Crypto Coordination Gives Retail an Edge to Beat Wall Street

DAOs and decentralized funds present new models for retail to outcompete.
With @tomscaria5 min read

Digital Investing communities, like r/wsb, have allowed retail investors to coordinate to form a collective edge so they can compete with institutional investors. These network effects driven venues already offer inherent advantages compared to hedge funds: talent can be aggregated and due diligence conducted globally at scale. While r/wsb represents the primordial state of retail investment coordination, DeFi investing communities, like IndexCoop and PieDAO, show a glimmer of the future. As open retail investment communities adopt DAOs and decentralized funds, they will collaborate to outcompete Wall Street’s closed asset management model.

I. Advantages of Open Communities

Online investing communities possess intrinsic advantages that allow for them to be a venue where retail forms an edge. Let’s begin by exploring the foundation offered by web2 communities. 

Aggregate talent at greater scale than closed funds

Wall Street funnels top college graduates into financial hubs based on some combination of nepotism and merit. It's indisputable that the birth lottery is a factor. By contrast, talent aggregation on r/wsb is much more fair. Anyone with an internet connection can join regardless of their domicile or social status; in fact, r/wsb members are primarily pseudonymous. Furthermore, progression within the community is meritocratic. Members curate each other through Reddit’s rudimentary reputation system, Karma. Those who consistently add value to the collective edge gain higher levels of visibility.

As open retail investment communities adopt DAOs and decentralized funds, they will collaborate to outcompete Wall Street’s closed asset management model.

Crypto advances the equality initiated by digital communities. On web3, individuals own their data. An individual’s on-chain data can be used to calculate their reputation. This further empowers the pseudonymity previewed by digital communities by allowing for continuity of reputation across different applications. New investment superstars rise to the occasion as communities scale talent acquisition and encourage meritocracy. 

Information networks compound knowledge and amplify narratives

Investing communities facilitate due diligence at scale and encourage communal learning. Hedge funds thrive on secrecy and conduct diligence in private. By contrast, investing communities are network effects driven. Content is curated cooperatively as proposed ideas are evaluated and upvoted. Collective knowledge compounds and investing communities become a key information network attracting amateur investors. As their competence improves, investors contribute to due diligence, grow in reputation and add value to the collective edge of the community.

While information becomes vetted and grows into theses, investing communities present a stronger medium for amplification. This is important in a market that’s increasingly memetic. Meanwhile, traditional media unfairly curates and amplifies narratives that cause less initiative. For example, CNBC invites hedge fund elites like Bill Ackman to discuss his activist longs and shorts. On CNBC, Ackman reaches a disjointed audience and causes a limited percentage of viewers to take action. On r/wsb, narratives swing markets by rallying a community of ideologically aligned investors. 

A defining moment in the influence of investing communities in markets.

The collective power of the retail investor was exemplified earlier this year with $GME and r/wsb. A virtual community mobilized around RoaringKitty, Keith McGill’s pseudonymous handle, to compete in the institutional finance game. McGill was never part of Wall Street’s funnel; He is a hidden investment talent who increased his financial IQ and built a reputation within r/wsb.  McGill discovered an opportunity and shared it with the r/wsb community, where members conducted due diligence at scale. McGill’s verified thesis then propagated through a community which shares a risk taking ideology. This allowed for RoaringKitty’s narrative to result in action. 

r/wsb transcended Reddit that day as mobs of retail investors rallied around $GME impairing hedge funds like Melvin Capital. That said, coordination around RoaringKitty's insight was unstructured at most. Furthermore, RoaringKitty didn’t directly monetize the same way Bill Ackman does managing investor capital. 

II. Crypto empowers communities to compete with hedge funds

The openness, meritocracy, and transparency encouraged by r/wsb previews how retail could play institutional financial games. Crypto infrastructure like DAOs and decentralized funds can further empower investing communities to form collective funds that thrive on network effects and the wisdom of the crowds.

DAOs x Decentralized Funds

DAOs are software-enabled organizations that can manage pools of capital - they transform the ideological alignment of communities into economic coordination. Structure around investment coordination has only been feasible for Wall Street fund managers who have the ability to form legal entities and raise outside capital to offset administration costs. Decentralized funds abstract away operational complexity and DAOs allow for scalable coordination that can take advantage of the processing power of crowds.

DAO members share their research/strategies and conduct due diligence in the open. The entire decision-making process is transparent with guardrails protected by code, reducing politics and encouraging accountability . Furthermore decision-making can occur at mass scale. As DAO members reach consensus, they can implement trades on pooled capital. Broader community members can invest capital allowing DAO members to earn management fees. Performance can be attributed to single members who can be compensated deterministically as per the rules of the DAO.

Furthermore, a community token can incentivize community members to vote on the direction of the fund. DAO operated funds represent the next wave of fund evolution -- network funds.

Conclusion: Retail Investing is becoming a financial MMORPG

r/wsb is a canary in the coal mine for the increasing role of retail investors. There are many trends coagulating in the secular decline of the Wall Street investment manager and investment advisor. It's more than the meritocracy fostered by communities, the compounding knowledge of the crowds, and superior capital coordination models enabled by DAOs. A seismic demographic shift of capital is underway as Gen Z grows in wallet share. This is a tech forward generation that learned about investing through the crypto bubble of 2017 and has low trust in institutions. 

Investing is becoming a financial MMORPG and this is why we're excited to be building Prysm. We're building a social investing experience that commits to decentralized infrastructure and encourages collaboration. Prysm is an open platform to share, discover and monetize investment opportunities — you can form sub communities and coordinate with like-minded investors. Let’s give retail the edge they deserve. Join the movement here.