A prelude to DeFi bursting onto the scene?

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Was last week’s confrontation between Reddit and Wall Street really the beginning of the end of centralized finance, as described by Gemini founder Tyler Winklevoss? Or was it simply an isolated incident of people coming together to right a perceived wrong – with no long-term economic consequences?

When GameStop, a struggling video game retailer, came under fire from hedge fund short sellers, a coalition of individuals led by the forum r/Wallstreetbets on Reddit intervened to save GameStop by buying the shares and causing the stock price to rise from $20 to $483, inflicting real damage on the short sellers.

But then Robinhood, the exchange platform chosen by the insurgents, suspended purchases of GameStop shares and seven other GME shares. Reddit users have criticized Robinhead for pandering to hedge funds and other entrenched Wall Street interests. Robinhood, for its part, stated that it was forced to suspend purchases on GME because otherwise it would run out of money to cover the transactions.

However, more than 30 class action lawsuits have been filed against the centralized trading platform – one claimed that the suspension was exactly what the hedge funds wanted [GME-shorting], and another even claimed that Robinnity was robbing the poor to give to the rich.

Others have suggested that this kind of chicanery has no place in a decentralized financial world. In a related development, Galaxy Digital’s Mike Novogratz called GME a huge supporter of DEFI, and a crypto user who wished to remain anonymous told Cointelegraph: Restriction of purchase of selected shares by individuals is a form of centralized control mechanism. In a decentralized exchange market, no one would have that power.

However, this position is not unanimous. Mati Greenspan, co-founder of Quantum Economics, didn’t find much to be happy about when making a purchase at GameStop: The narrative that Main Street was finally able to beat Wall Street at its own game is extremely inaccurate because, he says, there were hedge funds on both sides of that trade. He added: It’s hard to see how buying overvalued shares of a company that is losing money will make the world a better place.

With that in mind, let’s look at any lessons we can learn from r/Wallstreetbets vs. Suits. If small investors can influence stock prices, for example, then surely they can do the same with cryptocurrencies from large capitalizations?

The sign on the wall?

The events surrounding GME and Robinhood were a wake-up call for the public, Alexei Zamyatin, co-founder and CEO of Interlay, a blockchain interoperability research and development company, told Cointelegraph, adding: I doubt most people outside the financial/banking world knew that Robinhood’s main customers were hedge funds, not individuals.

I’m not entirely sure I agree that the recent GME saga has proven that retail investors can reasonably coordinate long-term stock movements, George Jaglis, executive director of the Institute for the Future at the University of Nicosia, told Cointelegraph. I see it as evidence that the market has recently peaked, rather than a new wave of continued dominance in the retail market, as many commentators like to portray, he added.

Kai Burchardi, head of BCG Platinion, a division of Boston Consulting Group in the Netherlands, told Cointelegraph: In theory, a shared crowd of individuals could move many assets, including prices of cryptocurrencies – but of course that depends on the size of the crowd. The Reddit forum r/Wallstreetbets has reportedly mobilized thousands of individual investors to buy GameStop stock. In general, I think the number of small cryptocurrency investors will increase, whether they merge or not, as in the GameStop example, Burchardi said.

Historically, retail investors, not institutions, have driven cryptocurrency prices, said Lex Sokolin, chief marketing officer and co-head of global fintech at ConsenSys, adding that Cointelegraph has done just that:

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Their risk tolerance was higher, and the crypto story is more attractive to those looking for a new system. Over the past year, DeFi has aligned private and institutional capital, which will be an important aspect to keep an eye on in the future.

The generation gap?

But what about the respective parties last week. Dallas Mavericks owner Mark Cuban has suggested that the old-school investment community is now suffering from the backlash of what he calls the Value Generation Store. Is it really a conflict between young and old?

According to Sokolin: We have seen not only a generational struggle, but also a philosophical one. Moreover, as the information gap has narrowed, internet investors are better able to compete with professional investors: They can organize and vote with their money, which in total can rival the billions of haute finance. William Knottenbelt, professor of computer science at Imperial College London, told Cointelegraph:

The battle is not between the young and the old, or between ordinary people and hedge funds. Rather, it is a struggle between those who believe in protecting and extending individual freedoms – including the right to operate in the financial markets – and those who do not.

As a result, DeFi has great potential to protect and expand certain freedoms, Crottenbelt continued, but it is not immune to some of the ethically questionable activities that also occur in more centralized systems.

Meanwhile, according to Burchardi, it is a struggle between centralized and decentralized that may or may not be correlated with age. In one year, for example, we have seen the value of DeFi grow from almost zero to $25 billion – plus committed capital. This growth is decentralized and often driven by the community.

Winning on social media?

If individual investors have not yet definitively proven their influence, what about social media? Have platforms like Reddit ever shown that they are a force to be reckoned with in the financial world? Sokolin told Montelegraph: We have witnessed the power of social media and the strong emotions that have upset the financial games of the past. Crypto already embodies this spirit, with many values valued by the community rather than analysts.

Mati Greenspan, in his newsletter, agrees: 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.

Has decentralized finance benefited from the fuss over Robinhood’s suspension of its purchase of GME? These events, in my opinion, will definitely lead to adoption, Zamyatin told Cointelegraph. DeFi builders are now in the spotlight, and it is our responsibility to engage non-crypto users and demonstrate the positive potential of a decentralized financial system.

Jaglis said Montelegraf: Today, DeFi is where Bitcoin was in 2013 or 2015: A few early adopters see the potential, but the mass market has yet to realize the disruptive effect it will have on traditional finance. He agreed that the events of the past week are likely to accelerate approval.

The Americans have learned the limits of their market structure, Sokolin said. It’s not like Robinhood pulled the switch. These transactions must be cleared through the Depository Trust and Clearing Corporation, and the transactions take T+2 [transaction date plus two days], and due to volatility their collateral requirements have increased tenfold. Fi’s programmatic markets would likely have avoided this fate because they operate in real time and are open 24/7.

Can DEX manage the power?

Are decentralized exchanges ready for the mass market? Can they handle the volume of last week’s r/Wallstreetbets action without ruining it? Today, these decentralized markets are still small and not always at the corporate level, Burchardi told Cointelegraph : They will have a big problem with these volumes – at least in their current versions.

Moreover, decentralized exchanges are not even fully decentralized and can be manipulated, as Zamyatin noted in a recent blog post. A DEX administrative account can extend contracts or stop transactions, which means that all our [infamous] hedge fund has to do is contact the person or group managing the account, apply pressure, or offer a lucrative bribe – and at the very least, the transactions can be delayed.

The Ethereum platform, on which the majority of DeFi projects run, is also fully decentralized. Three mining pools control more than 50 percent of Ethereum’s hash, Zamyatin noted, and we don’t know who controls these pools behind the scenes or if they have collaborated. Technically, we’re not there yet, and market manipulation is still possible – but probably more difficult than on centralised platforms, Zamyatin told Cointelegraph.

Also, because Ethereum houses the majority of DeFi projects on the network, as the demand for transactions increases, so do the prices of gasoline, and at some point they can become overpriced very quickly.

Short-term hysteria, long-term change?

Last week’s events can be seen as a DeFi moment of the Boston Tea Party, when American settlers dressed as Iroquois Indians dumped 342 crates of tea into Boston Harbor to protest British rule – a seemingly irrational act, but one that is now seen as a precursor to the American Revolution.

We will remember this as yet another example of short-term mass hysteria and FOMO dynamics that drove some assets to valuations that had nothing to do with their underlying fundamentals, before returning to fairer prices, Giaglis said:

We are undoubtedly entering an era where more and more people see the potential of decentralized, peer-to-peer, disjointed and censorship-resistant applications, especially in financial services.

Mr. Burchardi agreed that there is a significant shift toward decentralized funding, but added that two key issues still need to be addressed to ensure future growth: How can we make DeFi more practical ? And when and how will it be settled? The answers to these questions will determine the evolution of the DeFi.

Overall, last week’s event divided the crypto community without providing clarity on generations or retailers/institutions, but it may have alerted the broader investment community to some of the shortcomings of the current system – a learning moment of sorts for decentralized finance, for what it’s worth.

Either way, the blockchain and crypto community needs to make sure its technology, security, and protocols are in place for the day when the general public ventures into its markets.

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