The rise of decentralized finance (DeFi) allows early investors and communities to help new businesses succeed, while giving them equity on the ground floor.
Photo courtesy of Unsplash / Clay Banks
The retail investor-fueled frenzy around memes stocks and cryptocurrencies has been framed in the media around colorful figures. Barstool Sports founder Dave Portnoy takes on Robinhood CEO Vlad Tenev in a David and Goliath saga; Billionaire Elon Musk is pushing the price of Dogecoin up with memes on Twitter. While these plots and narratives are compelling, they miss the underlying engine of this new phenomenon: the desire of retail investors to participate in the markets on the same terms as Wall Street.
Retail investors are currently a estimated at 25 percent of the stock market. They have the capital and the appetite for risk but do not have access to transactions. Rather than sit idly by, they look for the opportunities available to them, whether it’s a short squeeze or dynamic trading with options. Rallies such as GME and AMC are a strong message that we have a new generation of investors ready to change the capital market.
Although the number of Initial Public Offerings (IPOs) has gradually declined over the past three decades, the size of individual transactions has increased. This means that fewer companies are offering their growth potential to the public. Who is capturing this growth? Investors with access to private transactions, expertise or complexity to manage transactions. Whichever way you do it, one thing remains constant: Retail investors don’t benefit from some of the pre-IPO growth. While Uber went public at a market cap of $ 75 billion, very little of that value was captured by the retail investors or the engines that helped create this valuation. Coinbase, likewise, went public at a market cap of $ 50 billion, but only allowed retail investors who built its platform to participate after the company was directly listed.
The rise of decentralized finance (DeFi) allows early investors and communities to help new businesses succeed, while giving them equity on the ground floor. Although cryptocurrencies and DeFi protocols are the first products in this space, DeFi harnesses the power of retail investors and creates a positive feedback loop leading to inclusive capitalism.
The stock market has been portrayed by regulatory policy and media narratives as a complex black box, so regular and unsophisticated investors shouldn’t touch it. Despite many different regulations, from investor protection (Dodd-Frank Act of 2010), corporate structures (Securities Act of 1933), accounting (Sarbanes-Oxley Act of 2002) to consumer credit (Truth in Lending Act of 1968), regulations sometimes fail. protect before a problem has already arisen. During the 2008 financial crisis, retail investors lost their homes, while Wall Street received multibillion dollar bailouts for business executives.
New retail investors are betting against non-transparent practices (like bare shorts) and pushing the market towards a more transparent ecosystem. However, since the traditional financial system relies on inherent secrecy and private transactions, neither retail investors nor regulators may be able to uncover these practices as quickly as an efficient market demands. Transparency is an integral part of DeFi, and any participant or investor trusts the code and open practices. All transactional data is publicly available for anyone, leading to a fully transparent system to start with.
Equitable access to participate in markets and have access to the same information that other actors have access to is an essential part of a level financial system. Consumer DeFi, a decentralized financial system serving consumers, is inherently transparent and provides quick access for the investor and the community to benefit from growth. The retail frenzy will evolve into consumer-centric financial markets and more inclusive capitalism during this decade.
Hossein Azari is the CEO of cmorq, a consumer DeFi platform specializing in blockchain analytics to create better banking for everyday people. He was previously a senior scientist at Google and co-founded Clarity Money (which was acquired by Goldman Sachs).