We are seeing some of the things we've discussed for years slowly playing out. From institutional adoption of crypto as an added investment to the adaptation of numerous traditional companies to the technology.
I think it's interesting that researchers at Galaxy Digital would choose to call this move a threat to “TradFi” revenue even though companies like Robinhood itself is a traditional finance company that only began offering crypto trading in January, 2018.
At the same time, it's easy to see that it's more about focusing on the trading environment losing value than the individual companies themselves, and that makes sense because the difference is essentially the system.
TradFi = centralized trading environment enforced through asset custody
The environment is sometimes exchanges like NYSE, and the enforcement happens through brokerage apps.
DeFi = decentralized trading where the assets are self custodied and smart contracts handle matchmaking or trade execution.
That said, this also brings some of our widely held predictions that some TradFi companies will have to adapt to the DeFi’s technology quickly and this would directly threaten the revenue of everyone left behind.
Robinhood happens to understand exactly how to play the first mover game by ensuring that there are incentives to pull users in.
Robinhood’s push into real-world assets (RWAs) is gaining momentum, with the digital brokerage launching a tokenization-focused layer-2 blockchain and introducing stock token trading for users in the European Union.
Built on Arbitrum, the new layer-2 network will enable the issuance of over 200 US stock and exchange-traded fund (ETF) tokens, giving European investors access to US assets, Robinhood announced on Monday.
Robinhood’s stock tokens will have zero commissions and be available for trading 24 hours a day, five days a week. — Cointelegraph report
Investors and traders essentially stand to benefit from instant trade settlements, zero commissions (a long-held strategy of Robinhood) and the 24 hours trading, all of which are missing from off-chain trading systems relying on major TradFi exchanges like NYSE.
Galaxy Digital weighs in
In a Friday report, Galaxy Digital said Robinhood’s tokenization move removes assets from traditional market channels and brings them onchain, directly challenging the concentrated liquidity and activity that give major TradFi exchanges like the NYSE their edge.
“This directly challenges the deep concentration of liquidity and activity that gives major TradFi exchanges (e.g., NYSE) their competitive advantage,” Galaxy Digital wrote.
The platform’s architecture mirrors rollup models like Coinbase’s Base, giving Robinhood complete control of its sequencer and the ability to capture all transaction fees. Galaxy estimates Base generates over $150,000 in daily sequencer fees for Coinbase. — Cointelegraph report
As we can see, by using a layer 2, Robinhood aims to generate additional revenue on-chain, which sort of offsets its revenue loss for offering zero-commission, also, it gives it some control over the tokenized stocks, while benefiting from other features of a scalable blockchain.
With proper execution, this could significantly pull trading activities from off-chain systems as Galaxy Digital suggests, while also acting as a means for stocks to be used across the decentralized finance ecosystem.
That said, It should be expected that even these strategies of L2s being adopted by TradFi players for the control it brings will eventually become ineffective. As TradFi adapts and allows value to move on-chain, alternative players will create means to make it stay there and that will generally involve flowing to more decentralized ecosystems.