DeFI: A Possible Solution to the Shortcomings of Centralized Brokerages

The crazy Gamestop mania stock surge revealed a lot about the broken nature of today’s financial ecosystem. What started as a short squeeze to edge out institutions has given rise to a new era of investors, although regulators are now watching brokerages such as Robinhood more closely. This leading brokerage made headlines with investors flocking to buy the Gamestop shares, after which it would later place a temporary restriction on trading these shares. 

According to Robinhood, the main reason for taking action was a sudden rise in the deposit amounts required by clearinghouses. Nonetheless, investors have taken the brokerage to court with over 90 lawsuits filed since the Gamestop saga. Most of the lawsuits claim that the brokerage manipulated the market by restricting certain trading shares, resulting in losses and missed opportunities. 

Going by the latest developments, it appears that Robinhood is allegedly involved in market manipulation and selling clients data. The famous brokerage has come under pressure recently following claims that it makes most of its revenue from selling clients data to institutions, putting them in possible violation of the California Consumer Privacy Act (CCPA), whose mantra is “Do Not Sell My Personal Information”.

Are Brokerages Selling Your Data? 

With so much activity online, data is gradually becoming the new gold. Companies such as Robinhood seem to understand the value proposition of information well and navigate around the fine prints to remain safe. The brokerage offers traders a commission-free trading environment while making money by selling their data. 

According to a recent report by a compliance firm dubbed Clym, Robinhood and other brokerages make a significant part of their revenue through a practice known as ‘payment for order flow’ (PFOF). Ideally, these firms are paid a small payment by other institutions in exchange for their clients’ data. 

Notably, the brokerages also hedge on their regulatory risks through user agreements that favour them in a dispute. For instance, Robinhood’s user agreement features a clause that requires the settlement of disputes through arbitration instead of the civil system. This is currently a challenge for the Gamestop investors who recently sued the firm. 

While the likes of Robinhood may have dominated ‘gamified’ trading in the past decade, the Gamestop saga has triggered a shift to decentralized markets such as crypto. Investors are now looking for options out of the traditional finance ecosystem, which is currently in a chokehold by big institutions and central authorities. 

A New Era; Decentralized Trading Platforms

Cryptocurrencies are no longer just a fantastic possibility but a gradual reality. This market has grown into a trillion-dollar industry, with projects coming up every other day. One area that witnessed massive growth in the past year is Decentralized Finance (DeFi), a crypto niche whose focus is to decentralize financial services by eliminating the need for third-party intermediaries such as brokerages.  

DeFi innovations that eliminate the pains of traditional brokerages include Polkadex, a peer-to-peer orderbook-based crypto exchange. This DeFi protocol is built on Substrate and combines the functionalities of centralized and decentralized exchanges to give users a seamless trading experience. 

In addition to its decentralized orderbook, Polkadex also features a decentralized KYC option. This function allows users to store personal information on their wallets, making it easy to liaise with financial authorities when the need arises. Going by its value proposition, Polkadex is among the DeFi projects that pave the way for a new era of decentralized brokerage services.  

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Summary 

As the financial market grows older, it is becoming evident that a revolution to digital ecosystems is inevitable. Currently, most people in the world interact with the digital payment ecosystem in one way or another; those fortunate enough have tasted the fruits of decentralization by using crypto assets such as Bitcoin and Ether. 

The digital assets trend is now gaining traction amongst institutions, with large banks moving to consider issuing crypto services. However, KYC remains a significant hurdle towards this adoption. DeFi protocols that will have integrated KYC features before mainstream adoption stand a chance of being the compliant industry pioneers. That said, the journey to mainstream adoption is just getting started!