Since the start of 2021 there have been a variety of “meme” stocks which have gained significant attention due to the behavior of short sellers, and the capacity for retail investors en masse to compete with institutions.
Short sellers in the traditional market bet that a stock will significantly underperform its current position in the long run. Hindenburg Research does a tremendous job of successfully establishing their shorts, so successfully that their public announcements will often single handedly drop a stock’s price, as seen with Draft Kings and Nikola.
Unfortunately for those who invest in stocks that are the targets of substantial shorts, the loss of value may not only be sudden but permanent if the retail masses do not see value. Short sellers, influential whales, and retail chaos are also present within DeFi, and can also have substantial impact on the price and future health of a token, but whether traditional markets or DeFi, both have many different responses to significant short activity on single or multiple assets.
DeFi uniquely operates 24 hours a day and around the world, creating 24 hours of intensity, requiring investors to have contingency plans for activity that takes place when they are not online. Fortunately for the DeFi investor, Pharo can hedge against a possible short price impact, eliminating concerns when investors are sleeping (aren’t online).
We aim to use blockchain technology to help make the sale and purchase of risk more efficient, enable lower operational costs, and provide transparency into the industry. Blockchain can provide the means to disinter-mediate the market with a peer-to-peer risk platform that helps us act as society’s safety net. We envision new individuals building their own markets and products on top of the Pharo protocol. In this case sophisticated investors can come together to protect themselves from short depressions within the 24 hour investment cycle that is DeFi.
As a follow up to this article we strongly recommend reading about protecting yourself from Rug Pulls, another event where investors lose both value and trust: https://pharo.medium.com/cover-your-rug-pull-6640a2efd3f6
