Blockchain enthusiast developer and writer. My telegram: ksshilov
The potential of the GameStop (GME) stock was first discovered on r/WallStreetBets in the fall of 2020, and soon the GME market price started to rise, creating more hype on social media, and eventually culminating in a short squeeze of Melvin Capital’s position, which lost them about $13 billion.
Since this happened, I’ve talked with the founders of blockchain projects operating in this climate and asked them what they think about DeFi and the fintech market in general.
Some of the founders suggested that now may be a great time for decentralized finance to finally hit the mass market. Others disagreed, and we separated their opinions into three distinct groups, which you can find in this article below.
GameStop mania truly started to pick up steam late January 2021, when r/WallStreetBets started hyping GME, the stock of the embattled game retailer. GameStop, which saw its revenues severely impacted by the COVID-19 pandemic, was also targeted by Melvin Capital, which bet on GME shares hitting rock bottom. Melvin Capital had been shorting GME since 2014, while increasing its short position until it exceeded the free float of stocks, a discrepancy noticed by Reddit traders back in October 2020.
A video surfaced on the Reddit board, which suggested traders could organize a short squeeze for Melvin Capital. The conversations and hype increased, which brought the price of GME to a record high. Melvin Capital had to close its short position, ending up with a $13B loss. GME itself went through a wild price swing, starting off at below $5 just six months ago.
During the peak hype on social media, GME spiked on two occasions to a record of $347.51 and a lower peak at $325, when Melvin Capital was forced to buy and cover its short position. The short squeeze turned into a social media competition to break the logic of markets, as traders swore to give up profits just to make a point.
Despite the social media buzz, one name stood out; a user known as Keith Gill, who used the moniker RoaringKitty for his YouTube persona. Gill went through a hearing before the US House Financial Services Committee with the goal of clarifying unpredictable market effects, trading stops, and a concerted effort for a short squeeze.
Gill’s testimony held the position that he only used publicly available information on the short interest for GME. Despite his participation on Reddit and highly influential persona, Gill claimed he was not trying to create a mass movement of investors.
The community of r/WallStreetBets is still alive and well, and it still works to amplify stock selection signals.
The signature profanity and apparent mindless risk-taking also hasn’t slowed down in the slightest.
While this swarm behavior of investors was noted, in the end, it was Robinhood who took the brunt of the criticism for stopping orders. The rules of a short squeeze would have raised GME prices even higher if the Robinhood app had allowed more new buyers to order more shares.
The hearing centered on the role of Robinhood in essentially manipulating the market, with most of the questions aimed at Vlad Tenev, one of the co-founders of the trading app. But the hearing also set the floor for potential repercussions for retail traders using social media. So far, US lawmakers have not started tackling these trends in earnest, with only tangential rules such as the Section 230 act potentially holding social media companies responsible for some of the content within.
What the r/WallStreetBets case exposed was a form of investor swarm behavior. The stock selections are often driven by memes and popularity, creating a market force to be reckoned with. As of February 2021, it is still unclear how US or international authorities will handle the potential for groups of traders deciding on a specific stock or a strategy.
The GameStop saga happened at a time when fintech was expanding, and expecting multiple investment markets to open for retail. Fintech first tackled banks, allowing relatively high international money transfers at a lower cost. Later, apps appeared for investing in various assets. The process also coincided with the rise of cryptocurrencies, where wallets immediately opened the opportunity to buy highly volatile assets.
In general, fintech-based investment remains a free-for-all in 2021. There are indications that regulators are more concerned about the proper liquidity and capitalization of large-scale market participants, which is also easier to measure. But the potential for so-called “social contagion” behaviors also opens the door to closer observations for social media content.
One of the growing markets for risky assets, known as crypto-based decentralized finance, is a hotspot for social contagion behavior. DeFi projects often expose themselves to social media, attempting to draw in newcomers with the promise of high yields. The problem with newcomers, however, is that it is possible to sway the price of an asset, but when the driver of group behavior slows down, this may lead to deep losses in the personal finance level.
There were also personal consequences for Keith Gill, who will now face a lawsuit for misrepresenting his persona, and acting as an amateur investor when he actually had a deep knowledge of finance and accounting.
For now, almost all Reddit personas remain anonymous and there are still no barriers to sharing stock tips on social media. The US Department of Justice followed the Congress hearing with its own criminal investigation, but the outcome of that is still to be determined. Due to social media amplification, the reliance on algorithmic trading may also have to evolve and reflect unexpected events and even illogical trades.
As a white-label exchange software provider serving a global client base, we stay tuned to the regulatory changes that may affect client compliance requirements worldwide, and we’re continuing to see regulatory clarity and acceptance. The Office of the Comptroller of the Currency (OCC) in the US recently clarified that national banks and federal savings associations can provide cryptocurrency custodial services for customers. The OCC sees banks providing crypto custody services as a modern form of traditional bank activities related to custody services.
Never in our almost eight-year history have we seen higher demand to launch digital asset exchanges and offer access to cryptocurrencies, and we believe this is fueled by the positive regulatory stance and corporate interest in this new asset class. While DeFi has introduced new decentralized offerings to the market such as lending, borrowing, and on-chain insurance, we also see the demand for these same services integrated with crypto as the underlying assets from CeFi institutions booming.
Within the last few years, we’ve seen how we can reimagine borrowing/lending without the centralized intermediaries. DeFi lending projects are going for mainstream adoption with their increasing abilities and applications. Similar to lending, stock trading also has unnecessary intermediaries and the majority of the world's population cannot access popular stock markets due to these inefficient gatekeepers. Robinhood meant to democratize trading for the masses, but GameStop's case and a trading halt once more justified the importance of DeFi. Until corporations tokenize their stocks, we’re unfortunately a bit limited. However, I believe DeFi can act as an “L2” for stock trading in the near future.
We at ICTE are certain that DeFi blockchain technology is advanced and mature enough to support the requirements of all sectors of the global financial market, like high-frequency trading, trusted composition data, and trading strategy transparency at reduced overhead costs.
DeFi ensures that you have full control of your assets and no one else can access, use, freeze, or take your assets without your permission. You are also free to find other providers and venues to exchange your assets with. All your actions are associated with your trading address and your positioning in the market is transparent. This is very beneficial for personal security because your address is the only identity you would have on the market, and you are otherwise anonymous as a trader.
The personal control of your assets, anonymity, and transparency are the most important values that DeFi would bring to the financial world, especially in cases like GameStop. The blockchain would show the movement of assets from lenders to investors to the open market, and short-selling would be more easily identifiable -- even if a single trader utilizes multiple addresses to execute their strategies. Now is definitely the time for DeFi to be fully adopted.
DeFi has created balancer pools, vaults, yield farming, algorithmic stablecoins, and these developers are just getting started. Network fees have been outrageous but it has not stopped further adoption of new and innovative protocols. Trustless protocols are far safer than anything we currently have in traditional finance and the GameStop fiasco proves that. A group of internet strangers can short squeeze billions of dollars from hedge funds and the government starts to step in to protect the funds from losing too much from their own behavior. There's no meddling in DeFi as code is law and autonomous immutable protocols will take over.
DeFi is like a "clubhouse" of finance. Money and assets are way simpler to access, and simplicity means new use cases, such as startups' "global IPO" crypto exchange listings, aka IEOs, or asset tokenization. DeFi reminds me of a clubhouse because it is driven by communities. GameStop's coordinated short squeeze highlights the growth of communities with social networks as LATOKEN reviews. Communities are strong in crypto, and their willpower can become a self-fulfilling prophecy, especially if it is about adopting a better currency. While GameStop and crypto are very different assets, I think some hedge fund managers would be less likely to short-sell crypto after this case of community power. Don't get me wrong, short-selling is necessary to prevent bubbles, and institutional and retail investor rights must be protected.
The GameStop craze proves that the current financial system remains broken for everyday investors. Whether it's the monetary system or market-shifting hedge funds, the status quo is built for insiders. DeFi shifts the paradigm, giving the everyday individual access to a better and inclusive suite of financial products. It’s only just starting to reshape financial services, from high-yield savings to borrowing, but DeFi is actively providing a much needed catalyst for change.
The GameStop fiasco has not only exposed the fragility of our financial system, it highlighted the fact that access to investments is an issue faced even in the most advanced economies. DeFi will rise this decade as a way to empower individuals to invest how and when they want - with minimal intervention.
The future of feature film funding is an NFT/DEFI model that allows investors to buy and trade characters in a movie! We are about to release a model that allows investors to buy and stake “film character” NFTs to receive a film token, a token that can be zapped into film royalties.
While DeFi has seen a recent surge of interest, I do not think it is ready for mainstream adoption, even after the enhanced attention the GameStop stock received within the WallStreetBets Reddit community. Several factors come into play, but they almost all boil down to user experience. Most participants in DeFi are still “power users” and many lack the requisite skill set to audit smart contract code or to manage private keys appropriately. This level of increased risk and uncertainty is a large barrier for mainstream adopters. Retail investors will most likely come to DeFi through centralized on-ramp/off-ramp service providers who will not only vet the quality of the DeFi projects but provide a simpler (and more traditional) portal for accessing these innovative products. I think we are seeing this being built out in various CeDeFi products, particularly by centralized exchanges as they begin adopting new business models to compensate against loss revenue as power users migrate to DEXs.
What happened with r/WallStreetBets, Gamestop shares, and brokers like Robinhood is just one indicator that DeFi is NOT a solution in search of a problem. The problem is very real. The DeFi value proposition is that, due to its decentralized nature, there are no third-party intermediaries who can halt trading or shut down the exchange.
However, adoption of any new technology requires a slow, deliberate transition. When email first launched, sending messages required knowledge of coding languages and pretty significant technical savvy. Only after a few years were user-friendly interfaces added to make email simple for everyone.
Interacting with and using DeFi protocols is evolving at a rapid pace, but I don’t believe that it’s ready for mainstream use. With that said, more and more traditional traders are finding themselves “falling down the rabbit hole.” The more traders who join DeFi, the more investment is made into infrastructure to make it mass-market user friendly. It may take a few years, but I believe that DeFi will inevitably cross the chasm on the adoption curve and become mainstream.
GameStop demonstrated the urgent need for both DeFi and tokenization; the danger of a single, for-profit company determining when/how over 20 million investors can trade became clear as did the totally antiqued, legacy exchange infrastructure with multi-day (!) settlements, which tokenization eliminates.
But what the DeFi innovation explosion has really demonstrated so far is the power of composability, which makes it so simple to build. What if we can bring that same composability to the entire web – imagine being able to take any existing application, fork it as easily as a DeFi service, quickly add some features, and launch it without having to rebuild backends or pay for infrastructure. This is possible with a decentralized peer-to-peer hosting service and a blockchain based economic layer that compensates authors based on the use of their code by sharing in hosting revenue. This is the future, and it is possible right now.
DeFi has been gearing up for mainstream adoption since 2018. Many talented developers and well-funded startups have poured an incredible amount of work into fundamental infrastructures powering blockchain applications, such as layer 2, identity and key management, smart contract tooling, node infrastructure, and fiat on-ramps, etc. Through the thick and thin of the market, the culmination of all of these persistent efforts have made it possible to build DeFi applications that are indistinguishable from the Web 2.0 experience - mainstream adoption is already here.
Now is the time for DeFi to start going mainstream. As we saw with GameStop and other stocks recently, the centralized financial system has reached its breaking point with many challenges. In centralized finance, brokers and companies can decide to stop trading, but in DeFi, individuals can freely manage their funds for investing, trading, and lending. The centralized financial system relies on two-day settlements, which is why the entire system froze waiting for capital to settle. Harmony enables two-second settlements for transactions as demonstrated by our cross-chain Uniswap port on the mainnet. We envision the mass migration of global finance markets coming on-chain in the next few years.
The GameStop fiasco is the latest large-scale exposé on why many are reluctant to enter the traditional financial markets. Most notably, it left many thinking that markets don't actually evolve organically but rather just do what they were created to do. In DeFi, the markets are (or at least should be) fully controlled by transparent and auditable code, creating a level playing field. In the past few months we have seen moves by institutions and regulators that were aimed at “protecting investors,” but they mostly achieved just the opposite. DeFi is only in its infancy, but with time it will evolve and there will be a large uptick in users, giving everyone the opportunity to truly own their money and the responsibility that comes with it.
The explosive rise of GME is a testimony to the overhauling impact of decentralized finance and the crumbling legacy finance. In the pre-DeFi era, those in power could easily delist assets or block opportunities for potential business cases. With DeFi, it is a truly democratic stage that bestows the credit to those who deserve to be in power. I won’t be surprised to see a lineup of more consumer services embracing P2P payment alternatives.
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