Now DeFi cops start roaring

Gamestop madness continues: now DeFi cops start roaring

Even the ever-loud crypto space has been flooded with commentary about the Gamestop (GME) saga playing out in the traditional financial world right now.

For those who missed it, here’s a quick recap:

  • Gamestop, the video game retailer, was shorted more than 140 per cent of its stock price by large hedge funds in anticipation that the stock would go down.
  • Small investors on WallStreetBets, the famous stock trading subreddit, became aware of the trend and began buying call options on the stock.
  • The stock began to shoot upwards on its way into 2021, culminating in a massive squeeze to the upside last week.
  • Due to the fact that there were so many stock shorts of GME, those who held these positions went underwater.
    Some short sellers had to close their positions or were taken out of the market by other companies.

Due to the high demand and uncertainty about the legitimacy and risk of Gamestop’s share price performance, brokerage Bitcoin Superstar houses have started to stop trading GME across the US.

It is by far the biggest financial story of 2021, and crypto investors, especially DeFi bulls, are taking this trend as a sign that on-chain financial applications are the future.

Economist Alex Kruger put it well when he said:

“Great thread about WSB and RobinHood. The problem: the system is rigged. The solution: decentralised finance. It doesn’t get any clearer than that.”

The sense that the system is “rigged” comes as WallStreetBets and traders in the ecosystem run into problems using platforms – from Discord and Reddit to trading platforms like Robinhood itself.

DeFi, by comparison, is considered trustworthy and fair because it cannot decide whether users trade or not. Instead, the qualifications one has to interact with different platforms, whether that is Uniswap on Ethereum (Go to Buy Ethereum Guide) or another app on a new blockchain, are based on their ability to pay the transaction fee.

Even if the Gamestop saga doesn’t directly drive capital to DeFi, many have noted that it shows how much room the decentralised financial space has to grow.

Santiago Roel Santos, chief executive at ParaFi Capital, put it nicely when he noted that Gamestop’s market cap (at least at the height of yesterday’s rally) was practically larger than all the DeFi coins currently in circulation.

The total market cap of DeFi is still less than Gamestop $GME

One is a struggling Dallas-based video game retailer, the other is core infrastructure of a new global, decentralized financial system.
– Santiago R Santos (@santiagoroel) January 27, 2021

For context: market data shows there is around $36 billion worth of capital in DeFi. This is only a few percent of the circulating cryptocurrency market capitalisation.