Disgust over GameStop’s trading shutdown will accelerate DeFi adoption. Here’s how to gain DeFi investment exposure.
Last week’s frenzy around GameStop’s stock (GME) and firestorm over Robinhood’s trading shutdown laid bare real problems with our existing market infrastructure and its lack of transparency.
These problems (which are nothing new, just more widely apparent) are part of what historically inspired the creation of Decentralized Finance (DeFi).
A near perfect advertisement for DeFi
The DeFi network of trust-minimized smart contracts on open blockchain networks provide financial services that, until now, were reliant on centralized counterparties like Wall Street clearinghouses.
In contrast to DeFi infrastructure, traditional Wall Street clearinghouses represent centralized points of control and potentially catastrophic failure risk.
While the GameStop/Robinhood blame games continues and will likely wind its way to Congress, the bottom line is already clear: traditional market infrastructure failed and outrage over sudden, inequitable trading stoppages in shares like GameStop is warranted.
DeFi’s promise and inevitability
Perhaps one day publicly traded companies may issue their shares in a blockchain native format that can freely ride DeFi’s censorship resistant rails. Already the groundwork for tokenized equities is being laid.
In such a world, you might be able to self custody your digitized shares of a company and switch exchanges near instantly to stay nimble in a global market. Imagine if you could send, store or trade a stock in the same way you could exchange a bitcoin.
Once imagined, it is hard to unsee the inevitability of our future financial system built around DeFi.
A lot needs to happen before the vision for DeFi is fully realized. Right now DeFi does not by and large offer a way to trade as simply as you would on a traditional centralized exchange.
But already today DeFi protocols are not subject to “unsporting” (to be polite) centralized trading shutdowns (aka “getting rugged”) like we saw with Robinhood last week, and again with CashApp this week.
Further, DeFi presents an investment opportunity for everyone, not just institutional and accredited investors.
How to gain investment exposure to DeFi growth
DeFi protocols have native cryptoassets that reward users for contributing meaningfully to the market and its infrastructure. Two promising DeFi protocol tokens are listed on Blockchain.com’s exchange:
About Aave (AAVE)
Aave is “a decentralized non-custodial money market protocol where users can participate as depositors or borrowers. Depositors provide liquidity to the market to earn a passive income, while borrowers are able to borrow in an overcollateralized (perpetually) or undercollateralized (one-block liquidity) fashion.” (Source: Aave)
When users deposit funds to the protocol, it mints a new aToken (like aDAI), which can be redeemed for the underlying in much the same way other DeFi protocols operate. The AAVE token is the governance token for the protocol itself.
About Yearn Finance (YFI)
yearn.finance is “an aggregator of various lending protocols that optimizes for the highest yield. The native token YFI is used for governance over the network and is distributed exclusively through active participation and liquidity provision.” (Source: Messari)
There are only 30,000 YFI tokens in existence, and they have all been distributed. Additional tokens can only be minted if a governance proposal (here known as a Yearn Improvement Proposal, or YIP) passes. Visit the yearn.finance FAQs for more.
Investing in layer-1 protocols like Ethereum (ETH) and Bitcoin (BTC) is another more general way to gain exposure to the growth of DeFi.
As DeFi grows in the form of expanded crypto borrowing and lending, use of crypto trading (decentralized exchanges, or DEXs), and other growth of DeFi use cases, then demand for the “substrate” tokens (eg ETH) that underpin DeFi will also likely grow.
Robinhood’s trading shutdown was a wakeup call for many and reinforced our view that now is the time to move on from antiquated centralized market infrastructure.
Defi offers a rare and open opportunity to invest directly in the next generation of financial infrastructure as it is being built.
DeFi is still maturing and presents a number of risks, including volatile token prices and hacks that can lead to a loss of funds. It is important to do your own research and think carefully about these potential risks before participating in DeFi.
Dr Garrick Hileman is a visiting fellow at the London School of Economics and the head of research at Blockchain.com, the leading provider of cryptocurrency solutions and creator of the world’s most popular crypto Wallet and the Blockchain.com Exchange. You can read more of his analysis and research on Twitter @GarrickHileman and @Blockchain.
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