Tokenized stocks are blockchain-based representations of traditional company shares, allowing investors to gain exposure to the stock market through digital assets.
These stocks are typically backed 1:1 by real shares held in custody by an organization, enabling investors to track the price movements of stocks without directly owning the underlying asset.
While tokenized stocks offer benefits such as fractional ownership and global accessibility, they often lack voting rights and operate within evolving legal frameworks.
Tokenized stocks demonstrate how traditional financing can be brought to blockchain, although their future will depend on regulatory clarity and increased market adoption.
What are tokenized stocks?
Tokenized stocks are digital representations of traditional company shares issued on the blockchain. They allow investors to gain exposure to traditional market shares through blockchain-based tokens, rather than relying on traditional exchanges or brokerage accounts.
Each tokenized stock aims to reflect the price of the underlying share and is often backed at a 1:1 ratio by real shares held by a regulated institution. In some cases, tokenized stocks may artificially track market prices using financial instruments or alternative pricing sources.
And since they operate on blockchain networks, tokenized stocks can be traded 24/7, purchased in small parts, and accessed globally, reducing reliance on intermediaries. However, their liquidity is often lower and they do not include voting rights. They also remain within an evolving regulatory environment, where regulations and laws may differ across jurisdictions.
Types of tokenized stocks
Tokenized stocks are typically built on two main approaches:
Asset-backed tokens: Issued by regulated entities that purchase and hold real shares of the company under organizational custody. These tokens track the market value of those shares and are verified through regular audits.
Synthetic tokens: These simulate stock price movements using financial derivatives, blockchain oracles, or smart contracts without owning the actual shares. They provide the same degree of price exposure but carry higher risks in terms of price stability and counterparty risks.
How tokenized stocks work
Custody
The process begins with licensed financial institutions purchasing and securely holding shares of publicly traded companies. These shares are placed under the custody of an organization and serve as the underlying asset that backs the corresponding tokens issued on the blockchain.
Custodians are required to comply with securities regulations in their jurisdictions and maintain secure storage of assets. Regular audits are typically conducted, and proof of reserves is published to verify that the number of tokens in circulation matches the number of real shares held.
Tokenization and issuance
After securing the shares, the issuer mints digital tokens representing the underlying assets on the blockchain. These tokens are programmed to reflect the market price of real shares, with values updated in real-time through data sources and blockchain oracles to maintain accurate price exposure.
Entities like Chainlink are often used to provide realized price data, proof of reserves, and cross-chain communication through the Cross-Chain Interoperability Protocol (CCIP). These mechanisms help maintain accurate pricing and consistency for tokenized stocks across multiple blockchain networks, such as Solana and Ethereum.
Trading
Once issued, tokenized stocks can be traded on both centralized exchanges (CEXs) and decentralized exchanges (DEXs). Due to their presence on blockchain networks, these tokens can be transferred and exchanged in a manner similar to other digital assets. Trading and settlement are managed through smart contracts that execute trades automatically and record them on the blockchain.
Redemption
Holders of tokenized stocks can redeem their tokens for stablecoins or fiat currency based on the current value of the underlying shares. Upon redemption, the corresponding tokens are burned to keep the total supply of tokens aligned with the number of real shares held by the custodian.
Benefits of tokenized stocks
24/7 trading: Tokenized stocks can be traded at any time, allowing investors to respond to market events immediately without waiting for traditional exchanges to open.
Fractional ownership: Tokenization allows investors to purchase smaller parts of shares instead of whole units, reducing the entry barrier for participation.
Global accessibility: Investors can access tokenized stocks through blockchain platforms, without the need for local intermediaries or complex paperwork. However, availability may depend on local regulations and platform licensing.
Fast settlement: Transactions are processed on-chain and can settle within seconds, providing faster execution compared to traditional settlement cycles in markets.
Integration with decentralized finance (DeFi): Tokenized stocks can interact with DeFi protocols, allowing users to use them as collateral, participate in liquidity pools, or adopt yield generation strategies.
Risks and challenges
Tokenized stocks can facilitate your access to and trading of traditional stocks via blockchain, but they also come with some risks that you need to understand. The regulatory environment for tokenized assets is still evolving and varies by country, which may affect how these tokens are issued, traded, and accessed by investors.
Holding a tokenized stock gives you exposure to the price of the underlying asset, but it usually does not confer the same rights as traditional shareholders, such as voting or attending company meetings. Furthermore, tokenized stocks rely on custodians, token issuers, and smart contracts. Issues such as technical failures, poor management, or low trading activity can affect their overall stability and reliability.
Given the small size of the tokenized stock market so far, liquidity may be limited, making it difficult to buy or sell large amounts quickly. Before investing, it's essential to conduct your own research, use reliable platforms, and understand the regulations that apply in your area.
Closing thoughts
Tokenized stocks combine traditional equities with blockchain technology to provide a more accessible and flexible way to gain exposure to global markets. With features like 24/7 trading, fractional ownership, and faster settlement, they present new opportunities for investors looking to bridge traditional finance with digital assets.
However, tokenized stocks are still an emerging product, and factors such as regulatory uncertainty, market size, and custody risks should be taken into account. You should take your time to understand how these stocks work, stay updated on regulatory developments, and only invest amounts you can afford to lose.
Further reading
What is data tokenization and why is it important?
What are real-world assets (RWAs) in decentralized finance and crypto?
What are decentralized finance (DeFi) aggregators and how do they work?
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