When my parents call me asking about X, I know we’ve reached the critical inflection point of a bubble. Yesterday, GameStop was exactly that.
I’m not going to focus on the details of Short-Squeeze, Melvin Capital, and the history of reddit user DFV since a simple Google search can give you more information than what I can provide. Instead, I’ll be talking about my views on the ordeal and how our future markets could be re-shaped by the recent turn of events.
I want to start with the meta-analysis. I’d argue that the entire ecosystem of our world has become more and more “decentralized.” The internet proves to be the biggest example — it’s greatest achievement is the success of decentralizing knowledge. Bitcoin and Ethereum are also obvious — they’re effectively decentralizing finance*. At this point, it’s safe to assume that the internet has helped level the playing field of knowledge; no longer are you required to be born into a world of wealth and privilege to access the potential of education. Similarly, Bitcoin and Ethereum are becoming instrumental in helping level the financial playing field — especially in non first-world countries. When I look at these technologies and their adoption, it’s clear they spell out a fundamental human desire we all strive for: fairness and equal opportunity.
What’s fascinating with the recent GameStop development— is that while many are jumping onto the spaceship looking for a free ride to a get-rich-fast-scheme, others are also tagging along out of spite. Those who have seen unfathomable wealth accumulate at the top — especially at a time when others at the bottom are struggling to find their break — are fed up with how the game of life is manipulated to only enrich the lives of the quiet, wealthy, and cunning minority. It’s no secret that their game of life is, quite frankly, not the same one that most of us can participate. Indeed, the retail traders are hungry for blood — looking for vengeance on these billionaires who play by a different set of rules.
The current chain of events, in my view, was a perfect storm that all started with the Pandemic; economic downturn, feds printing money for stimulus checks, and the infamous reddit user DFV who acted as a catalyst (and now essentially a cult leader) to over-run the hedge fund(s). When the government started sending out stimulus checks, a huge wave of retail traders started to sign up for Robinhood with hopes to turn monopoly money into something more substantial. With Tesla shooting to the moon and WallStreetBets becoming a hub for regular Joes becoming millionaires within a short couple of months, more and more people began piling on the “YOLO” bets alongside DFV**. This in turn was often rewarded in the tumultuous market today — and more success stories began to crowd the WallStreetBets subreddit. As this flywheel effect continued, the “reddit warriors” had eventually reached a critical mass, overcoming the activation energy required to start the frenzy that would devastate the hedge fund that had overextended.
Now with that long intro, let’s look at what happened with Robinhood yesterday. When Robinhood launched in 2013, they opened up the flood-gates for retail investors to get involved in the market; their mission was to “democratize finance for all” (Sounds awfully like Bitcoin doesn’t it?). Yet, we saw retail investors being barred from entering into the market the entire trading day, while some of the hedge funds managed to artificially drop the price of the stock in order to exit some of their most risky positions. The Robinhood CEO came out to talk about his decision — stating that the volatile markets were in a position to jeopardize both the company’s compliance to regulations and their tolerable amount to risk. However, I find these claims unsatisfactory. One of the arguments the Robinhood’s CEO made — that they were exposed to unprecedented risk while funds were being settled for new customers — sounds dubious. I find it hard to believe that a well established company like Robinhood couldn’t find a way to restrict new accounts; why not halt trades for accounts in which the money has not been settled yet? Why not halt some of the new account sign-ups while they figured out an alternative solution? Obviously, there’s speculations of collusion, market manipulation, and other criminal offenses — but I’ll leave the official investigation to the SEC.
When we see something like this unfold, the problem is quite simple really — a company had exercised their authority (whether it’s right or wrong) to make a decision on behalf of its users which had huge implications to the macro of our world; for example, Facebook, Twitter, and others were criticized for their overarching authority on information that may have shaped how world politics played out. In this example, Robinhood is under heavy fire for the massive financial implications for both retail investors and institutions alike. The outrage is likely justified; Robinhood, a company who brands themselves as being “for the people,” with their decision, had ultimately given the retail investors the finger.
How can this be solved? I believe Decentralized Finance could be part of the solution. At its core, Ethereum as a network has no single owner; no entity can exercise the same level of authority that Robinhood did. If our U.S. market was on decentralized exchanges such as Uniswap, it would be impossible for these “corrective actions” to occur. Indeed, while Robinhood stopped trading, firms like Fidelity were still executing orders; in fact, NYSE is the only entity that has the power to officially halt trading (ultimately to protect the investors). While a decentralized exchange does not offer a full solution to our current markets today, its the idea that these protocols can drastically change the way we view and interact with financial markets today (for the better!).
Why is this important? The internet was incredibly effective at disseminating knowledge — but has also managed to capture very tightly, billions of people in its web (think about six degrees of Kevin Bacon). Naturally, a small ripple in this environment has the potential to reach an enormous number of people. Coupled with this unparalleled potential, big players can become too massive — too powerful to start shaping the entire web and the world to their own benefit. Decentralization, fundamentally, is a way to combat this — redistributing the power more appropriately.
Decentralization, Ethereum, and the complex nature of our financial markets pose immense challenges. Decentralization is not inherently better than centralization (I for one, am skeptical of full-decentralization but this might be an article for another time). Ethereum comes with challenges of its own — and is certainly not a magic bullet. Our financial markets are heavily regulated — and centuries of economic theory are quietly at work behind it. Yet, it’s important to stress the importance of progress within these domains. I am a firm believe that technology should enrich the lives of the entire world, not just a few minority.
Ultimately, it’s the desire for fairness and opportunity that powers individuals and groups to work on Ethereum and other decentralized applications. And it’s this spirit — one that aims to empower individuals rather than institutions — that makes it clear to me that a form of Decentralized Finance will eventually triumph.
Now, the near future is quite easy to predict; my parents will likely hear about GameStock for a couple more days on the news. The bubble will have likely popped by then — and the battlefield will clear with both big winners and losers. Gamestop (and other meme stocks)— worth only $20 a month ago and now nearly $400 — may find itself flying over the clouds like Icarus, but will soon lose its lift and fall as quickly as it rose. Yet, the far future is not so easily discernible. While I believe in Decentralized Finance, true decentralization and the effective use of Ethereum still prove to be an enormous undertaking. Furthermore, it’s very likely that new regulations will start to emerge as this debacle settles, but only time can tell who Capitol Hill will ultimately represent.
As for me, I won’t be participating in this crazy game — but will admire it from afar. I’m merely excited that there’s so much to be learned.
*Ethereum has more purposes than finance but DeFi applications seem to be the biggest use-case today.
**I also want to note here that what DFV has done is incredibly smart and well theorized; it’s not strictly YOLO bets but it’s still incredibly risky.