Author: 0xRickyW
Compiled by: AididiaoJP, Foresight News
Original link: https://www.techflowpost.com/article/34320
Disclaimer: This article is reprinted content. Readers can obtain more information through the original link. If the author has any objections to the reprinted form, please contact us and we will make modifications according to the author's requirements. Reprinting is only for information sharing and does not constitute any investment advice and does not represent Wu Shuo’s views and positions.
In the past period of time, on-chain stocks have continued to receive attention, and one issue has appeared repeatedly.
If you are optimistic about a certain direction that the world is going in, why can't you make this judgment into a package, buy it with cryptocurrency, and let others follow suit?
For example, if you believe that artificial intelligence will significantly increase the demand for electricity, you may want to be exposed to companies that make power generation, power grids, and equipment at the same time. The point is not just to have a chatbot give out five tickers, but to understand the exposure, buy a basket of assets, and keep using it as opinions change.
This is the product form that is more worth getting started with.
The question that arises is: Can this be done directly in an ordinary brokerage account? Put it on the chain, what exactly is added?
Before a product can be exciting, you need to understand the underlying mechanics: Who owns the stock? What do the tokens represent? How to get funds back? In what aspects can a startup company form a real business?
First: What exactly are you buying?
Buying stocks itself has become highly digital. Click the operation in the app and the account number changes accordingly. It’s not blockchain that makes stocks digital.
Behind the buttons, brokers handle entrustments, trading venues match purchases and sales, clearing and settlement arrange what each party owes and completes delivery, and custody and registration agencies keep securities and ownership records. Some agencies perform multiple functions simultaneously.
In a common brokerage structure, investors are the beneficial owners, and intermediaries or nominal holders are the registered holders. There is a layer of records and legal relationships between investors and companies. Investor.gov has a brief explanation of this distinction.
“On-chain stocks” can refer to several different things:
Tokens linked to bona fide shareholdings or recognized indirect security interests;
third-party products backed by shares held elsewhere;
Derivatives that only track the stock price and do not confer ownership of the stock.
The second category is the most confusing. The product can be 100% collateralized by stocks, but it is still a certificate issued by another company, not an equity stake in the company named after the token.
For example, xStocks defines its product as a fully-collateralized tracking certificate, which is not a direct equity stake and does not give shareholders voting rights. The SEC staff review also pointed out that different tokenization structures will give investors different rights.
So it can be broken down into two questions: What is the token backed by? As a holder, what rights can you claim?
Even if the token name contains Apple, the above two questions may not have answers. If the issuer goes bankrupt, what will happen to the holders' claims?
How do stocks turn into tokens?
Take, for example, a simplified stock-backed product. Assume Apple stock price is $100, example only, not current price.
The issuer arranges for the actual shares to be placed into a designated brokerage or escrow account. The issuer creates the product, the brokerage helps buy and sell the stocks, and the custodian keeps the positions. Apple itself does not have to be the token issuer.
The issuer then creates or "mints" the tokens according to the terms of the product. Assume that initially one token corresponds to one share. This does not create an additional share of Apple, but merely creates a representation of rights tied to existing assets. Dividends, stock splits, and product designs can change the exchange ratio over time.
Some systems allow authorized institutions to convert between stocks and tokens, and some allow qualified customers to issue and redeem them directly after completing their registration. Alpaca’s Authorized Participant Guide is a specific example.
Next comes distribution. The exchange or investment application opens the product to qualified users. Market makers quote buying and selling prices and bear risks using their own inventory and funds. The exchange is a place, and the market maker is one of the participants.
Tokens may be held on the platform or, where supported, placed in personal wallets. But holding tokens by yourself does not mean that the underlying custodian disappears. The token balance can be displayed on the chain, but it cannot independently prove that the stocks are actually stored in a certain brokerage account.
Ultimately there are two exit paths, and they are not the same:
Sell: Another buyer takes over the existing tokens.
Redemption: Following the issuer’s process, the tokens are withdrawn from circulation and the holders receive cash, stablecoins or securities according to the terms.
Being able to buy tokens does not automatically mean you are eligible to redeem them directly. Thresholds, fees, time and qualifications all count.
Furthermore, just because a token changes hands ten times, it does not equal ten new shares. Trading volume and the number of assets supporting a product are two different indicators.
How does the price anchor the underlying stock?
Let’s say the underlying stock is $100 and the token is $105. Qualified institutions may be able to buy the underlying shares, mint tokens and sell them. If the price difference is sufficient to cover the costs and risks, the deal is established. The increase in token supply helps push the price back down. When the token is too cheap, the reverse operation can be done by buying and redeeming it.
This is arbitrage. The key is whether these trades can actually be executed, rather than just having a price feed on the screen.
Imagine Sunday again: tokens are still trading and the underlying stock market is closed. How difficult is it for market makers to hedge? Is anyone redeemable? At what price?
Therefore, "7×24-hour trading" does not mean "transactions at good prices around the clock." Spreads will widen and prices will diverge. xStocks’ description of primary and secondary markets is worth referencing.
What are various aspects of the industry doing?
It can be summarized by a simple chain:
Stocks → Brokerage and Custody → Legal Structures and Token Issuance → Trading and Distribution → Portfolios, Lending and Other Applications.
Upstream is about assets and rights. The middle layer transforms these rights into things that people can touch and trade. Downstream is to make products that users want to use.
Supporting the entire chain also includes:
Blockchain and smart contracts record balances and execute written rules.
Stablecoins and payment channels move funds and have their own issuance and redemption risks.
Wallets and security systems manage keys, authorizations and permissions.
Quotes and oracles feed prices and external information into applications. Price oracles are not proof of reserves.
The compliance system determines who can buy, hold, transfer out and redeem according to relevant rules.
Services handle dividends, stock splits, mergers and acquisitions and other corporate actions. Reconciliation checks whether token balances, custody records and customer accounts match.
The final confirmation of on-chain transfers does not mean that every underlying security or banking step is completed at the same time. Institutions, operational processes and legal obligations remain in place.
All parties involved need a business model. Brokerages and custody charges, issuers may charge product fees or issuance/redemption fees, exchanges charge transaction fees, market makers earn spreads and manage risk, infrastructure companies sell software, and applications rely on users or distribution to monetize.
From an investor's perspective, the key is who gets paid for solving the problem. A large number of transactions passing through a certain network does not mean a large amount of income; good business performance does not mean that token holders can share the profits.
Why go on the chain?
Traditional brokerages already offer fractional lot, portfolio and security mortgage loans. These are not cryptographic inventions.
It will be interesting to see what happens when equity exposure becomes available through the same infrastructure that users already use to hold stablecoins, trade, lend, and build financial products.
From a market perspective, its importance is reflected in five aspects.
1. Assets are more accessible and stablecoins become the capital track.
A useful brokerage account is not equally easy to open everywhere. For those who already hold stablecoins, there will be an extra layer of friction if they first redeem their bank funds and then fund another account.
Tokenized shares could provide accredited investors with a more direct path: from stablecoins to equity exposure. Investment products are therefore easier to distribute across markets, especially to those already using crypto. It won’t eliminate local rules and onboarding requirements — individual products will still be geographically restricted — but it will make the funding and distribution experience significantly simpler.
2. Developers can reduce duplication of construction and shift to product development.
Imagine building a portfolio around the argument that artificial intelligence will drive up electricity consumption. What is needed is not just a list of companies, but also the ability to buy assets, hold them, rebalance, and possibly access financing.
With compatible tokens and protocols, developers can reuse existing wallets, trading venues, lending facilities and smart contracts. There is room for indices, derivatives, automated portfolios, and products that have not yet appeared.
The advantage is that trial and error startup costs are lower. Small teams can focus on the experience aspects they do differently.
3. Investors can move positions, not just funds.
If a better application is found, investors may want to move their existing positions there instead of selling first, cashing out, and buying elsewhere.
Traditional securities firms already support physical transfers. The opportunity on-chain is to make positions easier to move and use between compatible wallets, applications, and protocols.
Transferable stock tokens, it is possible to achieve this between compatible wallets and platforms. For example, xStocks is designed to be used across wallets, exchanges, and DeFi protocols.
Compatibility still matters. But "assets can follow" will change the relationship between investors and applications. Applications must continue to do business.
4. Positions can not just lie in the account.
Eligible stock tokens can be used for collateralized lending or margin trading. This is already happening: Kamino supports borrowing USDC with selected xStocks.
Where supported, holders can also lend their tokens and earn interest paid by borrowers, or provide liquidity to automated market makers and earn transaction fees. These fees come from real transactions, and Uniswap’s fee mechanism is an example.
This is an optional extra, not a free benefit. Lending carries liquidation risk, and lending or providing liquidity also carries risks beyond simply holding.
5. Transactions and settlements can run according to the Internet's schedule.
News doesn’t wait for the stock market to close. Markets for supported tokens can continue to trade during nights and weekends, so investors don’t have to wait for the next opening bell to react.
There’s also a layer of independent settlement benefits: Equity tokens and stablecoins can be interchanged in a single atomic on-chain transaction — either at the same time, or neither. This reduces the risk of handing over one side but not receiving the other.
The difference is important: 24/7 trading of tokens does not guarantee that the underlying stock market or primary token issuance and redemption will also be open around the clock. Even if the market is open, there is no guarantee that the spread will be narrow enough.
Taken together, these factors constitute reasons to be bullish in this direction. More people can access assets, developers can build products around them, and investors can do more with their positions.
Going back to the combination at the beginning: from "believing that the world will go in a certain direction" to a combination that is buyable, transferable, and usable, the path will be shorter.
This makes more sense than simply putting a ticker symbol into a crypto wallet.
Where are the opportunities for startups?
The three pieces are relatively clear: turning ideas into investable products, scaling operations, and making financing available.
1. Make investment ideas into a portfolio that others can actually buy.
The view that "artificial intelligence will drive up electricity consumption" still means a lot of work for users: selecting assets, understanding risks, placing orders, and maintaining portfolio updates. Startups can cohere these steps and, to the extent permitted, let others follow the strategy.
The opportunity lies in capturing this experience for a specific group of people. AI-generated code listings are easily replicable. Products that have distribution, a credible track record, and users are willing to keep investing in them are much harder to copy. On-chain must improve the way portfolios are held, transferred or used elsewhere.
2. Enable the operation of tokenized stocks to scale across service providers.
Issuers, brokers, custodians and applications need to have consistent records, even if transactions fail, redemptions are delayed, or stock dividends or stock splits occur. Startups can sell software, do reconciliations, coordinate updates, and help operators handle exceptions.
A pragmatic entrance is a costly, buyer-clear workflow. Support for multiple service providers enables independent products beyond the internal systems of one publisher. Reliable docking and a history of handling difficult cases can cause switching costs; endless customization for each customer cannot become a scalable software business.
3. Make eligible stock tokens available as collateral.
For a stock token to be useful collateral, lenders must be able to price it, understand its legal rights, and recover the value if the borrower defaults. Market closures, redemption restrictions, and differences between issuers make this matter more complicated than accessing a stock price source.
Startups can create collateral assessment, risk management and liquidation tools for lending platforms without having to become lenders themselves. The value lies in helping the platform decide what to accept, how much to lend, and how to exit under pressure. This relies on reliable data and real liquidity, not just a smart contract.
These are three different businesses: investment products for users, operational software for financial institutions, and infrastructure for lending. Each requires specific customers and a reason for existence beyond “putting tokens on the chain.”