Was last week’s Reddit versus Wall Street stand-off really the “beginning of the end for centralized finance,” as Gemini founder Tyler Winklevoss described it? Or was it just a one-time instance of individuals coming together to right a perceived wrong — with no long-term economic consequences?
As GameStop, a struggling videogame retailer, came under attack by hedge-fund short sellers, a coalition of individuals spearheaded by r/Wallstreetbets, a Reddit forum, jumped in to save GameStop by buying its shares, driving its stock price from $20 to as high as $483 — and doing some real damage to short traders in the bargain.
But then Robinhood, the insurgents’ trading platform of choice, suspended purchases of GameStop’s GME stock and seven other stocks. The Redditors cried foul, asserting that Robinhood had caved in to the hedge funds and other entrenched Wall Street interests. Robinhood, for its part, explained that it was forced to suspend GME purchases or it would have run out of cash to cover the transactions.
However, more than 30 class-action lawsuits were filed against the centralized trading platform — one complaint arguing that the suspension was just what “the [GME-shorting] hedge funds wanted,” and another even declaring that “Robinhood stole from the poor to give to the rich.”
Others implied that this sort of chicanery wouldn’t have occurred in a decentralized financial world. Along those lines, Galaxy Digital’s Mike Novogratz called the GME flare-up a “giant endorsement of DEFI,” and one crypto user, who wanted to remain anonymous, told Cointelegraph: “Restricting individuals from buying a selected stock is a form of a centralized control mechanism. In a decentralized trading market, no one would have that power.”
This view wasn’t unanimous, though. Quantum Economics co-founder Mati Greenspan found little to applaud in the crowd-sourced purchasing of GameStop stock: “The narrative that Main Street was finally able to beat Wall Street at its own game is extremely misguided,” as according to him, “there were hedge funds on both sides of this trade.” He went on to add: “It’s hard to see how buying overpriced shares of a company that’s losing money will make the world a better place.”
With that as a backdrop, here’s a deeper dive into what lessons, if any, could be drawn from the r/Wallstreetbets vs. the suits showdown. For instance, if retail investors can now move stock prices, then surely they can move large-cap cryptocurrency prices, no?
Is the writing on the wall?
“The events around GME and Robinhood were a wakeup call for the broader public,” Alexei Zamyatin, co-founder and CEO at Interlay — a research and development company focusing on blockchain interoperability — told Cointelegraph, adding: “I doubt most people outside of finance/banking were aware that Robinhood’s main customers were hedge funds rather than retail users.”
“I’m not entirely sure I agree that the recent GME saga has proven that retail investors can meaningfully coordinate to move stocks in the long run,” George Giaglis, executive director at the Institute for the Future at the University of Nicosia, told Cointelegraph. “I see this more as evidence of late-stage market-topping rather than a new wave of sustainable retail-driven market domination as many commenters would like to portray it,” he added.
Kaj Burchardi, head of BCG Platinion Netherlands — a division of Boston Consulting Group — told Cointelegraph: “In theory, a joint retail crowd can move many assets,” including crypto prices — but of course, that depends on the size of the crowd. The Reddit r/Wallstreetbets forum reportedly mobilized thousands of individual investors to purchase GameStop shares. “Overall, I think the number of retail investors will grow in the crypto space — independent if they join forces similar to the GameStop example,” said Burchardi.
Historically, retail investors — not institutions — have driven crypto prices, Lex Sokolin, chief marketing officer and global fintech co-head at ConsenSys, told Cointelegraph, adding:
“Their risk tolerance has been higher, and the crypto narrative appeals more to individuals looking for a new system. DeFi put retail and institutional capital on level footing last year, which will be a key aspect to watch going forward.”
A generational struggle?
But what about the respective parties in last week’s scrap. Dallas Mavericks’ owner Mark Cuban suggested that “the old-school investment community is currently taking a kicking from what he describes as the ‘Store of Value Generation.’” Is it indeed a conflict between the young and old?
According to Sokolin: “We saw not just a generational struggle but a philosophical one.” Furthermore, as the information gap has now shrunk, internet-native investors are now more capable of rivaling professional investors: “They can self-organize and vote with their money, which, in aggregate, can rival the billions in high finance.” William Knottenbelt, a professor at Imperial College London’s department of computing, told Cointelegraph:
“The struggle is neither between younger and older generations nor between ordinary people and hedge funds. It is more between those who believe in the protection and expansion of the personal freedoms of individuals — including the right to engage in financial markets — and those who do not.”
Along these lines, “DeFi shows strong potential when it comes to protecting and enhancing certain freedoms,” continued Knottenbelt, “but it is not immune to some kinds of ethically dubious activities that also manifest in more centralized systems.”
Meanwhile, according to Burchardi, “it is a centralized vs. decentralized struggle,” which may correlate with age, but not necessarily. “For instance, in just one year, we saw the value of DeFi move from close to zero to $25 billion-plus of locked capital. This growth is decentralized and often community-driven.”
A win for social media?
If individual investors didn’t demonstrate their clout conclusively, then what about social media? Did platforms like Reddit serve notice that they are now a force with which to be reckoned in the financial realm? Sokolin told Cointelegraph: “We witnessed the power of social media, and powerful emotions tip over the financial games of the past. Crypto already embodies this ethos, as many assets are valued by the community, not by analysts.”
Mati Greenspan, writing in his newsletter, agreed: “One lesson that the world seems to have learned is that social media can be a leading indicator, and even a driving force, for future price movements.”
As for decentralized finance, did it get a boost from the outcry when Robinhood suspended buying of GME? “These developments, in my opinion, will definitely drive adoption,” Zamyatin told Cointelegraph. “DeFi builders are in the spotlight now, and it will be up to us to onboard non-crypto users and to showcase the positive potential of a decentralized financial system.”
Giaglis told Cointelegraph: “DeFi is today where Bitcoin was in 2013 or 2015: a few early adopters are seeing the potential, while the mass market has yet to realize how disruptive this will be to traditional finance.” He agreed that last week’s events would probably accelerate acceptance.
“Americans learned the limits of their market structure,” added Sokolin. “It’s not that Robinhood removed the button. It’s that they have to clear with the Depository Trust & Clearing Corporation, and trades take T+2 [trade date plus two days] to settle, and volatility forced their collateral requirements to go up 10 times.” DeFi’s programmatic markets presumably would have escaped this fate because they are transacted in real-time and open 24 hours, seven days a week.
Can DEXs handle the flow?
Are decentralized exchanges even ready for mass markets? Could they handle the volume of last week’s r/Wallstreetbets’ action without crashing? “Today these decentralized markets are still small and not always enterprise-grade,” Burchardi told Cointelegraph, adding: “They would have big challenges to handle these volumes — at least in their current versions.”
Moreover, decentralized exchanges aren’t even wholly decentralized and could be subject to manipulation, noted Zamyatin in a recent blog post. A DEX’s administrative account could upgrade contracts or halt operations, which means “our [proverbial] hedge fund need only get in touch with the person/group in control of this account, apply some pressure or offer a lucrative bribe — and trading can at least be slowed down.”
Nor is Ethereum, the platform that hosts most DeFi projects, completely decentralized. Three mining pools control more than 50% of Ethereum’s hash rate, noted Zamyatin, and “we don’t really know who controls these pools in the background” if they were to collude. “We’re still not quite there from a technical perspective, and market manipulation is still possible — yet arguably, it is more difficult than on centralized platforms,” Zamyatin told Cointelegraph.
Furthermore, since Ethereum houses most of the DeFi projects on the network, as demand for transactions rises, so do the gas fees, and at some point, they may become too expensive, very quickly.
Short-term hysteria, long-term change?
Maybe last week’s events will be viewed one day as DeFi’s Boston Tea Party moment when American colonists disguised as Mohawk Indians dumped 342 chests of tea into Boston Harbor to protest British rule — a seemingly irrational act, but one seen now as a precursor to the American Revolution.
“We will remember this as another instance of short-term mass hysteria and FOMO dynamics that propelled some assets to valuations that had nothing to do with their underlying fundamental values before reverting to fairer prices,” observed Giaglis, adding:
“We are undoubtedly entering an era where more and more people realize the potential of decentralized, peer-to-peer, disintermediated and censorship-resistant applications, especially in the financial services industry.”
Burchardi agreed that a significant movement toward decentralized finance was now underway but added that two key points still needed to be resolved to ensure future growth: “How can you make DeFi more convenient? And when and how does it get regulated? The answers to these questions will determine how DeFi progresses.”
All in all, last week’s event may have split the crypto community, with no clear generational or retailer/institutional clarity, but it arguably alerted the greater investing public to some of the flaws of the current system — a sort of “teaching moment” for decentralized finance, as it were.
In any case, it behooves the blockchain and crypto community to make sure its technologies, security and protocols are in order for the day when the larger public rushes in to use its markets.
Immunefi to bolster DeFi security service with new funds
Decentralized finance (DeFi) security platform Immunefi has announced a $5.5 million fundraise from a group of 11 institutional investors, including Blueprint Forest, Electric Capital, Framework Ventures and Bitscale Capital, in addition to a series of private individuals.
Immunefi will utilize the funds to advance its services in DeFi security, providing asset protection to smart contract protocols, as well as implementing financial incentives to benevolent hackers.
The service is reportedly responsible for protecting more than $50 billion in protocol assets from projects such as Synthetix, Chainlink, SushiSwap and PancakeSwap. It has paid out $7.5 million in bug bounties throughout its history.
According to analytical data from DeFiYield’s “REKT Database,” the DeFi space has experienced malicious hacks totaling more than $1.74 billion throughout its lifespan, a vast proportion of which has been witnessed in the months since July 2021.
The $609-million hack of cross-chain protocol Poly Network in early August 2021 bears the undesirable crown for the industry’s largest-ever hack. However, in welcomely unusual circumstances, Mr. White Hat — as they came to be known — returned all of the available funds, the remaining balance being the $33 million in Tether (USDT) initially frozen.
Over the past year, the prevalence and severity of financial breaches within the DeFi space have established a surging demand for security services such as Immunefi.
Mitchell Amador, founder and CEO of Immunefi, spoke on the importance of offering DeFi protective measures:
“DeFi is unique because vulnerabilities in code represent a possibility of a direct loss of users’ money. Bug bounty programs are open invitations to security researchers to find those vulnerabilities in exchange for a reward, and have proved one of the most effective ways to deal with critical security holes.”
In late September, a $1.05 million bug bounty fee was paid to renowned white hat programmer Alexander Schlindwein in the aftermath of the Belt Finance saga for his instrumental role in preventing a potential $10 million downfall for the protocol. The claim was facilitated through Immunefi’s specialist bounty program.
More recently, white hat hacker Gerhard Wagner pocketed a cool $2 million for diligently advising a solution to a “double-spend” flaw on the Polygon network, preventing a potentially catastrophic $850 million exploit, with the bounty now standing as an industry record.
Immunefi’s Amador also commented on the potential impact a service such as Immunefi could have on the wider technology landscape:
“We believe that by helping launch such programs on Immunefi, we contribute not only to protecting DeFi projects for today, but also to shaping the tech industry for the future.”
Polymarket binary trade under investigation by CFTC
- CFTC is scrutinizing the DeFi platform to ensure they abide by the rules.
- The prediction market platform has made a bold move by hiring the previous CFTC director to tow them in the right direction.
Polymarket, a DeFi platform in New York, has been placed under a microscope by the Commodity Futures Trading Commission (CFTC). The state agency that regulates the United States derivatives trade wants to investigate some irregularities within the DeFi platform.
The regulatory body wants to know whether Polymarket is allowing its clients to deal with binary inappropriately. The agency will also determine if the company will get listed with the regulatory authority.
Polymarket is working under a powerful team
The prediction market platform recently brought in former CFTC enforcement chief James McDonald. He left the role late last year after serving since April 2017 as the enforcement director. After stepping down, he joined Sullivan & Cromwell as a legal firm in New York. His experience will play a big part in the investigations.
A representative from Polymarket noted that they would cooperate with the regulatory authority and abide by the required directives. The company will give all information that the agency needs to make the probe smooth. By doing this, they can provide their customers with the best service.
Leading with diverse markets
Polymarket has facilitated almost 5 billion shares since its establishment. Currently, the company is in the process of raising some funds. According to an anonymous source, the money could see the firm rise to nearly $1 billion valuations.
The prediction platform allows users to predict upcoming events with various unique markets. The customers use the USD Coin stable token while making predictions.
Polymarket does not take positions against its customers and hosts the smart contract interface allowing users to link with the protocol.
At the end of last year, Polymarket got a $4 million funding round led by Polychain Capital. The development involved former Coinbase CTO Balaji Srinivasan, CoinShares CSO Meltem Demirors, and AngelList CEO Naval Ravikant.
Decentralized finance (DeFi) traders argue that smart contract interfaces should use different procedures from centralized exchanges. However, the CEO, Shayne Coplan, has not given light on the concerns.
Other platforms have also begun offering decentralized speculation markets like Polymarket. Augur established a Polygon deployment of its company less than a month ago.
Polymarket always strives to stand out among its competitors by providing diverse markets. The opponents include Augur, DoubleDown Interactive, Stox, and ZenSports.
Polymarket markets include opinions on covid-19 case numbers and CryptoPunks floor prices. Augur is built on Ethereum, and its markets are more concentrated on crypto price predictions and contests.
DeFi Lending: Understanding the ins and outs of decentralized lending
What is DeFi Lending?
Decentralized finance is a blockchain technology that eliminates the use of intermediaries like brokers and decentralized ledgers. This type of finance offers anybody willing to earn interest and profits through trade using digital assets. Most assets used for trading in decentralized finance are a result of a cryptocurrency platform called Ethereum. It is also responsible for most decentralized finance applications.
Instead of intermediaries like banks in traditional finance, Defi is enabled by smart contracts and protocols directed by AI and computer algorithms. While some think it cannot go mainstream since some traders do not accept crypto coins and tokens due to the fear of volatility, statistics do not support the same. According to Defi Pulse, there is 83.05 Billion USD locked in DeFi today. DeFi has also brought about a significant improvement to the blockchain.
How DeFi Lending works
DeFi lending provides a chance for trade between two parties and can only involve a trusted third party if the APIs allow. With the use of this criterion of finance and smart contracts, P2P ending is possible. A crypto investor can enlist his crypto coins for lending on the crypto platform and lend out to another investor by use of protocols. This type of lending is becoming a trend because of how trustless and transparent it is.
A borrower is supposed to create an account on the cryptocurrency platform then ensure that he has an active wallet. He is then supposed to open smart contracts that are supposed to guide how the lending is expected to happen.
Defi lending allows the lender to earn interest from the loans. One can borrow money at a specific interest rate. It is also helpful as it serves financial services while giving back to the cryptocurrency community. It is beneficial to both lenders and borrowers because borrowers can access crypto loans quickly, and the lender earns a yield from investments instead of watching wealth sit in one’s wallet. Lenders are like investors who deposit their money in lending pools like banks in centralized finance.
Various ways can be used for an investor to access their interest and from borrowers. Moreover, different liquidity pools have different borrowing approaches, so an investor needs to research the pools.
Borrowers are expected to offer something of equal or more value compared to the loan amount provided. This is used as collateral during loan payments. Depending on the borrower, a wide variety of crypto tokens can be offered as collateral for the loan.
Benefits of DeFi lending
Decentralized finance is advantageous in different ways. These are;
- Unlike traditional banks, the processing speed of crypto coins is fast
- Decentralized finance complies with the law of the land
- There is an availability of helpful analytics that a borrower can use to tell the best lender and vice versa
- DeFi is permissionless
- There is transparency in their services
As DeFi targets to go mainstream, it is advisable to try its services like lending to compare it with the usual way of things; it might just be your niche!