Screen Shot 2021 02 03 at 4.55.54 PM

DeFi Stocks Trading Climbs After Robinhood Fail

Synthetic assets trading in decentralized finance is picking up after stock buyers were locked out of traditional markets last week.

Platforms like Mirror, FTX, and Synthetix, which are live, and others still in the works like Injective Protocol, allow investors to gain access to traditional stocks and assets via tokens which replicate their price. 

Daily volume on Mirror has surged above $30M, more than three times the average in December, while liquidity climbed to a record $171M. Granted, amounts traded are still negligible compared to overall crypto volumes of billions per day, let alone traditional stocks trading volume, but the jump points to increased demand to access stocks like Tesla and Netflix, and commodities like Silver, without relying on centralized entities. 

Robinhood Debacle

Last week had the world up in arms as a ragtag group of investors put the squeeze on hedge funds who had deeply shorted GameStop, AMC, and other securities. As Robinhood restricted the purchase of GameStop securities (GME) in the wake of rampant buying, the company was sued and ridiculed with its supposed position as the “brokerage of the people” came under fire.

As a result, three of the top five posts on the Ethereum subreddit this week are calls for decentralized stock exchanges of some form. 

24/7 Trading

As crypto markets are typically 24/7, this means that investors can trade synthetic assets after hours, as they did last weekend, buying silver (SLV) on Mirror. Silver futures started surging late last week after Wall Street Bets Redditors turned their attention from GME and AMC to the metal.

Increased demand for the token representing silver on Mirror pushed its price on the platform up by 24% from Friday  to a high of $37 on Sunday. 

And while many in the WSB gang were likely waiting for markets to re-open, DeFi traders were able to front run traditional finance by trading silver over the weekend,  leading some like economist Alex Kruger to celebrate the future of finance’s arrival. 

Pricing Problems

But there are still kinks to work out: the synthetic asset dropped like a rock to a low of $29 on Monday as oracles repriced the stock once traditional markets opened. 

Still, after-hours trading the “meme stock” of SLV, with its $3M 24-hour volume, the third highest on Mirror, demonstrates untapped demand for combining traditional asset trading with key capabilities of DeFi.

Synethix, the liquidity derivatives protocol, also offers a synthetic silver derivative called sXAG. The protocol currently disables trading when the price feed oracle is not live, making sXAG’s trading experience closer to that of traditional finance, rather than the 24/7 bonanza that is DeFi. 

“Stockchain” Dream

While current synthetic assets must dance to the beat of the drum of oracles prices derived from legacy sources, the writing may be on the wall for a crypto-native stock exchange. 

Instead of relying on traditional asset prices through sources like Chainlink’s silver oracle, in a true “stockchain” the security itself would exist on-chain.

Concentrated Custodians

Right now, when trading stocks, the ownership of the asset, similar to the title of a house, isn’t held by its  owner, but is maintained in a centralized database and in the US, is custodied by one of four major players, The Bank of New York Mellon Corporation, State Street Corporation, Bank of America Corporation and JPMorgan Chase. 

A decentralized securities exchange would enable verifiable, on-chain ownership to actually lie with whoever is holding the asset. The potential for self-custody of stocks would give DeFi enthusiasts another tool in taking over control of their assets.

As tech leader Balajis Srinivasan  quipped, “the problem isn’t that some cryptos may be securities. The problem is that all securities aren’t yet cryptos.”

Blame Game

The fallout from Robinhood’s restrictions left many wondering whether to blame the broker, the clearing firms, the Depository Trust and Clearing Corporation, or the Dodd-Frank legislation which came on the heels of 2008’s financial crisis.

But the issue of blame may be less important than the self-evident conclusion: traditional markets are broken if they can’t deliver timely execution of trades (their very job). Stock exchanges underpinned by blockchain networks may be the solution.

Holy Grail

The blockchian-native exchange could allow global-access to trading securities, instead of current country-based restrictions; 24/7 trading compared with 9:30am-4pm on weekdays; and settlement in minutes instead of the two-day standard of today. That’s in addition to self-custody and censorship resistance. 

While projects like  Mirror, Synthetix, FTX, and Injective Protocol offer users access to legacy stocks’ price movements, a decentralized exchange with all securities settled on-chain remains a holy grail of DeFi.