Was the standoff between Reddit and Wall Street last week really the ‘beginning of the end for centralized finance,’ as Gemini founder Tyler Winklevoss said described it? Or was it just a one-off case of individuals coming together to correct a perceived mistake – with no long-term economic repercussions?
When GameStop, a struggling video game retailer, was attacked by hedge fund short sellers, a coalition of individuals led by r / Wallstreetbets, a Reddit forum, jumped to save GameStop by buying its stock, pushing its stock price from $ 20 to high as $ 483 – plus some real damage to short traders.
But then Robinhood, the insurgents’ favorite trading platform, stopped buying GameStop’s GME stock and seven others. The Redditors wept disgustedly, claiming Robinhood had succumbed to the hedge funds and other entrenched Wall Street interests. Robinhood, for his part, explained that it was necessary to suspend GME purchases or else the money would run out to cover the transactions.
However, there are more than 30 class-action lawsuits were filed against the centralized trading platform – a complaint alleging that the suspension was exactly what “the [GME-shorting] hedge funds’, and another even stated that ‘Robinhood had stolen from the poor to give to the rich’.
Others suggested that this kind of chicanery wouldn’t have happened in a decentralized financial world. In that sense, Mike Novogratz from Galaxy Digital called the GME triggered a “massive endorsement of DEFI”, and a crypto user, who wished to remain anonymous, told Cointelegraph, “Restricting individuals to buy a selected stock is a form of centralized control mechanism. trading market no one would have that power. “
However, this opinion was not unanimous. Quantum Economics co-founder Mati Greenspan found it Little to applaud at the crowdsourcing of GameStop shares: “The story that Main Street could finally beat Wall Street at its own game is extremely misplaced,” he said, “there were hedge funds on both sides of this trade.” He added, “It’s hard to see how buying overpriced stock in a losing money company will make the world a better place.”
With that as a backdrop, here’s a deeper dive into what lessons, if any, can be learned from the r / Wallstreetbets vs. the suit showdown. For example, if private investors can now change stock prices, then they can certainly change the prices of large-cap cryptocurrencies, right?
Is it writing on the wall?
“The events surrounding GME and Robinhood were a wake-up call to the wider public,” Alexei Zamyatin, co-founder and CEO of Interlay – a research and development company focused on blockchain interoperability – told Cointelegraph, adding admits, “I doubt most people outside of Finance / Banking were aware that Robinhood’s main clients were hedge funds and not retail users.”
“I’m not entirely sure I agree that the recent GME saga has proven that retail investors can meaningfully coordinate to move stocks over the long term,” George Giaglis, executive director of the Institute for the Future told the University of Nicosia, to Cointelegraph. “I see this more as evidence of late-stage market summits than a new wave of sustainable, retail-driven market domination, as many commentators would like to portray,” he added.
Kaj Burchardi, head of BCG Platinion Netherlands – a division of Boston Consulting Group – told Cointelegraph, “In theory, a collective shoppers can move a lot of assets,” including crypto prices – but of course that depends on the size of the audience. The Reddit r / Wallstreetbets forum has reportedly mobilized thousands of individual investors to buy GameStop stock. “Overall, I think the number of retail investors in the crypto space will grow – independently if they join forces, similar to the GameStop example,” Burchardi said.
Historically, retail investors – not institutions – have been driving crypto prices, Lex Sokolin, chief marketing officer and global fintech co-head at ConsenSys, told Cointelegraph, adding:
“Their risk tolerance has been higher, and the crypto story is appealing to more people looking for a new system. DeFi brought retail and institutional capital up to par last year, which will be an important aspect to look to the future. “
A generation struggle?
But what about the respective parties in last week’s scrap. Dallas Mavericks owner Mark Cuban suggested that “the old-school investment community is currently taking a kick out of what it describes as the ‘Store of Value Generation’.” Is it indeed a conflict between young and old?
According to Sokolin: “We saw not only a generation struggle, but also a philosophical one.” In addition, as the information gap has narrowed, internet native investors are now better able to beat professional investors: “They can organize and vote with their money, which in total rivals the billions in high finance.” William Knottenbelt, a professor in the computer science department at Imperial College London, told Cointelegraph:
“The battle is not between younger and older generations, nor between ordinary people and hedge funds. It’s more between those who believe in protecting and extending individuals’ personal freedoms – including the right to participate in financial markets – and those who don’t. “
In this sense, “DeFi shows strong potential when it comes to protecting and enhancing certain freedoms,” continued Knottenbelt, “but it is not immune to some types of ethically dubious activities that manifest themselves in more centralized systems.”
Meanwhile, according to Burchardi, “it’s a centralized versus decentralized struggle,” which can correlate with age, but not necessarily. “For example, in just one year, we saw the value of DeFi evolve from nearly zero to $ 25 billion plus blocked capital. This growth is decentralized and often community driven. ”
A win for social media?
If individual investors have not convincingly demonstrated their strength, what about social media? Have platforms like Reddit noticed that they are now a force to be reckoned with in the financial world? Sokolin told Cointelegraph, “We witnessed the power of social media, and powerful emotions tumbled over the financial games of the past. Crypto already embodies this ethos as many assets are valued by the community, not analysts. ”
Mati Greenspan, writing in his newsletter, agreed, “One lesson the world seems to have learned is that social media can be a leading indicator and even a driving force for future price movements.”
As for decentralized funding, did it get a boost of outrage when Robinhood stopped purchasing GME? “These developments, in my opinion, will certainly boost adoption,” Zamyatin told Cointelegraph. “DeFi builders are now in the spotlight and it is up to us to get non-crypto users on board and demonstrate the positive potential of a decentralized financial system.”
Giaglis told Cointelegraph, “DeFi is where Bitcoin was today in 2013 or 2015: a few early adopters see the potential, while the mass market has yet to realize how disruptive this will be to traditional finance.” He agreed that last week’s events were likely to accelerate adoption.
“Americans got to know the limits of their market structure,” adds Sokolin. It’s not like Robinhood removed the button. It’s they have to clear with the Depository Trust & Clearing Corporation, and trades take T + 2 [trade date plus two days] to settle, and the volatility forced their collateral requirements up to ten times over. “DeFi’s programmatic markets would likely have escaped this fate, as they are transacted in real time and open 24 hours a day, seven days a week.
Can DEXs handle the power?
Are decentralized exchanges even ready for mass markets? Can they handle the volume of last week’s r / Wallstreetbets promotion without crashing? “Today, these decentralized markets are still small and not always enterprise quality,” Burchardi told Cointelegraph, adding, “They would have major challenges dealing with these volumes – at least in their current versions.”
In addition, decentralized exchanges are not even completely decentralized and can be manipulated, Zamyatin noted in a recent blog post. A DEX’s administrative account can upgrade contracts or stop operations, which is’ our [proverbial] hedge funds only need to contact the person / group in control of this account, apply some pressure or offer a lucrative bribe – and trading can be slowed at the very least. “
Ethereum, the platform on which most DeFi projects are hosted, is also not fully decentralized. Three mining pools control more than 50% of Ethereum’s hash rate, Zamyatin noted, and “we don’t really know who controls these pools in the background” if they colluded. “We’re still not quite there technically, and market manipulation is still possible – but arguably it’s more difficult than on centralized platforms,” Zamyatin told Cointelegraph.
Additionally, since Ethereum is home to most of the DeFi projects on the network, as the demand for transactions increases, so do gas fees, and at some point they can become too expensive very quickly.
Short-term hysteria, long-term change?
Perhaps one day last week’s events will be seen as DeFi’s Boston Tea Party moment when American settlers disguised as Mohawk Indians dumped 342 chests of tea in Boston Harbor to protest British rule – a seemingly irrational act, but now seen as a precursor to the American Revolution.
“We will remember this as another example of short-term mass hysteria and FOMO dynamics driving some assets toward valuations unrelated to their underlying fundamentals before reverting to fairer prices,” noted Giaglis, adding:
“We are undoubtedly entering an era where more and more people realize the potential of decentralized, peer-to-peer, disintermediated and censorship-resistant applications, especially in financial services.”
Burchardi agreed that a major move towards decentralized financing is now underway, but added that there are two more important issues to be resolved to ensure future growth: “How can you make DeFi easier? And when and how is it regulated? The answers to these questions will determine how DeFi progresses. “
All in all, last week’s event may have split the crypto community, with no clear generations or retailer / institutional clarity, but it likely pointed out to the larger investing public some of the shortcomings of the current system – a kind of ‘learning opportunity’ for decentralized financing as it were.
In any case, it suits the blockchain and crypto community to ensure that its technologies, security, and protocols are in order for the day the wider public storms into its markets.