Key Takeaways

• Tokenized stocks are digital assets that track the price of real-world equities, such as shares in public companies.

• Offer precise fractional investment and may offer fast settlement compared to traditional equities.

• DeFi integrations allow tokenized stocks to be used as collateral, earn yield, or provide liquidity.

• Ideal for both crypto investors or those looking to easily gain exposure to the stock market.

• Always review the risks, terms, and issuer details before investing. These products are not currently available to US persons and may be subject to regulatory restrictions in other jurisdictions.
  

What Is a Tokenized Stock?

A tokenized stock is a blockchain-based token that represents exposure to a traditional equity, such as shares in Apple (AAPL) or Tesla (TSLA). These tokens are typically designed to mirror the price of the underlying asset, meaning if the real stock price goes up or down, the value of the token is designed to follow suit. 

Many issuers of these tokens will acquire the real shares in question, lock them in custody, and then mint equivalent tokens on a smart-contract compatible network such as Ethereum or Solana. Tokenized stocks are part of a broader trend known as real-world asset (RWA) tokenization, bringing traditional assets like stocks, bonds and even real estate onchain. 

Typically, each token corresponds to one share (or fraction of a share) in the underlying entity. Not all tokenized stocks represent direct legal ownership in the company; some may offer only price exposure or synthetic replication through derivatives. In some cases, tokenized stocks may also include rights like dividends, depending on the structure and platform. Custody of these tokens is managed by the platform, rather than the token holder themselves.

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 How Do Tokenized Stocks Work?

Tokenized stocks are created by issuing a blockchain-based token that reflects the value of a specific equity. Tokenized stocks are typically created using one of two models:

1. Custodial-backed tokens: A regulated institution holds the underlying shares in reserve and issues corresponding tokens onchain. These tokens may represent a claim on the shares, subject to the issuer’s legal structure and disclosures.
   

2. Synthetic or derivative tokens: These tokens mirror the stock price movements through financial instruments or smart contracts, often without directly owning the underlying asset.
   

When you purchase a tokenized stock, the transaction is handled by a blockchain network rather than a traditional stock exchange or marketplace. You can trade these tokenized shares as easily as you can with any other crypto token, and smart contracts enforce supply controls including burning and minting. By using this kind of token, crypto investors can gain exposure to the traditional stock market while keeping all of their assets onchain.

It’s important to note that trading tokenized stocks does not necessarily confer legal ownership of the underlying shares, voting rights, or dividend entitlements. The rights attached to each token depend entirely on how the token is structured and the jurisdiction in which it is offered.

What Are the Advantages of Using Tokenized Stocks?

Tokenized stocks offer a wide variety of advantages not found in traditional stock trading. Firstly, settlement can occur more quickly due to transactions being handled by smart contracts. The same model can also allow for round-the-clock trading unlike the limited hours of traditional stock markets. Both of these aspects allow traders to respond more quickly to financial events and ensure they stay ahead of movements in the traditional market. 

In addition, as a result of being based on the blockchain, these tokens can reap all the benefits of DeFi. Through tokenization, these traditional stocks can be used as collateral for lending and borrowing, or contributions to liquidity pools to earn yield on decentralized platforms and applications, opening the door to new financial opportunities. 

Beyond DeFi, tokenized stocks also allow for more precise fractional ownership of shares, which allows investors to gain exposure to publicly traded companies with lower initial capital requirements. As the lines between finance and blockchain continue to blur, tokenized assets could become a gateway for everyday investors to access a wider range of investment opportunities.

What Are the Risks Involved in Using Tokenized Stocks?

As with any financial product, there are risks involved, and it’s important to understand all the details. There may be jurisdictional restrictions in place in your region which can limit the availability of tokenized stocks, or the ability to receive dividends. Additionally, tokenized stocks may not have the same regulatory classification as regular stocks in your region, so it’s important to be aware of the implications of this. 

Tokenized stocks involve custody of assets, so it’s also crucial to be aware of who issues and backs these tokens, whether that’s a regulated custodian holding the underlying assets or a synthetic provider replicating the price. 

Tokenized stocks sit at the intersection of TradFi and DeFi, offering a powerful and flexible gateway for investors to access equity markets onchain. With institutional adoption growing, tokenized stocks might come to be a central component of the traditional stock market and the wider world of finance.