How is Robinhood’s Suspension of GameStop Positive for Blockchain Adoption?
Users are outraged at the stock trading app Robinhood due to their recent delisting of stocks such as GameStop, Nokia, and BlackBerry. As a result, some are hailing cryptocurrency and decentralized exchanges as a solution to this so-called “corruption” in traditional finance and Wall Street.
Recently, there has been turmoil in the stock market. In early January, users of the subreddit r/WallStreetBets, a community created to discuss high-risk investing decisions, noticed that there was a massive opportunity to make money in GameStop. Redditors saw that hedge funds had been betting massive sums of money against GameStop, in an investing technique known as a “short.” The Redditors decided to buy as much GameStop stock as possible in order to ruin the hedge funds’ short positions and make a massive profit. Needless to say, their plan worked, and GameStop’s stock managed to increase in price by over 2000%, an unheard-of amount in the traditional finance world. Since their strategy worked so well, they continued buying other stocks that were being shorted, such as AMC Theaters and Nokia, and made the hedge funds lose billions. A lot of the trading was done on Robinhood, a stock trading and investing app used by Millennials. In an unexpected move, Robinhood suspended trading of these affected stocks, which helped the hedge funds that were bleeding cash, but hurt the average investor looking to make a quick profit. The official reason Robinhood cited for this suspension was due to some of the rules and requirements about liquidity for a brokerage. Nonetheless, this has caused outrage in the retail investment community, as it shows that the broker, which was literally named after someone who stole from the rich to give to the poor, seems to be on the side of Wall Street.
This decision will have massive consequences for the future of finance, and has far greater implications than it seems at first glance. A stock broker, which is meant to be a neutral entity allowing for anyone to buy and sell legal assets, just took the side of hedge funds and greater regulations in investments. This means that the average person cannot and will not trust these platforms anymore as a safe, reliable, and censorship-free exchange platform. And this breach of reputation expands far beyond Robinhood. For the average investor, seeing that Robinhood can delist or suspend a stock means that Charles Schwab, Fidelity, M1 Finance, and every other brokerage also has that ability, and they can do it at their own discretion. It makes the average person feel as if they are not respected, and that they cannot win against the big money of Wall Street.
For these users, cryptocurrency and decentralization might offer the solution. Proponents of blockchain have taken to Reddit and Twitter to spread awareness of how cryptocurrencies are censorship-resistant, and that there are already platforms built that are leaps and bounds better than current exchanges.
Traditionally, in order for a person to trade U.S. stocks, they have to go through a registration process which has a “Know Your Customer” requirement. This means that a user has to give their social security number, date of birth, address, and other sensitive information to the stock broker before they are able to trade. This regulation was created after 9/11 to ensure that terrorists are not able to trade U.S. securities, but has many side effects. For one, it is more difficult for people not based in the United States to trade American stocks, which means there are billions of people who could be investing but are unable. Second, if any one of these brokerages experienced a hack or breach, millions of Americans would have their identities compromised, and would have to deal with identity theft.
Blockchain solves this problem by being decentralized. Since there is no central authority for a decentralized application, there is no way to collect this information, so users around the world can use these apps and rest assured that nobody will steal their identity.
There are already blockchain applications created to allow anyone to trade stocks, securities, and other assets. For example, the dApp Mirror.Finance uses synthetic assets to allow users to trade stocks such as Apple, Amazon, and Tesla. Unlike regular stocks, these can be held in a blockchain wallet, and offer the holder total control over their assets, instead of having to trust a broker like Robinhood to hold them.
Not only are there ways to trade stocks on the blockchain, but also a robust infrastructure of decentralized exchanges that allow for censorship-free transactions. For example, Uniswap, a decentralized exchange based on Ethereum, allows anyone to trade ERC20 tokens without having to create an account. The platform has its own governance token, UNI, which allows holders to vote and make decisions about the platform. No changes to the Uniswap exchange can be made without a formal vote by Uniswap token holders. This means that if a government forced Uniswap to shut down or delist a token, they would not be able to do so without a Uniswap governance vote, and it is highly improbable that holders of the token would agree to these demands. As a result, the Uniswap platform is a compelling solution to the problem of centralized exchanges being able to delist whatever asset they want.
If Uniswap and Mirror.Finance were used together, then anyone, anywhere in the world, would be able to trade whatever assets they wanted, without there being much risk of regulation. This realization could explain why Mirror’s governance token, MIR, has doubled since January 20th, and why Uniswap is up over 1000% from it’s all-time low. When retail investors begin to use decentralized blockchain applications over the traditional stock brokerages, volume on the platforms will skyrocket, and will most likely propel these projects to new heights, in both volume and token price.
Only time will tell whether or not Robinhood continues to bow to the will of hedge funds and big money, but regardless, their reputation has already been tarnished. Once users realize that solutions like Uniswap and Mirror.Finance exist, and solve all of the problems that a centralized exchange like Robinhood has, there may be a mass migration to these platforms. This type of movement would greatly increase the adoption and use-case of cryptocurrencies, and offer greater support for the idea that blockchain is spearheading a financial revolution.
Update: On February 1, Robinhood said users could now buy up to 20 shares of GME. Though this is an improvement over the initial suspension, it still shows the problems with a centralized system, including liquidity failures, the need to report to regulatory agencies, etc.
By Lincoln Murr