Tokenized Equities (Here We Go Again)

Seemingly every week, yet another protocol announces they are putting equities on-chain.

We are living in the dark ages, they say. Blockchain is here! Tokenize! They're creating worse versions of existing products for users who don't want them, then wondering why nobody shows up to trade.

Here's why tokenized equities are fundamentally broken.

Fundamentals

Tokenized equities are blockchain tokens that represent ownership in traditional stocks.

The pitch sounds reasonable at first.

The issuer buys e.g. AAPL 0.00%↑ shares through normal markets, issues blockchain tokens backed by those shares, and lets you trade the tokens on crypto exchanges.

Crypto exchanges give access to 24/7 trading and near-instant cross-border settlement, theoretically democratizing access to markets for people who wouldn’t otherwise have access. We can even do it on DeFi (if we’re into that) while maintaining exposure to real companies.

Yet the tale of the tape is bleak.

FTX had tokenized stocks - we know how that ended. Binance quietly discontinued them shortly after launch. Mirror Protocol created synthetic stocks on Terra, which was nearly as spectacular a failure as FTX.

Every major attempt has either collapsed, been abandoned, or exists in a state of zombie-like irrelevance.

Tricky Arbitrage

Traditional markets work because arbitrage keeps prices aligned. If XYZ 0.00%↑ trades at $150.00 on NYSE and $150.01 on Nasdaq, arbitrageurs will eliminate that penny difference in microseconds. The end user doesn’t care where they trade; the market handles any fluctuations for them.

The key part: they can settle at Nasdaq with stock bought on NYSE, seamlessly. The U.S. securities clearing system just works.

The analogue in the tokenized world, however, is what Nathan Allman from Ondo Finance diplomatically calls a "high-friction minting and redemption processes". In other words, it’s expensive.

Let’s see what effect this has on spreads:

Say AAPL 0.00%↑ trades at $150.00 on Nasdaq, and my favourite tokenized version $xAAPL trades at $150.01.

So, I buy on NYSE… but to complete the arb, I need to take this stock to the protocol, and ask them to mint me an $xAAPL to sell.

Even assuming this process is instant, it’s not cheap - I can expect to pay anywhere between 10 bps (that’s 0.1%) and 1% for the privilege, depending on the stock and protocol.

Let’s say it costs 0.5%. This effectively means that until $xAAPL trades above $150*100.5% = $150.75, there is no profit in it for me. And for the other side, I can’t arb until it’s below $150*99.5% = $149.25. This is a massive spread of 1%: far wider than spreads I see on NYSE or Nasdaq.

ETFs and ADRs

If the above mechanics seem familiar to you, it’s because they are exactly how ETFs are formed.

A company like Vanguard or Invesco takes a (basket of) stock(s) and sells units of that basket to us.

ADRs are similar: copies of single US stocks listed outside the US for local investors, with a simple conversion back to the original. ADRs made Jane Street what it is today.

This solves the cross-border problem that we described above.

Indeed, S&P 500 ETFs are very popular in Europe and Asia, and are even structured in tax-efficient ways for their local populace, like UCITS in Europe. By embracing different regulatory regimes, ETF issuers deliver a better outcome for investors.

Crypto tokens, meanwhile, usually don’t benefit from any tax-favorable structures.

Well What About the Other Problems?

Like 24/7 trading?

Or DeFi venues?

DeFi Users Don't Care About Stocks

The DeFi ecosystem evolved around entirely different primitives: yield farming, governance tokens, automated market makers, and protocol-native assets.

DeFi users who want leverage trade perps on $ETH or $BTC, not tokenized AAPL 0.00%↑ shares.

DeFi values decentralization, permissionless access, and crypto-native innovation.

Tokenized equities offer none of these benefits - they're centralized, regulated, and fundamentally tied to traditional infrastructure, but without any of the liquidity or reliability that makes traditional markets work.

Traditional Users Have Zero Incentive to Switch

Tokenized stocks don’t offer leverage: they’re for investors, not traders. And if you’re going to buy a stock to hold for multiple years, you can afford to wait for the market to open.

Aside from the liquidity concerns, investors also have to face counterparty risk from the tokenization platform.

A close friend of mine had a huge TSLA 0.00%↑ token position on FTX shortly before the blow up. He thought he was safe: the tokens were theoretically backed by a Swiss company, with real shares.

Even better, a US data release on D-day had caused them to pump big time.

He found a group in the same boat, and they spent weeks trying to find the owner of their shares. The conclusion? An empty office building in Zug, the name of the holding company nowhere to be seen. There was no backing.

The Future is Perpetual

Tokenized equities take efficient, liquid markets and make them worse for investors. For traders who want leverage, platforms that deploy perps to offer crypto UX in traditional market liquidity are the answer.

We need QFEX. No blockchain required.

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