- What implications do the events at the end of January 2021 surrounding the Reddit thread “r/wallstreetbets” and the consumer trading app Robinhood have for the world of crypto?
- What parallels can be drawn between the problems uncovered in these events and well-understood areas of study such as exchange trading, securities, and governance/coordination?
- What implications do censorship and de-platforming of public equities have for on-chain settlement of bearer-asset trading?
On January 22, 2021, users of the Reddit community Wall Street Bets (WSB) coordinated a short squeeze on GameStop (GME), leading to a price rally of over 600% intra-day and triggering circuit breakers on the NYSE. The move was noted by major publications and unequivocally condemned by Wall Street.
A short squeeze takes place when the price of a stock rallies to the point where traders who shorted the stock are forced to buy back shares in order to minimize losses. The “WSB short squeeze” has reportedly cost short sellers, including prominent US hedge funds like Melvin Capital LLC and Citadel, nearly $20B in losses.
After five days of volatile trading, the online communications platform Discord suspended its own WSB channel on the basis of "hateful and discriminatory content.” The service was being used to coordinate another short squeeze on AMC, a movie theater operator that was particularly affected by the COVID-19 pandemic. Other short squeeze targets have included BlackBerry, Nokia and Koss Corp, and the silver market.
On January 28th, the U.S. Securities & Exchange Commission (SEC) released a statement announcing it was investigating whether WSB’s actions constituted market manipulation. Legal scholars are debating whether actions by a publicly accessible online community would fit into existing definitions of market manipulation. Discord restored access to the WSB servers and has been reportedly helping the WSB team with moderation.
In the aftermath of the GME short squeeze, major brokers like Robinhood, TD Ameritrade, E-Trade, and Webull restricted trading of the securities targeted by WSB, but provided little background about the impetus of their decisions. Positions were forcibly closed, and many investors lost money.
Key Problem / Topic Area
- What are the most efficient structures for signal coordination and/or resulting governance of decentralized systems?
- What is the appropriate tradeoff of securitization vs. free-trade and sovereign management of bearer or non-bearer assets?
Specific Questions or Problem Statements
- Does the open access to financial infrastructure provided by crypto applications help address the problem of exchange censorship by making it impossible for a single entity to de-platform the whole?
- Are there negative externalities associated with the free and unregulated access to markets, and can crypto markets provide a compromise?
- Is it practical to settle securities using pseudonymous blockchains, and what are the trade-offs relative to traditional finance (TradFi)?
- What precedent exists for the type of de-platforming and subsequent public communication of justification that was observed in the course of these events?
- What level of asymmetry existed in how the decisions and actions of service providers (e.g Robinhood) affected different groups of stakeholders (retail, institutional, etc.)?
- Can Decentralized Autonomous Organizations (DAOs) reemerge as coordination mechanisms for investors?
Approach / Methodology
- This post is intended to pose questions that have been surfaced by these events and ask how they relate to existing areas of research.
- Please provide published papers or reputable sources to back the claims made in comments, especially as it relates to more technical discussions such as the feasibility of security settlement on blockchains.
Relevant Precedents and Reading Material
- Understanding a Revolutionary and Flawed Grand Experiment in Blockchain: The DAO Attack by Harvard Law
- Is the DAO a security? By the U.S. Securities Exchange Commission
- Experiments in Algorithmic Governance: A history and ethnography of “The DAO,” a failed Decentralized Autonomous Organization by Quinn DuPont
- Security tokens: architecture, smart contract applications and illustrations using SAFE by Hemang Subramanian
- Blockchain-Based Settlement for Asset Trading by Jonathan Chiu