you might want to follow me on Twitter for more interesting content!
