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Is Robinhood Getting into DeFi?

  • Robinhood has added several new cryptocurrencies to their list of investable crypto assets.

  • Of the new cryptocurrencies added, three are associated with decentralized finance.

  • Over $200 billion is locked into DeFi protocols, yet the industry remains unregulated.

  • A mix of regulation, centralization, and DeFi could bring new investors to Robinhood.



 

Last week Robinhood added to the list of cryptocurrencies that can be bought and sold on the Robinhood ($HOOD) investing platform. Compound ($COMP1-USD), Solana ($SOL-USD), Polygon ($MATIC-USD), and Shiba Inu ($SHIB-USD) were added by Robinhood, and brings the amount of tradable crypto assets on Robinhood to 11.


What was notable about the four digital currencies selected by Robinhood is that three of the cryptocurrencies have utility within decentralized finance, and one is a meme token, or a coin without utility. Robinhood’s selection could be a sign of where the company wants to go in the future, while positioning itself to take advantage of the next meme stock / meme token rally.


Robinhood was at the center of the meme stock trade in 2021, where investors bought into stocks of struggling companies that had large short positions. The immense buying by Robinhood traders and others, caused stock prices in companies like GameStop ($GME) and AMC ($AMC) to increase rapidly, forcing short sellers - those that profit when stock prices decline - to purchase the stock to cover their shorts and cut their losses. The heavy buying by the investors who were short added to the stock price’s increase. The meme stock investment frenzy also had an impact on Dogecoin ($DOGE-USD), a crypto currency with no utility at the time. Dogecoin entered 2021 trading for less than a penny per coin. The meme stock / meme coin investment trend would push DOGE to 73 cents, an all time high, and a more than 12,000% increase from where it started the year.


Source: Yahoo Finance

The meme trade was good to Robinhood. In the first three months of 2021, the company’s revenue grew to $522 million, marking a 309% increase from the same quarter a year before.


Dogecoin’s increase in price in 2021, put a spotlight on Shiba Inu, another meme coin, which was billed as the Dogecoin killer. Shiba Inu’s popularity grew in 2021, and believers in the coin pushed hard for Robinhood to add it to the trading platform. A Change.org petition, calling for Robinhood to add Shiba Inu, secured over 500,000 signatures.


During the meme stock trend of 2021, investing in Shiba Inu was difficult for investing newbies, especially those without any knowledge of decentralized exchanges. To buy the Shiba Inu token last year required several steps, such as obtaining a crypto wallet like MetaMask, funding the wallet, then finding a decentralized exchange that offered Shiba Inu for purchase. In addition, there were hefty gas fees (processing fees charged for transactions on the Ethereum network). Even Coinbase, the popular centralized cryptocurrency exchange didn’t offer Shiba Inu tokens during early 2021.


Unlike Shiba Inu, Compound, Solana, and Polygon were created with the intention of being useful. The Compound token, created by Compound Finance, is offered as a form of interest to crypto investors that stake their crypto assets on the Compound Finance platform. Solana, labeled by its fans as the Ethereum killer, operates on its own blockchain, and can execute over 60,000 transactions a second, in comparison, Ethereum can only execute 30 transactions per second. Polygon was created with the aim of lowering fees for transactions on the Ethereum blockchain. The utility of these tokens have made them relevant building blocks in the construction of decentralized finance.



What is DeFi

Decentralized Finance or DeFi, has taken aspects of traditional finance like lending, borrowing, investing, and insurance and put them on the blockchain. DeFi sites like Compound allow users to virtually lodge their crypto assets and earn interest on those assets, without having to fill out an application or sign a document. The same goes for borrowing, with a few clicks to connect a crypto wallet to the Compound site, a user can borrow money from Compound by using their crypto assets as a collateral.


Polygon’s network has provided thousands of DeFi startups a blockchain that runs parallel to Ethereum to deploy their apps on. Many of the current DeFi protocols have been built on the Ethereum network, which has caused a lot of traffic on the network, and has resulted in high gas fees for transactions. For instance, staking $50 of Ethereum on the Compound Finance site, which was built on the Ethereum blockchain, can cost $30 in additional fees. Using the Polygon network, fees for asset transfers amount to a few pennies. Solano provides another blockchain to conduct financial transactions on, also at a cheaper rate than Ethereum. Similar to how Compound Finance operates as a bank on the Ethereum network, Aave provides a similar service on several blockchains, one being Polygon. Apricot is a lending and borrowing protocol created on the Solana blockchain.





Robinhood Goes DeFi

DeFi is both exciting and speculative. DeFi platforms in their startup stage typically offer annual percentage yields that are sometimes 10x more or higher than what traditional banks offer, which is exciting for people who have a digital wallet filled with crypto whose prices aren’t moving up. Because DeFi platforms are unregulated, crypto investors take a big risk when they lock their crypto assets to a platform, and users have no recourse if a platform goes bust.


a relatively new scam type particularly common in DeFi, in which the developers of a cryptocurrency project — typically a new token — abandon it unexpectedly, taking users’ funds with them. - https://blog.chainalysis.com

DeFi sites like Compound, Aave, Curve.Fi, and Maker are a few of the well known DeFi apps providing crypto enthusiasts conservative options to make money on their crypto holdings, but there are bad actors in the space. Some sites have offered extremely high interest rates in order to draw crypto investors to their apps, only to renege on their offer and leave investors holding a bag of worthless coins (see the explanation of a rug pull above).




Companies like Coinbase and Crypto.com are centralized and regulated, but are offering DeFi features to their users. With the addition of Solana, Compound, and Polygon to Robinhood, in addition to the crypto wallet feature that Robinhood recently rolled out, some level of DeFi offering could be in the works at Robinhood. A developer recently discovered code to a beta version of a stock loan program, which would allow Robinhood users to loan out stock to other institutions who require the stock to settle trades or conduct short sales. A similar feature could be applied to cryptocurrencies, and allow crypto investors on Robinhood to stake their crypto currency in return for interest.


Though not in the same category as Compound, Polygon or Solana, the creators of Shiba Inu and the Shiba Inu community are creating an ecosystem around the token. Shibaswap is one project that was created in support of the Shiba Inu token. AMC recently announced that it would accept Shiba Inu, as well as Dogecoin as payment.


Robinhood’s Stock

Robinhood’s stock ended last week’s trading at $11.38 per share. The company went public last July at $38 per share, and traded to a high of $85 per share shortly after the initial public offering. Since trading to $85, the stock has been in decline. The all-time low for the stock is $9.93, which the stock traded down to in February. According to Tipranks, the price target for Robinhood is $17.00 per share. The target is based on 12 analysts who have offered price targets on Robinhood over the last three months. The highest forecast among the analysts is $41, with the lowest price target being $11.00.


According to DeFiLlama there is over $200 billion spread out among several hundred DeFi protocols. A DeFi offering could help Robinhood attract people to the trading app who are interested in DeFi, but are turned off by the unregulated aspect of it, as well as people who find the process of getting started in DeFi too difficult.




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