Building a better stock market: Tokenized shares bridge trading gap on blockchain
Blockchain tech allows for the creation of a community-governed system that is fundamentally incompatible with traditional finance.
The dramatic short squeeze of the stock of video game retailer GameStop this January was the moment when r/WallStreetBets finally transformed from a humble Reddit forum into a financial force that can no longer be ignored. But lost among the memes, trading app drama and hand-wringing over the sanctity of the stock market was one surprising outcome: GameStop’s share price didn’t just rise — the company actually listened to its many new retail investors and aggressively ramped up its strategy to focus on e-commerce. Rather than just a one-off market glitch, the investments made by r/WallStreetBets users resulted in the real transformation of a company that many in Wall Street had been predicting the demise of.
Related: GameStop inadvertently paves the way for decentralized finance
You’d think Wall Street types and their fan club in Congress would be hailing this as a rare triumph of market evangelism. But the wrong people made money out of this event so, in their eyes, the GameStop episode was a dangerous fluke.
The stock market remains in the hands of self-dealing and corrupt institutions. But just because the traditional market is rigged with rules that shift with the elites’ moods doesn’t mean that everyday retail investors should cede all shareholder control and abandon trading equity entirely. Instead, a hybrid model incorporating cryptocurrency and bringing tokenized shares of companies onto a blockchain ledger for people to buy, sell and exchange, can help to build a better, more transparent stock market accessible to all.
Since I founded the r/WallStreetBets subreddit in 2012, the community has grown immensely and undergone a number of changes. Until recently, discussion of crypto tokens was considered off-limits among r/WallStreetBets users. But the popularity of innovative trading apps has helped to close the gap between stocks and digital assets. r/WallStreetBets’ latest initiative aims to create exchange-traded products, or ETPs, which function like traditional ETFs but instead allow community members to buy indexed shares of cryptocurrencies as well as shares of companies like Tesla or Facebook.
If, as expected in the future, more companies start tokenizing their shares on the blockchain, not only will they assist in creating a more democratic market, but they’ll benefit from a number of technological efficiencies and gain access to a powerful army of retail investors.
Related: Understanding the systemic shift from digitization to tokenization of financial services
Tokenization of financial services
As friendly as the market can be to large institutional players, old methods of raising capital still present a number of challenges and outdated protocols for most companies. The stock exchange’s strict rules help some more than others, as does the willingness of banks and financial institutions to issue credit and handle general difficulties for business owners convincing private investors to get involved. With tokenized shares on a blockchain, issuing equity comes with lower costs and greater flexibility in fundraising. This way, everyday investors have more of a voice, and the value of businesses is more closely aligned with market forces rather than an elite group of wealthy investors.
Rather than forcing people to guess what decisions are being made in smoky back rooms, tokenized shares traded on a blockchain move in plain sight, with greater transparency for both regulators and shareholders. Regulators have the ability to monitor capitalization tables and share activity instantly, as well as view corporate governance votes that are on-chain. Shareholders, whether studying algorithms or YOLOing stimulus dollars on meme stocks, are able to see any on-chain activity in regards to the sale of shares, as well as votes from other shareholders regarding corporate decisions. Such a system is much fairer than the current status quo for everyone involved.
Our outdated system restricts shares by jurisdiction, meaning a Portuguese citizen is shut out from investing in companies that may even operate within their own country. If you ask me, anyone who’s ever sold their Wii for 3 euros or 550 yen should have the right to throw money at GameStop. But a blockchain-based system makes tokenizing equity universal and accessible 24/7, 365 days per year. In addition to providing greater access, this shift eliminates after-hours and dark pool trading that allow institutional investors to trade without exposure and without publicly showing their intentions while searching for a buyer or seller. The r/WallStreetBets ETP initiative overcomes these built-in biases and eliminates the advantage that large institutions abuse to make secretive trades that drive inequality.
To borrow an online term, the TLDR (too long didn’t read) summary is that blockchain allows for the creation of community governance that is fundamentally incompatible with traditional finance. Democratic features like community polling empower each and every participant to shape how allocations and investment decisions are made, and the results are clear. Numerous academic studies have compared the financial market accuracy between professional individual traders and decisions made by collective intelligence, showing time and time again that even a group of outsiders can outperform top indices.
Related: Crypto social governance will lead to online freedom
To take a slang term from the r/WallStreetBets subreddit about the power of investing as a community, research supports that “apes together” indeed are strong, and somehow, as a collective, make better decisions than the pros. If Wall Street calls it market manipulation when a bunch of normal people band together to pursue their economic interests, maybe it’s time for a new market.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.