Robinhood Fiasco Strengthens the Case for DeFi: A Deep Dive

Most ordinary people don’t waste time thinking about Wall Street. There is a sense among the citizenry that stock market trading is a walled garden, a cliquish, probably immoral practice that tends to enrich the already wealthy – but for whatever reason, we let them do their thing. This past week, however, regular folk sat up and took notice after hedge fund fat cats were beaten at their own game.

So what happened? Essentially, a cadre of intrepid everyday investors using the r/WallStreetBets forum upset hedge funds by buying shares in a retailer, GameStop, whom the funds were betting against.

The coordinated effort caught the public’s imagination at a time when the idea of making billions betting against companies struggling in a pandemic seems downright cruel.

The trading platform Robinhood quickly became a focal point for widespread censure after restricting trading and precipitating a 55% drop in the GameStop price. Several brokerages (and the New York Stock Exchange) followed suit, as one $13 billion hedge fund – Melvin Capital – closed its position amid crushing losses.

The whole story calls to mind the Ron Burgundy “Boy, that escalated quickly” meme. With accusations of market manipulation running rife, Robinhood – a platform that claims to open doors to Wall Street for regular day traders – racked up thousands of negative reviews on Google Play, motivating the tech giant to delete them and restore the app’s rating from one star to four.

Talk about the established order closing ranks.

The irony of a company named Robinhood facing off with a small army of self-organized traders was not lost on the media, who have reported the story with barely concealed amusement. Restrictions on trading are more sinister, however, with Robinhood’s attempt to manage the situation making a mockery of the term “free market.”

Outrage is the only logical response to this whole episode, and one Robinhood customer has even filed a class-action lawsuit against the company.

Traders who have been active in crypto’s decentralized finance (DeFi) sector have reason to be smug right now. That’s because DeFi is, by its very nature, permissionless – an ecosystem of open finance protocols anyone can utilize for the purposes of trading, borrowing, lending, and saving. The use of smart contracts – operations written in sophisticated software code that executes automated processes – ensure that DeFi protocols run programmatically, rather than by a board of directors. 

The promise of DeFi, then, is an end to the shenanigans that have enveloped Robinhood in the past week. Open 24/7, immune to censorship, politically neutral and highly transparent, DeFi takes the power away from centralized behemoths and eliminates the need for trust.

Anyone can contribute, whether as a developer or user, and the risk of trading being restricted is nonexistent. In 2020, DeFi went from having less than $700 million worth of value locked in its protocols to $15 billion by year’s end. A month on, and it’s close to doubling that figure. 

Crypto trader, analyst and operator Qiao Wang believes the Robinhood fiasco has accelerated the adoption of DeFi by five years. Unsurprisingly, blockchain-focused hedge fund partner Anthony Pompliano concurred, predicting that “the system can’t sustain the decentralized revolution that is coming.”

As if to inflame the pitchfork-wielding crowd, Robinhood then “temporarily turned off Instant buying power for crypto” after traders pumped meme-inspired token dogecoin by 800%.

In his January 29 newsletter, Messari’s Ryan Selkis wrote, in a rejoinder to what Fred Wilson called the revenge of retail, “Maybe the “institutions" aren’t as smart as they think they are. After all, the smart money sure has missed a lot recently. They missed COVID. They missed Tesla. They’ve missed crypto. They forgot to make sure their short positions couldn’t be easily cornered. They underestimated retail sentiment shifts and populist anger.”

A year ago, DeFi was pretty complex – but things are changing as barriers to entry fall. Plasma.Finance is just one platform to have emerged with a focus on demystifying the industry and onboarding curious traders disgusted by the implosion of tradfi.

With Plasma, users can invest in DeFi tokens, contribute to liquidity pools to earn yield, deposit and cash out in fiat, access lending protocols, swap assets across blockchains – the lot.

All DeFi instruments are accessible from a single dashboard, and Plasma auto-calculates APY and P&L to save you the trouble of creating a spreadsheet. Defi for the masses, in other words.

For investors wary of being burned by trading altcoins, there are always stablecoins, cryptocurrencies that are pegged to assets such as the U.S. dollar.

The stablecoin market has exploded in the past 12 months, with many traders using the likes of Tether (USDC) to escape volatility. Amazingly, the stablecoin market is now valued at over $35 billion.

Increasingly, DeFi investors are tokenizing U.S. dollars into assets such as USDC and USDC, then depositing them in attractive DeFi protocols.

With regular users losing faith in everything from trading platforms to tech giants like Google and Facebook, the march of decentralization seems unstoppable.

Thanks to DeFi, we have a compelling alternative to the censorship, cronyism, and injustice that characterizes the legacy system. It’s time to take back control.