In late January, a group of Reddit users who belonged to a subreddit called r/WallStreetBets made international headlines when they banded together to purchase GameStop stock. GameStop (GME) is a company that sells video games and gaming consoles in malls. GameStop’s business has been steadily slowing in recent years as more consumers purchase games online. It resulted in being one of the most shorted stocks on the market. At his highest, the cumulative short position represented 140% of the available shares.
One small group of Redditors realized that they might be facing a naked short selling situation. “Naked shorting is the illegal practice of short selling shares that have not been affirmatively determined to exist”. If enough people were buying the stock, it would pressure the short seller, forcing them to cover their position by buying more shares. This would then trigger a snowball effect pushing the price up.
In a coordinated effort, the Wallstreet bets community came together and started buying a massive amount of GameStop stock, pushing the price up from a 52 week low of $2.57 a share to a 52 week high of $483.00 a share. During the meteoric rise, we witnessed multiple attempts by brokers to stop regular people from buying the stock. They finally succeed with the share plunging back to around $50. The share has now recovered to over $100 USD (as of 26th February) in a second attempt to trigger the so-called “short squeeze”.
The GME situation revealed a major issue in the financial system showing that retail investors are entirely dependant on intermediaries. If regular people want to bypass Wall Street gatekeepers, a system like decentralized finance shows a great deal of promise.
The Case For Decentralized Finance
As GameStop’s stock price skyrocketed, billion-dollar hedge funds shorting the stock began to bleed money. The Robinhood app — -which enabled many Redditors to make commission-free trades — -started preventing users from trading GME stock. The reason behind this was that they had to meet clearing requirements. “We had no choice in this case,” Robinhood CEO Vlad Tenev said in an interview. “ Robinhood’s operations team received a request early Thursday morning from the National Securities Clearing Corporation (NSCC), a subsidiary under the Depository Trust and Clearing Corporation (DTCC), for a security deposit of $3 billion to back up a surge in trade volume related to GameStop and other stocks. The $3 billion deposit requirement was ten times what it had typically been”. Tenev said.
Following these events, Robinhood’s users couldn’t buy the stock and the price collapsed, infuriating thousands of small investors in the realization that they were not in control of their portfolio purchases.
In the wake of the GameStop turmoil, decentralized finance that allows traders to bypass banks, brokerages, and exchanges are suddenly becoming an attractive option for investors looking at a “free market”.
“Defi” today has reached $42 Billion in locked value and keeps on growing every month.
The space is maturing at a fast rate, with several protocols emerging as leaders with an exponential adoption. All faces of the traditional markets are represented in the “DeFi” space:
Decentralized Exchange like https://uniswap.org/
Decentralized exchange with leverage: https://dydx.exchange/
Decentralized lending: https://aave.com/
Decentralized leverage: https://alphafinance.io/
Following the GameStop “issue,” the general public is increasingly searching for a financial market that Wall Street titans do not manipulate. Decentralized finance offers a market free from third parties to deny or stop any financial transaction. The GameStop tsunami illustrated an increasing demand for a market where participants can freely conduct transactions that are not subject to unreasonable fees and oversight.
Decentralized Finance in Action
The most significant advantage of decentralized finance is that Blockchain technology offers users the opportunity to interact directly. Unlike the Robinhood app, decentralized finance is not linked to clearinghouses or hedge funds.
The GameStop trading roller coaster’s twists and turns revealed several glaring flaws in the conventional trading and banking system. Blockchain and decentralized finance offer a confidential, unfettered alternative to a tightly controlled market by powerful gatekeepers. GameStop showed the world that a system where an app can halt trading simply because some shareholders were losing money is a symptom of a sore market out of balance. Blockchain and decentralized finance offer a system where users are free to conduct financial transactions without the threat of third-party intervention. Decentralized finance puts powerful and unrestricted financial tools into the hands of every user.
With around two years of existence, decentralized finance companies are attacking this giant market to restore the balance between Wall Street and the everyday investor. The value locked today can still look relatively small (Around $40 Billion), but went up 40 folds compared to last year at the same time. Companies are creating innovative products mimicking the traditional financial system like Terra Mirrors to trade existing US-listed stocks 24/7. At atato, we see a significant shift in banks and financial institutions’ interest in studying how to participate in this ecosystem while complying with the regulation. DeFi is just starting, but it forces the traditional financial system to evolve and adapt to this growing offering.
The GME storing might well be remembered in the history book as a starting point for a new financial market less dependant on traditional middlemen companies. We will see if Decentralized finance is this future, but if it is not, it is exciting to witness the birth of an entirely new ecosystem built on blockchain.
If you are looking at building a digital asset business or looking at Defi development, please contact us at [email protected]
Maxime Paul
