MGM Stock – GME Stock – Robinhood-GameStop Saga Sheds Light on DeFi as an Alternative System | Fintech Zoom
GME Stock – Robinhood-GameStop Saga Sheds Light on DeFi as an Alternative System
By Do Kwon, Co-Founder and CEO of Terraform Labs (TFL), the group behind Terra
In a real-world story where financially-starved youths attempted to steal from the rich (hedge funds) and give to the poor (the guy in mom’s basement), it evokes reminiscences of the story of Robinhood—especially when Robinhood is the household brand name of the trading app utilized by the Internet’s youth. Only this time, the Robinhood tale is infused with memes, the Internet, and a decentralized community eager for a show of defiance against Wall Street.
In late January 2021, the mass promotion of GameStop (GME) and AMC stocks on Reddit sent their stock values skyrocketing into the stratosphere. What started as a meme rapidly transformed into a social media frenzy of young Millennial and Gen Z traders attempting to liquidate hedge funds with open short positions on GME stock.
Hedge funds like Melvin Capital were losing billions when stock trading app Robinhood controversially restricted trading of GME and AMC stocks—a decision that is now under scrutiny because of Robinhood’s ties to some of the same hedge funds. GameStop and AMC stocks are back on the public markets, but that didn’t stop the U.S. House Committee on Financial Services from holding a hearing with testimonies from the CEOs of Robinhood, Citadel, Melvin Capital, and Reddit, and a movie deal with MGM.
The Robinhood-GameStop saga has been construed as a good guy vs. bad guy story with each side claiming the victim. However, it’s much more nuanced than that. Usually, it takes high-profile moments like this situation to realize the value of alternatives. In this case, decentralized finance (DeFi).
Robinhood and GameStop Shine a Light on the Cracks in Traditional Finance
For the first time, disaffected investors have an alternative to issues pervading the traditional financial system with applications that operate on permissionless blockchains. It’s called decentralized finance, or DeFi, as the crypto-savvy corners of the Internet have dubbed it.
Imbued with the power of decentralized technology that underscores public blockchains like Bitcoin, Ethereum, and Terra, DeFi is more than just some moniker for non-fungible tokens (NFTs), leveraged Dogecoin trading, and coin tribalism. DeFi may come with a significant amount of noise, but if you look behind the curtain, there is a drastic change for the financial world just over the horizon—and it’s a net positive for the average Joe.
At a high level, DeFi refers to an enormous collection of financial applications built on top of public blockchains like Ethereum and Terra that have expressive smart contract capabilities. DeFi apps range from money markets to exchanges and insurance derivatives, but they all maintain one common theme—decentralization.
But why choose DeFi analogs of traditional financial (TradFi) services?
Because the downstream benefits of the decentralization, accessibility, and transparency of blockchains are manifold, and meaningfully improve services across the financial spectrum. DeFi’s ethos is about democratizing access to financial services. This includes payments, trading, asset management, insurance, derivatives, or other financial primitives.
For the billions of people around the world without access to a simple bank account, this is a powerful development that helps unlock a treasure trove of dead capital globally.
With a few simple clicks using DeFi, Alice can tap into an exchange, money market, payments app, insurance platform, or options market without any threats of censorship, onerous KYC/AML processes, or delay periods. The entire process of Alice going from point A to point B in DeFi is seamless. She can deposit and withdraw her funds at any point, and trivially move them between applications at her whim—all she needs is an Internet connection. Not to mention everything is transparent, meaning Alice can observe the source code of applications she’s using, and even watch transactions on the blockchain happen in real-time—discerning market insights in the process.
No more opaque CDO-cubed for subprime mortgages hurled around like hot potatoes between banks before the inevitable financial catastrophe of 2008. No more walled gardens of financial access based on credit. No more closed-source technology hindering innovation.
But perhaps two of the most important benefits of DeFi, the odd terms that you hear DeFi evangelists espouse regularly, are composability and censorship-resistance.
In DeFi, situations like Robinhood’s decision to halt the trading of inflated GameStop and AMC stocks are ameliorated by diminishing the power of a centralized minority. This is a byproduct of decentralization and is commonly referred to as censorship-resistance. For example, DeFi applications that run on Ethereum, once deployed to the mainnet, cannot be “halted” and only altered typically via community governance of users, who double as the stakeholders of the application.
DeFi apps are not controlled by any single entity.
The potential of censorship-resistance (and community governance) applied to the Robinhood scenario manifests in synthetic asset protocols like Mirror and Synthetix. For example, since Robinhood has total control over its application, halting trading of specific equities like GME was possible at their discretion. Comparatively, synthetic assets on an app like Synthetix that operates on Ethereum cannot be de-listed without the community’s (i.e., users’) consent. Synthetic assets, or “synths”, simply track the price of real-world assets via computer programs called oracles and good ole-fashioned arbitrage, while operating on a blockchain.
As a more poignant example, in the immediate aftermath of the GME/Robinhood situation, the community for Mirror Protocol, a synthetic assets platform like Synthetix, but built on Terra instead of Ethereum, proposed listing GME and AMC synthetic equities on the DeFi app as an in-kind response to the ongoing situation. Both mirrored GME (mGME) and mirrored AMC (mAMC) passed the community governance process, officially adding synthetic equity exposure on Mirror to two assets censored by Robinhood mere days earlier.
However, synths technically don’t provide equity ownership, and only apply market-price exposure to holders. That’s where the other odd term, composability, makes an appearance.
Holding mGME may not reflect as outright ownership of the equity, but the underlying power of composability in DeFi dampens the strength of that counter-argument against synths significantly. You see, composability is a way for DeFi to make assets much more productive, accessible, and flexible. We call it the money legos of finance.
For example, synthetic assets on Mirror, called mAssets, can be used on Terra, Ethereum, and Binance Chain. They can be deposited as collateral in money markets to trade on
But, reverting to the ownership of equity in TradFi for a moment, one of the primary benefits of ownership is if equity produces cashflows.
Well, DeFi has that covered too. In fact, on Mirror, users can create yield-bearing synths like with mGME by supplying liquidity to a money market, minting a mAsset, and pooling mGME in a liquidity pool to earn a high APR. That’s the power of composability, it morphs financial architecture into pluggable money legos that sustain the advantages of the underlying blockchain. Namely, censorship-resistance, transparency, and self-custody as byproducts of decentralization.
Welcome to the future of finance.
Where is DeFi Going Next?
Polarizing events are often an excellent barometer for the perception of established norms, and in the world of finance, DeFi applications are ideally suited to meet the growing demand for tools that empower the average investor.
The momentum created by the Robinhood controversy seems to be influencing the top regulatory authority in the United States as well. SEC Commissioner Hester Peirce recently called for legal clarity for DeFi that allows for continued innovation. She referenced the recent testimony Robinhood’s CEO gave before the U.S. House Committee on Financial Services, sharing his sentiments that blockchain technology could be leveraged to bring about helpful improvements to finance, such as real-time settlement.
Inspiring hope for many in DeFi, Peirce said, “DeFi’s promises of democratization, open access, transparency, predictability, and systemic resilience are alluring.” In a world where regulators and innovators have frequently been at odds, this acknowledgment of DeFi’s transformative capabilities could be a true inflection point for the cryptocurrency space at large.
In light of the widening cracks becoming more visible in traditional finance, DeFi’s growth isn’t stopping any time soon. Expanding access to internet-connected devices in the developing world will further contribute to DeFi’s attraction. The 1.7 billion unbanked adults around the globe is an enormous mostly untapped user base.
As DeFi protocols become easier to use regardless of technical knowledge, we will see even greater spikes in DeFi adoption. For reference, capital inflows into DeFi have surpassed $40 billion (measured as TVL) in the last year despite its lackluster UX and stifling technical barrier to comprehending.
The combination of DeFi and the digital economy is democratizing access to knowledge and financial services, and so it’s only a matter of time before we will see real strides being made in closing wealth and opportunity gaps around the world. The Robinhood situation was just the spark that lit the fuse—a high-profile event that exposed a void in TradFi that DeFi solves.
Now it’s about convincing people to take action and migrate to a financial infrastructure based on transparency, inclusion, and empowering the little guy. We know from experience Wall Street definitely won’t, so why not take a chance with DeFi?
GME Stock – Robinhood-GameStop Saga Sheds Light on DeFi as an Alternative System