Fixing Retail Investing, Part III: The Bridge

NOTE: This is the third part of an ongoing series regarding the disconnect between what retail investors truly require in order to generate wealth and what is currently being (under-) provided in terms of platforms, products, pathways, and personnel. Part I dealt with the gamification of personal investing, the shortcomings of current offerings, and the new wave of DeFi-based ideas that could mitigate some of that disconnect. Part II offered up some simple changes to investment platforms that could create a virtuous and productive relationship between app and customer. For this part, we jump back to the end of the first post to expand upon the broader pathway of the long road to Decentralized Finance’s (DeFi) democratization of personal investing.

Positive change is an exothermic reaction.

An initial state sits at some level that, while stable, can be improved upon for a net benefit in the overall. There is an “activation energy” required to get from the initial to the final state. It requires agitation, a shaking up of the status quo, turbulence and discomfort, either over a long slow buildup or all at once in a maelstrom of shock and awe. However, once the necessary level of energy is obtained, we crest that hill of transitory discomfort and find ourselves at a final state that presents itself as a superior iteration to what once was. In chemistry traversal down this path comes in the form of energy of one or multiple types, but in general it is The Bridge: a level of progress or advancement that makes change nearly irreversible (without a larger, more unstable amount of change to force a regression).

I’ve been dancing around this concept for years, first initialized due to way too much down time to think about these things after a plethora of failed reactions during my past life as a chemistry grad student. It didn’t really crystallize for me until I went back to my hometown for my brother’s wedding earlier this month. It had been about 7 years since I had been back to Cedar Rapids, and about 13 since I had spent time in the parts of town between our lodgings and the venue. In those 13 years, Cedar Rapids was waylaid by an unprecedented flood that saw it lay waste to all neighborhoods adjacent to the Cedar River, as well as last year’s derecho that pummeled the area with 100mph+ winds for an hour straight and obliterated the city’s “Tree City USA”-level tree canopy. I lived in Cedar Rapids for 17 years, and despite having traveled nearly every corner of the city over that time, there were places and points in this month’s drives that I only recognized by the layout of the street grid. I had always considered, in an overly-dramatic and overly-sentimental sense, that the town that I grew up in had been washed away with the 2008 flood, but now I physically saw a city that was unrecognizable outside of its asphalt circulatory system. What stood in the formerly familiar was foreign.

But it was almost undeniably better.

Our almost-brand new and chic lodgings were built upon the old site of a sketchy, run-down used car lot. My brother and his partner were staying in a section of the city had previously been long-neglected but now housed a trio of cabin-esque townhouses with open floor plans and cozy living arrangements. We spent a non-trivial amount of time and money in the NewBo district: a trendy, almost hipster-y neighborhood that I would’ve killed to have when I was a frustratingly bored teenager whose idea of a fun hangout oscillated between “friend’s basement”, “the local Perkins”, and “for fuck’s sake can we please do something else besides going to Perkins?”

Cedar Rapids got dealt two very large, very full buckets of natural disaster-based bullshit in a 13-year span. It led to a lot of damage, lost property, and upended lives. But it led to a mini-renaissance in development, neighborhoods, and business. The flood and the derecho were The Bridge for an overall change for the better.

The move toward financial democratization has seen many Bridges in its past. Jack Bogle’s creation of Vanguard and the first index fund, the rise of ETFs, and the digitization of investing (both in terms of information and in terms of trading) are some of the largest Bridges that have developed in the past 50 years. Each Bridge caused a great leap forward toward evening the playing field between the haves and have-nots. Before the index fund, personal investing in “the market” was cumbersome and required either a professional or an inordinate amount of personal time and effort to build and maintain. ETFs occupied a similar space, though they greatly expanded the strategies available to individual investors without the time nor know-how to keep abreast of the latest investment research and trading. Digital platforms allowed for investors to make adjustments to their personal portfolios without the need to call brokers or advisors to place trades, streamlining the process and removing fee-harvesting middlemen.

Did these ideas just suddenly appear out of the blue one day, instantly adopted by a snowball-generating quorum of users? No, not at all. Vanguard existed for years before the concept of the index fund really took hold. Digital investment platforms were clunky and slow for years, only really being used by financial advisors and other professionals before hitting their inflection point and becoming faster and…only slightly less clunky, until Robinhood and their ilk entirely revamped the UX wrapper for the better. The fits and starts forward in financial democratization don’t appear all at once, they sit there for years, grinding away at better iterations and better overlap until BOOM: activation energy fulfilled, exothermic reaction reached, and a newer, better status quo becomes reality.

Well…kind of.

Bridges that move concepts forward, before being fully adopted and folded into every day processes, can be exploited by those in search of a quick buck. The concept of an index fund saw the rise of a class of mutual funds that shaved off an unfair portion of capital in fees while under-delivering in returns. The rise of personal investing that ETFs tapped into and democratized was exploited for years by Stratton Oakmont types who over-sold under-educated investors on pump and dump equities. The digitization of finance led to the rise of Quants, who reaped huge profits on inefficiencies in the market that led to more-accurate pricing of assets, but also nearly toppled the financial system more than once due to their overfitted models and avarice outweighing caution and simplicity. Malfeasance and purposeful blind-eyed ignorance to these exploits are a common in situ intermediate, the violent turbulence in the chemical analogue, in the pathway to a truly better state. This isn’t unique to finance: look at the dot-com bubble and its culling of the tech sector, practically a prairie fire that allowed for the rise of MAGMA (I personally advocate for replacing Netflix with the much more of-a-kind in Microsoft). This culling of Web 2.0 led to the digital-based economy that the developed world currently resides in. Because of this, it seems apt to extend this concept to the current environment surrounding and the Bridge forward for Web 3.0: the blockchain.

Blockchain, crypto, and DeFi are the Next Big Thing in terms of the World Wide Web, but we are at weird confluence of its progression. There’s a very real parallel to the irrational exuberance portion of the dot-com bubble: figurative shit is posting positive return despite making no effort to tether its valuation to anything tangible, either physically or conceptually. We are firmly in the exploitative phase of blockchain at the moment, where valuations seem to be driven almost entirely by the greater fool theory.

Why is this? Well, this weird point in technological advancement occurs when the concepts and future value of a technology are outpacing the real-world technical advancements being made. There are very cool, very amazing ideas being touted in DeFi. The issue is that the technology isn’t quite there yet to either make them feasible or scalable. We have dealt with this at Novatero: our efforts to create a DeFi version of COVES in the vein of uSTONKS ultimately fell short due to a lack of technology currently available to double-switch between the positions.

(Despite this we are running a COVES virtual track record on our Twitter account, with updates on position and total return every trading day. Check it out here!)

If the construction of a Bridge isn’t being stymied by a technological shortcoming, it probably is seeing struggles of a narrative sort. Narratives are a very powerful driver in finance, leading to leaps forward when favorable and ice skating uphill when not. Finding the right narrative to form that Bridge is a big portion of that overall progress, but it can take a long while before the momentum builds enough to do so. Bogle fought to find the right narrative for index funds for years before wide adoption followed by meteoric growth when ETFs came along. Bitcoin was an afterthought for years before it wasn’t.

DeFi right now is facing a lack of a bridging narrative between itself and traditional finance. A quick survey of FinTwit (Financial Twitter) sees a separation between traditional and decentralized, with traditional investment/fund managers exploring crypto assets as a technological curio instead of a legitimate step forward in finance. And why wouldn’t they? It’s a realm that, on the surface, seems to be nothing more than NFT drawings of low-res monkeys and dog-based coins. There is no narrative tether between their day jobs and their free time curiosities. DeFi isn’t mundane, isn’t day-to-day, isn’t just quite structural backbone material just yet.

DeFi needs a Bridge.

Look at rideshare companies. They were initially marketed as essentially taxis, but. Or short-term lodging solutions like Airbnb and VRBO. Hotels, but. Or even Tesla (if we ignore the charging station network). A car company, but. DeFi needs its own but. SPY/VOO/SPLG/IVV/etc. but. VIX/UVXY/VXX/etc. but. An established concept but built on fresher, more adaptable, more advanced bones. Exchanges like Binance or Coinbase are only a partial solution: a marketplace can only go so far if all its wares are ripoffs. COVES was built with this in mind: what if you could directly invest in VIX in an effort to hedge within a long-term, buy-and-hold index fund? GAIA and EASE can fit into this as well: instead of dealing with the laborious inefficiencies of buying and selling in low-volume exchanges, what if you could tether to a DeFi representation of the market instead?

Novatero is striving toward this Bridge in our efforts to move forward. I’ll be quite honest: it absolutely sucks right now. It is perpetually frustrating to see the land across the chasm and be unable to reach it either due to a lack of support or resources or just plain belief in the idea itself. I go through long stretches of frustration and self-questioning. “Is this the wrong path?” “Am I wasting my time?” It has required a level of self-assurance and, frankly, pigheaded stubbornness to keep pressing forward. Are we correct? Will our convictions be vindicated in time? The only thing we can do right now is double-check our methodology, press forward, make valuable connections, and hope that our work serves as a catalyst in some small way to getting DeFi over the hump.