Smart Contracts And the Evolution of Finance — I’m Here For The Tech & You Should Be Too
We’re on the verge of a financial revolution.
On a Saturday in early January, I was reading through r/wallstreetsbets and came across a post about the impending Gamestop short squeeze and natrually, I bought shares the following Monday. I was intriqued by the mechanics of a short squeeze, and it seemed to be working because the price was consistently going up. After WSB started gaining media attention, I started lurking a lot heavier on Reddit posts, and there were soooo many of them. At the end of each day, there would be a dramatic rendition of the price action, how the hedgefunds were attacking us, trying to drag the price down to shake out paper hands, etc. People would share their very thoroughly researched theories on when they thought the squeeze would happen, usually quite convincing, and I think it gave a lot of us a sense of purpose, to be part of something bigger than ourselves. The community was very supportive and as a new trader allocating most of my capital into this one extremely volatile stock (I had just discovered options too), I struggled with a lot of daily anxiety.
Fast forward to January 28th, 2021 and Robinhood, one of the most popular mobile trading brokerages, blocked its clients from buying Gamestop stock, only allowing retail traders to sell, effectively preventing the short squeeze and allowing their friends at Citadel to cover their short positions. This caused outrage throughout the WSB community. I remember watching the charts that day, stunned with disbelief that such obvious corruption was happening right in front of my eyes and there was absolutely nothing I could do about it.
After this, it wasn’t about making money anymore, it was about hurting the hedgefunds. I know several people who, having never traded a stock in their life, signed up with a brokerage and deposited just enough money to buy a single share of $GME or twenty shares of $AMC, on principal, because f*ck the hedge funds.
For me, trading was never the same after this, every stock was a short squeeze and every red candle was manipulation. Obviously this wasn’t actually the case, but the community was paranoid and brimming with hypervigilance. I realized I couldn’t justify investing my money into a broken system, especially when there was nothing preventing it from happening again. In June, Robinhood agreed to pay $70 million dollars in the largest ever FINRA settlement, but this was for a long list of other ways they mislead their retail customers. You can read the official complaint here.
From a business perspective, it makes sense; what’s a $70 million dollar fine from the authorities if you made $80 million dollars breaking the law? It’s pay to play, the government just wants to make sure to get their cut. This experience taught me that not only can I not trust the bank or the brokers, I also couldn’t trust the government to protect my interests as a retail investor.
And this is why blockchain will change the world. Smart contracts are executed automatically, based on the logical criteria written into the code. It’s a trustless system — a third party isn’t necessary to verify conditions because the contract can reference data and verify it all on it’s own, no people required.
Mark Cuban recently bet Peter Mallouk, the founder of Creative Planning, one million dollars that Ethereum would outperform the S&P 500 over the next ten years, and this was done using a smart contract. Each person entered a million dollars into the contract, and now we wait. At the expiration of the contract, the performance information will be referenced as written in the code, and the winner (sorry Mallouk) will receive the money automatically. No reminders, no demand letters, no court dates, no murder.
And while I think it’ll be some time before we realize the full potential of this technology, some of the financial products coming out on blockchain provide a better user experience and pay much higher returns than anything you could find at a traditional bank.
A quick google search of ‘loan against crypto’ will provide at least five different options for someone who’s interested in borrowing against their crypto holdings, and at ultra low APR’s (some as low as 3%). Did I mention there’s no credit check? No trip to the bank, no paperwork. On the other hand, if you’re not a very active trader and focused on acquiring crypto, you can stake it and earn a passive income at APR’s way beyond what a savings account pays (Binance APR’s 2.8–16%, Bunny Finance ($Bunny) is 228% and PancakeSwap ($Cake) is 104% at the time of this writing). All while serving both the interests of the consumer as well as the companies, and providing transparency. I know that’s not a word that’s used very often when it comes to crypto, but rug pulls are obvious if you know how to read code. The issue isn’t transparancy so much as lack of consumer education. This will get better over time, as the space evolves, security will continue to be a top priority for developers across the industry.
Investing in cryptocurrency is a learning curve, and a lot of people don’t even know it exists right now. I would wager at least 60% of the people who know it exists doesn’t understand the value of it. I first bought dogecoin on Robinhood, and then I learned about having keys, so I downloaded Coinbase, and then I discovered meme coins so then I needed Metamask and then I discovered dapps and it was about three months before I jumped over to Binance Smart Chain and even then, it still took at least three attempts before I was able to figure out how to use Pancake Swap. Not many people are just casually wandering over here, it takes time and dedication to navigate this space and understand what’s going on, but as it continues to grow, and the products get more innovative, people outside of this space begin to see the value, and that includes companies. Amazon, Google, IBM. Those who focus on customer experience and making their products user friendly and easily accessible to those who aren’t familiar with blockchain will be most successful in the long term.
The banks are scared, and they should be.
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” — Henry Ford
-Cass
