Tokenized Stocks: Market Design, Risk, and Adoption Outlook
TL;DR
* Trend: Backed Finance (xStocks) and Robinhood EU have launched tokenized U.S. equities, spurring interest in on-chain stock trading. The long-term potential awaits broader adoption.
* Upside: 24/5 or 24/7 access, multi-asset exposure, DeFi composability, zero on‑chain tax.
* Risks:
* Off‑Hours Liquidity & Volatility: Market makers bear unhedged risk, widening spreads and causing weekend price dislocations.
* Unclear Retail Appetite: Crypto users haven’t historically driven strong equities volume on-chain yet.
Future Potential:
* DeFi Composability: Using stock tokens as collateral, leverage, yield, etc.
* On‑Chain Primary Issuance: Direct token on-chain listing (e.g. SpaceX token stock via Robinhood).
* Multi‑Asset Leverage Trading: Perpetual contracts on stocks, commodities, indices with high-leverage.
Introduction
Tokenized securities are revolutionizing investing by digitizing assets like stocks and ETFs on blockchain, enabling 24/7 trading, multi-asset exposure and DeFi compatibility. Driven by blockchain and regulatory advancements, Backed Finance’s xStocks and Robinhood’s stock token are at the forefront, capitalizing on these regulatory and technological tailwinds.
This article dives into these projects, analyzing their opportunities, risks, and what the future outlook might be like for this landscape.
Project Analysis
xStocks
xStocks using a Jersey SPV & Swiss parent company structure with approved participants (e.g. Kraken, Bybit) conduct KYC‑mint/redeem 1:1 $USDC to real shares. It enables 24/7 trading on DeFi and 24/5 on CEX; secondary prices pegged by oracles and AP arbitrage, but weekend/holiday deviations are possible. No voting rights; dividends auto‑reinvest as more tokens; splits handled off‑chain. But it also has high issuance/redemption fees while it has off‑hours illiquidity issues and may have regulatory caps on share accumulation.
* Project Details
* Backed Finance designates certain entities as “ Approved Participants” (APs) for its issuance and redemption process. APs pay or receive $USDC to mint or redeem xStocks, and they act as the primary suppliers of these tokens to secondary markets, where the share certificates of such underlying stocks are put to custodians.
* Once minted, xStocks (a rebasing token) trade 24/7 on DeFi venues — and 24/5 on Kraken — instead of being restricted to stock‑market hours.
* Each asset has its own price oracle to supply timely price feeds.
* xStocks are launched on Kraken and Bybit for KYC’ed users as well as on multiple DeFi protocols on Solana like Kamino and Jupiter.
* Backed Finance charges a 25 bps fee when issuance and redemption happen.
* Price Pegging Mechanism
* The price of the xStocks at issuance/redemption is determined by the price the brokers execute the trades.
* For the secondary market, AP will do arbitrage trading to ensure the xStocks are the same.
* But there is likely to be a price deviation over the weekends and holidays when the stock market is closed and the price of xStocks depends on Oracle from Chainlink, not real asset price.
* Ownership and Corporate Actions
* The tokenized stocks only convey the value of underlying collateral (real stocks) where the ownership and voting rights are not conveyed to tokenized stock holders.
* xStocks holders receive dividends by having the dividends reinvested into the same token (after tax) and their xStocks balances increase to reflect the dividend.
* Same shall happen for split and other corporate actions (but no public info). Backed Finance shall issue tokens and send them to users.
* Legal Set-up
* Backed Finance adopts a dual structure:
* Parent company is a Swiss-based company under Swiss DLT Act, enabling Backed to develop and manage the operation of its platform while ensuring adherence to standards.
* A Jersey SPV is also established for issuing tokenized products with 0% corporate tax and a well-established legal framework.
* But the global nature of the internet raises concerns about inadvertent access by users in restricted regions.
* Also, there could be a potential cap for Backed Finance to acquire a certain company’s shares. Though not addressed publicly and right now, the xStocks are small in size, but ESMA or SEC may restrict or regulate large share acquisitions.
Robinhood
Lithuanian‑licensed derivative contracts on Arbitrum (soon own L2) with 24/5 trading for EU users. It is pegged to Nasdaq price feeds and only available inside Robinhood’s “walled garden.” Dividends paid in cash and trading pauses during actions. Users have no voting rights and real ownership of the stocks.
* Project Details
* Robinhood rolled out a set of tokenized shares based initially on Arbitrum with plans for Robinhood’s own L2 blockchain. It allows its EU users to trade on such assets with benefits like 24/5 trading and low fees.
* The products are financial derivative contracts offered by Robinhood.
* When users purchase contracts, Robinhood issues tokens and simultaneously places an off‑chain trade for the underlying shares with brokers.
* The share certificates are held by a U.S.‑licensed custodian, and Nasdaq provides the price feeds.
* Apart from the public traded US shares and ETF, Robinhood also introduced tokens for private companies like SpaceX and OpenAI.
* Right now, the assets are only available in Robinhood, making it a gated garden.
* Price Pegging Mechanism
* Compared to xStocks, Robinhood only needs to use Nasdaq’s price feeds as the mark price for the products where Nasdaq can provide the price feeds on a 24/5 basis.
* Yet still there could be potential extended market hours risks, since the off-hour trades on stocks normally experience low liquidity, and high volatility
* Ownership and Corporate Actions
* Robinhood will directly handle corporate actions for the users, such as adjusting user holdings proportionally in a stock split or sending euros to users upon dividend distribution.
* Also, trading will be unavailable during corporate actions.
* While the stock token is only a financial contract, users will not have the voting right and ownership of the underlying stocks.
* Legal Set-up
* The stock token is under MiFID II as derivatives in the EU where the issuer is Robinhood EU, a Lithuanian investment firm licensed and regulated by the Bank of Lithuania. Robinhood also stated that “when buying stock tokens, you are not buying the actual stocks — you are buying tokenized contracts that follow their price, recorded on a blockchain.” to avoid any ambiguity for direct ownership of the stocks.
* Robinhood also proposed to SEC a federal framework for RWA assets, which is under review.
Benefits and Risks
* Several benefits we observe that stock tokens can bring:
* Accessibility: having crypto users all around the world access to US stocks and ETFs;
* No tax: there are still no taxation regulations for on-chain activities yet.
* DeFi Composability: Bring valuable assets like stocks on-chain to unlock more use cases by integrating DeFi protocols.
* BUT providing access to stocks on crypto exchanges is nothing new.
* FTX provided stock trading in May 2021 where no following report came out indicating it had decent trading amount.
* eToro and Robinhood started its business providing investors access to commodities, fx, stocks and ETFs, but it was crypto that made both platforms profitable, not the other way around.
* Besides, stock token also faces After-hour Challenges where tokens can be traded 24/7 or 24/5 while underlying stocks cannot, posting price risks to either the market makers or the users and would cause high volatility and liquidity may also drop. When the market reopens, token will align quickly and cause further losses.
* Also worth following up is that we see the volume for the xStocks was about 6.6Mln usd on day 1. Would be a straight-forward metric to track if the real trading volume is gonna sustain
* While the challenges need to be fixed, there are also multiple non-exhaustic potentials pending to be unlocked:
* DeFi Composability: The utilization of stock tokens as collateral in DeFi protocols enables loop-borrowing, leverage trading, and other financial activities, attracting both retail and institutional investors. This functionality allows investors to hold tokenized securities, such as xStocks, to capture the appreciation of underlying assets while engaging in speculative strategies. DeFi platforms like Kamino have announced support for xStocks, signaling growing adoption. The continued integration of tokenized securities into additional DeFi protocols, alongside on-going user demand, merits close monitoring.
* Primary Issuance: Projects such as Robinhood EU, which offers tokenized securities for private companies like SpaceX, and we also observed initiatives pursuing direct SEC registration for on-chain trading, enhancing market access and capital efficiency for high-value assets. These pioneering efforts are expanding the scope of tokenized securities by bringing diverse and valuable assets onto blockchain platforms. However, the alignment of such innovations with evolving regulatory frameworks remains a critical consideration.
* High-leverage, Multi-asset Trading: On-chain platforms enable trading of perpetual contracts on stocks, commodities, and indices with high leverage, providing diversified asset exposure and meeting traders’ demands for capital efficiency and flexibility. These decentralized, non-custodial venues facilitate multifaceted access to tokenized securities, allowing investors to capitalize on market opportunities across various asset classes.
Disclaimer