Original author: Fishmarketacad
Original translation: AididiaoJP, Foresight News
Stock tokenization is not a new term, but because Robinhood announced the launch of U.S. stock tokenization services for European customers and even planned to develop its own L2, stock tokenization has once again become the focus of the market.
Most people still have a limited understanding of stock tokenization. This article will try to fully explain the basic knowledge of stock tokenization, covering:
What is Tokenized Stock and How It Works
Why do we need tokenized stocks?
Comparison of spot and perpetual contract tokenized stocks
The future of tokenized stocks
1. What are tokenized stocks? How do they work legally?
Before we delve into the differences between spot and perpetual tokenized stocks, let’s first understand why tokenized stocks are gaining attention again.
Regulatory and legal uncertainty
While tokenized stocks present technical challenges, their legal challenges are more complex. For many years, due to the lack of clear rules in major jurisdictions such as the United States, crypto companies have had to provide related services in crypto-friendly regions. The Crypto Act provides a clear legal framework for the issuance of tokenized securities, introducing the legal concept of a book-entry system (Wertrecht), which allows securities to replace physical stock certificates with digital records. The Crypto Act provides legal feasibility for tokenizing real-world assets.
Backedfi in action
Backedfi issued “bTokens” in Liechtenstein, which are ERC-20 tokens that represent fully collateralized tracking stocks. Each bCOIN token corresponds to a real Coinbase stock held by a custodian. This structure separates the regulated issuance process from the permissionless trading in the secondary market.
Users need to pass full KYC/AML to mint or redeem bTokens directly. These tokens are freely transferable and traded on DEX or a few regulated exchanges. When qualified investors redeem bTokens, they are settled in cash value rather than the underlying stock, because Backed brokers will sell the underlying stock publicly and convert the proceeds into fiat currency or stablecoins such as USDC after deducting a small redemption fee. Redeemed bTokens will be destroyed immediately to ensure 1:1 redemption.
bTokens do not represent ownership or voting rights of stocks, but only represent contractual claims on the economic value of the underlying stocks. If Backedfi goes bankrupt, the underlying stocks will be held in custody by an independent third party and isolated from the companys assets. bToken holders can recover the value through the liquidation process as creditors of the issuer, but the process is complicated.
Who can trade these tokenized shares?
bTokens is regulated under European law (specifically in Liechtenstein and Jersey) and is not registered with the U.S. Securities and Exchange Commission.
After the tokens are minted, they can be traded on DEX without permission, and DEX should block access from US users. The core challenge is that issuers have clear compliance obligations, but access control in the secondary market is difficult to achieve a comprehensive ban. For US users, bypassing restrictions and trading these tokens is still a high-risk non-compliant behavior.
Robinhood’s Model
Robinhood’s tokenized stocks take a completely different path, embedding blockchain-related technologies into its own trading platform, maintaining its centralized, user-friendly operation interface. Robinhood stock tokens are not direct claims on stocks, but derivatives constructed in accordance with MiFID II regulations. When users “buy” stock tokens, they are actually signing a contract with Robinhood Europe to track the price of US stocks.
The underlying assets are held by licensed institutions in the United States, and the tokens are essentially recorded on the blockchain (initially Arbitrum, with plans to migrate to self-developed L2). This structure allows Robinhood to provide a good user experience while also having full control over the assets. Key elements include:
Closed ecosystem: Users can buy, sell and hold tokenized stocks in the Robinhood app, but cannot withdraw them to external wallets or other platforms, limiting their composability in the DeFi ecosystem.
24/5 Trading: Makes up for the trading time difference between European and American markets, allowing users to respond to market dynamics outside traditional trading hours.
Seamless operation: Corporate actions such as stock splits and mergers are automatically processed, and cash dividends are automatically paid in Euros without exchange rate fees, simplifying the user experience.
Robinhood essentially uses blockchain as an efficient internal ledger to provide exposure to US stock derivatives. This approach prioritizes ease of use and compliance within its platform rather than the open ecosystem of DeFi. Although the closed system provides a secure experience for retail users, it also sacrifices the composability of DeFi.
By preventing users from withdrawing their tokenized shares, these tokenized shares cannot be used as collateral, liquidity, etc. in the broader on-chain economy. This provides other platforms with an opportunity to overtake, not only to compete for users, but also to build truly permissionless and interoperable tokenized assets, thus forming the foundation of an open DeFi ecosystem.
Regulatory Summary
Global regulation has given rise to two mainstream stock on-chain models:
1. Spot tokenized stocks
Robinhood and Backed.fi all use this model, the core of which is that each on-chain token corresponds to the real stock held by the custodian. The difference is:
Crypto-native companies such as Backed.fi purchase stocks (such as TSLA) which are held by custodians and mint corresponding tokens (such as bTSLA) on the public chain. Tokens can be freely transferred and combined, but only qualified investors can mint/redeem directly.
The stock tokens provided by Robinhood to European customers are derivatives under MiFID II. The underlying assets are held by US licensed institutions. The tokens are on-chain IOUs and cannot currently be withdrawn to external wallets.
2. Perpetual Futures
This model does not involve direct ownership of the underlying assets and is in a legal gray area.
How it works: Decentralized perpetual contract exchanges face significant legal risks due to the listing of stock perpetual contracts. US and European regulators view securities-based derivatives as regulated products that require specific licenses. To avoid risks, decentralized perpetual contract exchanges are usually registered in crypto-friendly jurisdictions and prohibit access by users from restricted countries (such as the United States).
These two models have their own advantages and disadvantages, meeting different user needs and risk preferences.
2. Why do we need tokenized stocks?
Why do we need tokenized stocks? The answer depends on who and where the user is.
Bullish case: More open global markets
The strongest argument for tokenized shares is their potential to democratize financial access on a global scale.
Global financial inclusion: European and American stock market participation rates are high, but only 5-15% of users in other regions can invest in U.S. stocks. Tokenized stocks allow users in Southeast Asia or Latin America to gain exposure to U.S. stocks with just a mobile phone and the Internet, without having to meet the funding requirements of traditional banks.
24/7 market access: US stock trading hours are not friendly to Asian users. Tokenized stocks break this limitation and allow global users to trade according to their own strategies.
Permissionless innovation: Tokenized shares are open financial primitives that developers around the world can use to build new applications, such as self-custodial brokerage applications, complex structured products, or automated income vaults, which are innovations that traditional brokerages cannot achieve.
Bearish case: Niche products in developed countries
For ordinary investors in developed countries, there is no urgent need for tokenized stocks:
Does it solve practical problems? European and American users can directly use low-cost, easy-to-use platforms such as Robinhood. Although the concept of DeFi self-custody is strong, setting up wallets, gas fee management, and the risk of being hacked are still a big threshold for the mass market.
Liquidity fragmentation: The on-chain trading experience is poor, and large orders have high slippage. Unless the on-chain market liquidity is close to that of the traditional market, users will face the risk of impermanent loss.
The groups that are most in need of stock tokenization at present are those excluded from the traditional financial system. For developed countries, its true value will be gradually released as the DeFi ecosystem matures and the advantages of composability emerge.
3. Tokenization of spot and perpetual stock contracts: Utilities and challenges
After understanding the legal scope and technical structure of on-chain stocks, we can explore the trade-offs between the two in actual use. There are two main models in the market:
Asset-backed stock tokens: ownership of stocks
Synthetic Perpetual Contracts: Designed for Capital Efficient Trading
Although there is a third model in theory (such as Mirror Protocols collateralized spot tokens), it has not been recognized by the market due to the high systemic risk of its supporting mechanism. Therefore, this article focuses on the first two models.
Tokenizing Spot Stocks: Utilities and Challenges
utility
Currently, on traditional brokerage platforms, users can only use stock portfolios as collateral for margin loans, which has limited uses. The core advantage of tokenization lies in composability, which transforms static assets into dynamic currency legos and realizes use cases that traditional finance cannot achieve:
Autonomous income generation. Users can deposit tokenized stocks into the income vault, which will pledge them to the lending protocol to lend stablecoins and automatically compound the returns to the stock holdings through the income, turning passively held stocks into dynamic income-generating assets.
Permissionless structured products. On-chain protocols enable complex trading strategies. When tokenized stocks mature, option protocols will emerge, and users can execute option strategies by depositing tokenized stocks and obtain profit opportunities independent of the crypto market.
Liquidity provision. Users can pair tokenized stocks with other assets to provide liquidity and earn a share of transaction fees (but bear the risk of impermanent loss).
Promote arbitrage and market efficiency. Tokenized stocks build a 24/7 bridge between the chain and the traditional market. When market makers find that the price of Apple tokens on the chain deviates significantly from Nasdaq, they can lock in risk-free profits by buying undervalued assets and selling overvalued assets, driving prices back and enhancing market liquidity.
challenge
There are still major obstacles on the development path:
Liquidity fragmentation. This is the most pressing issue. Currently, the liquidity of tokenized stocks is far from enough to support large transactions. Traditional markets can easily handle million-dollar orders, while a $100,000 transaction on the chain will result in a slippage of more than 1%.
Oracles and market closures. DeFi relies on oracles to obtain asset prices, but when traditional markets are closed, how is the real price determined? Take Pax Gold (PAXG) as an example. During the geopolitical turmoil, its price soared 20% due to low trading volume. If the oracle regards this temporary fluctuation as the real price, it may trigger a chain liquidation of the lending market and perpetual DEX, forming a systemic risk.
Smart contracts and technical risks. From token contracts to cross-chain bridges to DeFi protocols, every layer of the technology stack presents new potential points of failure. Even a historically secure protocol like GMX v1 could be attacked years later.
Counterparty and custody risks. Even with fully collateralized spot tokens, users still need to trust the issuer (such as Backedfi or Robinhood) and its custodian. Although these institutions are regulated, they are not risk-free. If problems occur, users will need to go through lengthy legal procedures to recover the value of their assets.
Corporate action processing. Stock splits, dividend payments, mergers, and other events cannot be executed autonomously on the chain and require the intervention of centralized operators.
Tokenizing Perpetual Stock Contracts: Utilities and Challenges
Perpetual contracts do not pursue asset ownership, but instead focus on providing pure capital-efficient price exposure, making them the tool of choice for active traders.
utility
The core advantages of Perpetual DEX are concentrated in trading scenarios:
Advanced trading functions (leverage and short selling). Single click to trade long and short, convenient for high-frequency trading.
Capital efficiency and rapid market creation. Compared with spot tokens that require custody of millions of dollars of underlying stocks, perpetual DEX only needs an AMM fund pool with sufficient TVL to launch the market, which can be more flexible in listing diverse assets.
Simplified trading experience. No underlying asset means no need to deal with corporate actions such as dividends and stock splits, and traders only need to focus on price fluctuations.
Delta neutral return strategy. When spot tokens and perpetual contracts coexist, a market neutral return strategy can be constructed. For example, when the funding rate is positive, buy spot and short perpetual contracts to achieve capital-efficient cash arbitrage (similar to Ethenas strategy).
challenge
The unique risks of perpetual contracts cannot be ignored:
Lack of ownership and composability. Perpetual positions are usually not withdrawn, loaned, or used as collateral in other DeFi protocols, sacrificing composability in exchange for transaction efficiency.
Funding rate complexity and holding cost. When market sentiment is severely biased, longs need to continue to pay fees to shorts. For stocks with low volatility, the funding rate may exceed the daily price fluctuations, eroding profits, so perpetual contracts are more suitable for medium-term and short-term transactions or Delta neutral strategies.
Extreme oracle and liquidation risks. The system is completely dependent on oracle prices. When traditional markets are closed, if the oracle obtains abnormal prices from illiquid sources, it may lead to instantaneous cascading liquidations.
Continued regulatory pressure. As a securities derivative, perpetual DEX is usually registered in offshore jurisdictions and circumvents US and European regulation through geo-blocking, but it always faces the survival risk of policy surprises.
4. The future of stock tokenization
Robinhood’s entry has pushed this field from a niche experiment to a mainstream track. In the next year, we will see:
Liquidity battle. Each platform will compete for market makers and trading traffic through incentives such as revenue and points airdrops to solve the chicken and egg problem.
Regulatory path exploration. More issuers will follow the Liechtenstein model, and the regulatory frameworks in Hong Kong and other places may also become models. Tentative cooperation between traditional financial institutions and compliant crypto companies will emerge.
Composability practices, mainstream lending protocols may accept blue chip tokenized stocks as collateral, and automated yield vaults and basis trading strategies will emerge.
The perpetual market is maturing. Listed assets will expand from US technology stocks to Hong Kong stocks and commodities, and the upgrade of oracle machines and risk management systems will become a technical focus.
If the vision of encryption is to put everything on the chain, stocks will definitely be an important piece of the puzzle, and this experiment is worth looking forward to.
