Tokenization of Stocks: A Marketing Move or the Prelude to Financial Innovation

Recently, a well-known trading platform launched a stock tokenization product, sparking heated discussions in the Web3 community. As a long-time observer of blockchain technology, I would like to share some thoughts on the actual situation behind this product. Frankly speaking, this feels more like a well-orchestrated marketing campaign rather than genuine technological innovation.

Overview

The stock tokenization product launched by the platform is essentially more like a well-planned marketing campaign. Its main purpose is to seize the discourse power of the popular topic of RWA, but from the perspective of actual innovation, there are not many highlights. In short, it treats Blockchain as a brand promotion tool and does not fully leverage the core advantages of blockchain's decentralization and composability.

This "synthetic packaging" model has shortcomings in legal structure and functionality compared to the "digital twin" model used by some exchanges. What it actually offers users is a derivative contract, rather than true ownership of the underlying asset. Although it claims to provide EU clients with exposure to US stocks, this can be achieved through traditional financial instruments without such complicated operations. Furthermore, enticing visions like "24x7 trading" and "retail investment in private equity" face numerous challenges in reality.

Although this platform has successfully positioned itself as an industry innovator with this product, its true significance lies in pointing to a possible path for the integration of traditional finance and decentralized finance. This path is likely to be led by Web2 companies that can simplify the complexity of Web3 and encapsulate it within more controllable ecosystems.

Four Models of Stock Tokenization

Before diving into an in-depth analysis of this product, we need to first understand the different ways of stock tokenization. There are various paths to migrate traditional stocks onto the Blockchain, each with its own characteristics.

Synthetic Assets

This is a purely decentralized financial model. Users do not need to hold actual stocks but instead create tokens that can track the price of any real-world asset (including stocks) by over-collateralizing crypto assets (such as ETH) in a smart contract. The price anchoring of synthetic tokens is dominated by the smart contract: real-world asset prices are obtained through oracles, which are then used to settle the gains and losses of token holders, thereby ensuring that the token value remains linked to the target asset price.

Users primarily trust the code and economic model; they bet that this smart contract system is robust enough, that the prices of over-collateralized collateral are stable and will not collapse.

Synthesized Packaging

This is essentially a derivative product model. The tokens purchased by users actually represent a contract signed with the issuer — the issuer promises to pay the token holders a return equal to the fluctuations in the corresponding stock price. To fulfill this payment commitment, the issuer usually buys actual stocks as a hedge, but this is not a legal obligation. Theoretically, as long as it obtains regulatory approval, it can also replace stock holdings by purchasing futures or other derivatives, without needing to acquire stocks in a 1:1 ratio. The issuer is also not obligated to disclose its specific stock holdings to the token holders.

What users fully trust are the issuing company and the regulatory bodies behind it.

Digital Twin

This is currently the most recognized model. For every Token issued by the issuer, a corresponding share of stock must be actually deposited in a regulated custodial bank. The Tokens held by users act as a "digital claim certificate" for a share of stock.

Users need to trust the issuer, the custodian bank, and the regulator at the same time, but there are usually on-chain tools (such as proof of reserves) that allow users to check at any time whether the stocks in the "vault" actually exist.

Native Digital Securities

This is the most revolutionary model. Stocks are no longer the "shadow" of off-chain assets, but are directly "born" on the Blockchain. The Blockchain itself is the legal record of ownership, completely abandoning paper certificates and centralized systems.

Users trust the blockchain network itself and the legal framework that acknowledges this form.

Comparative analysis of different modes

Synthetic Packaging vs. Synthetic Assets

Commonality: Both provide users with economic exposure to stocks rather than direct ownership. Essentially, they are both derivatives designed to replicate the price performance of stocks.

Differences: The core distinction lies in the basis of trust.

The trust in the synthetic packaging model comes from institutions and regulation. Users believe that this regulated company will fulfill its contractual obligations.

The trust in synthetic asset models comes from code and economic games. Users believe that the robustness of the code and the excess collateral can ensure the stable value of synthetic assets.

Synthetic Packaging vs. Digital Twin

Common point: In theory, both issuers of the two models hold real stocks as support.

Differences:

The purpose of holding stocks is different: in a synthetic packaging model, the issuer holds stocks to hedge its own risks, which is a risk management measure and not a direct legal obligation to the users. In the digital twin model, the issuer has a legal obligation to hold and custody one real stock for every issued Token on a 1:1 basis.

Ownership and risk differ: In the synthetic encapsulation model, the stocks belong to the assets of the issuing company, and users are merely its unsecured creditors. If the issuer goes bankrupt, these stocks will be used to repay all creditors, with no priority for users. In contrast, in the digital twin model, stocks are held in a segregated custody account established for the benefit of users, theoretically isolating them from the bankruptcy risk of the issuer, thereby providing stronger protection for users' asset ownership.

On-chain utility differs: Tokens under the synthetic packaging model are usually restricted within the issuer's closed ecosystem and cannot interact with external decentralized finance protocols. In contrast, tokens under the digital twin model are open, allowing users to withdraw them to their own wallets for decentralized lending, trading, etc., possessing true composability.

Questions about the product

Is blockchain really necessary?

The answer is: it is completely unnecessary. The functionality provided by this product, which allows European users to benefit from the rise in US stocks without holding US shares, can be fully achieved using contracts for difference (CFD) or other derivatives, which have existed in the traditional financial world for many years. The issuer can completely use a regular centralized database to record transactions, and there is no need to utilize a public chain at all.

So why still use it? The answer is simple: marketing. In an era where the concept of tokenization of physical assets is sweeping the globe, wrapping products in the guise of "blockchain" and "token" can instantly attract attention, create news, boost company stock prices, and position oneself as an innovator at the forefront of the times.

Where has the composability of decentralized finance gone?

The reality is: this kind of stock token cannot leave the issuer's application at all. Although it is issued on a public blockchain, its smart contract has a "gate code" that only allows transfers between wallets approved by the issuer. This means that users cannot withdraw it to their own wallets, cannot trade it on decentralized exchanges, and cannot use it for collateral lending - all the composability features of Web3 are irrelevant to users.

Why do this? It is for control and compliance. Once opened, the issuer cannot manage regulatory requirements such as KYC/AML. Therefore, it would rather sacrifice the core open spirit of Blockchain to establish an absolutely secure "walled garden."

Where is decentralization?

The reality is: users must fully trust the issuer. The only thing the Blockchain can prove to users is that "you indeed purchased a contract from the issuer." However, it cannot prove whether the issuer actually bought stocks to hedge risks, nor can it prove whether, in the event of the issuer's bankruptcy, there is still the ability to fulfill this contract.

This creates a huge paradox. Blockchain was originally designed to eliminate trust in centralized institutions, but this model requires users to place all their trust in one company. If that's the case, then what significance does it have to use blockchain to prove "you bought" this small matter?

Some "revolutionary" features that have been overly hyped.

The reality of 24x7 trading dilemmas

It sounds beautiful, but the reality is harsh. Why does the issuer only dare to promise "24x5" instead of "24x7"? Because the two days on the weekend are the "risk black hole" of the global financial market.

The challenges faced by market makers: Any trading market requires market makers to provide liquidity. To hedge risks, market makers need to buy stocks in the real stock market when users buy tokens. However, on weekends, major exchanges are all closed, and market makers cannot hedge. If they cannot hedge, they have to bear all the risks themselves. In case of a major event over the weekend, if stock prices plummet when the market opens on Monday, market makers could face bankruptcy.

Even during after-hours on weekdays, since the real stock market is closed, market makers can only hedge imperfectly through tools like index futures. To compensate for the risk, they significantly increase the bid-ask spread. Therefore, the cost of after-hours trading can be very high, and liquidity is poor, making it suitable only for users with urgent needs. It is more like an expensive "emergency exit" rather than a smooth highway.

The "Mirage" of Private Equity Investment

The controversy is: certain platforms have launched activities that give away tokens of unlisted companies, which immediately drew attention - the relevant companies quickly clarified that they had not authorized any token issuance, causing a stir in the market. This involves two key questions: first, why are the stocks of such popular companies being given away? Second, since it is claimed that the tokens are backed by real stocks, where do the stocks of unlisted private companies come from?

Stock source: The answer may lie in the "private equity secondary market" that is difficult for ordinary people to access. Transactions here are opaque, prices are not public, and liquidity is extremely poor. The issuer is likely to have acquired a small number of shares through a complex "special purpose vehicle" (SPV) structure. However, due to the limited quantity of these shares, even if the company goes public in the future, they will lack liquidity and are often given away as marketing gimmicks.

Opportunity or risk? Private equity investment has always had a very high threshold, only open to "qualified investors". The core reason lies in its immense risk and the high degree of information asymmetry. Institutions capable of participating in such investments can complete transactions without relying on stock codes; whereas ordinary people are restricted from access because they neither need nor can bear such risks. Tokenizing these types of assets seems to be "popularizing opportunities", but in reality, it pushes risks that should not be borne by ordinary people onto the masses - essentially, this is more like "popularizing risks".

Marketing Victory and Future Outlook

Despite the many controversies, from another perspective, this could be a strategic first step.

First of all, this is a victory in the narrative war. Although the product itself does not have much innovation in terms of technology, the issuer has overwhelmingly won in brand recognition and market presence against competitors that are technically more hardcore but less well-known. It has successfully tied itself to the grand narrative of "the future of finance," which is crucial for a publicly traded company.

Secondly, this paves the way for the future. The issuer has announced plans to establish its own Layer 2 Blockchain and support users in "self-custody" of assets. This is the key! It means that today's "walled garden" is just a transitional phase, a testing ground for accumulating users, testing technology, and maneuvering with regulations. When the gates of the garden truly open, all the limitations we are discussing today may be overturned.

Finally, this matter also indicates that the mass adoption of Web3 may not be possible without the participation of traditional internet financial companies. Because pure decentralized finance is still too complex for ordinary users. What these companies excel at is simplifying complex things, making them seamless and user-friendly. They act like translators, telling the story of Web3 in a language that the public can understand.

Therefore, our final conclusion is:

The stock tokens launched this time, at the current stage, indeed carry more symbolic significance than practical significance, resembling a successful marketing campaign.

But it is also like a wedge, opening the door to the integration of traditional finance and Blockchain. It has taken the first step in the most pragmatic way. True transformation does not happen overnight, and what we are witnessing may be the prologue to this significant transformation.

For ordinary investors, staying clear-headed and seeing the essence, neither being dazzled by glamorous narratives nor completely denying the possibilities of the future, may be the wisest attitude.