I’m trying to understand what tokenized stocks actually mean. Where does the value come from? A stock is an actual percentage of a company’s ownership. A token of a stock is basically an NFT of a stock? The value is only from what other people are willing to pay for it?
Company A will accept funds to buy some stock like MSFT, then they will mint a token i.e. xMSFT that you'll own in a blockchain ledger. You can trade this for whatever you want but the company promises to buy any token xMSFT at MSFT price whenever you want[1]. So the tokenized asset remains pegged as long as there's trust in the institution.
Also, the company will grow a balance sheet out of the funds created by the owners of the tokens and they frequently will give you some sort of yield on your position.
[1] Open Market hours and usually accompanied by a fee.
Minor benefits around clearing and settlement, but these allow for 24/7 even if the clearing house is not so. On the other hand, I don’t see how they should be able to block it. It is a derivative product, can MSFT block e.g. puts on its stock? Stock ownership gives rights, not obligations.
Not a crypto person, but is it a situation where one may have crypto and wants to invest it without converting it to USD/CAD/JPY/etc.. and paying taxes on it?
Value comes from the underlying. Of course you are carrying some intermediary risk but that's also inherent with stock brokers as well. Similar to a stablecoin backed by treasuries. Voting isn't the only value of holding stock, although some platforms have proposed passing through to token holders voting and dividend distributions as well.
One of the primary benefits for traders is 24/7 liquidity and the ability to plug the token into other products onchain, like lending markets.
The value of stock buybacks come from lowering shares in circulation. Fewer shares means that shareholders have to share profits with fewer, leading to larger profits or dividends per share.
I see it as a Ponzi scheme when people argue that they're a replacement for dividends. You're describing them as if dividends are an assumption, in which case they're perfectly reasonable.
Even for companies that do not pay dividends, share buybacks should increase the value of each share, because you share profits with fewer other shareholders.
Buybacks raise the EPS/earning-per-share by lowering the denominator (number of outstanding shares).
this won't really matter much because even if tokenization of stocks is banned you can just create perpetual futures that settle on the price of the real stock. so if you are a crypto only investor (due to your country preventing open capital markets or other restrictions) you will put your money there and then some intermediaries with access to both tradfi markets with actual stock and access to the crypto perpetual futures markets will provide the liquidity and keep prices in sync.
Cyberpank is having a really nice and modern mobile app for your bank but all the interface doesn't give you any hint that transfering money out of the country is even possible.
Perpetuals are OK for trading, but not good for holding as a long-term investments - usually you need to pay interest on any open position.
I guess the appeal of tokenized stock is to do things regulators don't want you to do (e.g. evade capital controls). Otherwise one can just access market directly through a broker.
I'd expect given all the counter party risk you are taking on that you should be paid a small rate to take on a perpetual future or tokenized stock.
Otherwise when the market goes bankrupt you'll be left with nothing and you won't have gotten compensated for the risk of holding the perpetual future or tokenized share.
I've looked at the xyz:SP500 contract on hyperliquid and it's funding rate seems to be negative most of the time. Currently the annualized rate is around -0 to -2%, so if you hold a long position over a year you will roughly earn 1% on top (negative funding rate means short positions pay funding to long positions). This makes sense because the no-arbitrage principle requires this to be roughly in line with holding an actual SP500 basket and receiving dividends. And you don't pay interest on open positions, you are just holding a derivative and need to meet margin obligations - but you can leverage as much as you are comfortable with.
Is there some pricing going on with infinite dividend and funding legs and/or is there sort of supply and demand "cost of carry" thing in the perpetual world?
I don't think US investors are the target here. They can already make bets on the SP500 in a number of ways: ETFs, futures, options etc. - unless you wanna make a highly leveraged bet which traditional broker margin requirements will prevent. The tradfi venues are probably even a bit cheaper (though we are talking about a few bps difference).
24/7 liquidity and near instant settlement, easier access for international investors, and ability to plug token into other apps and products onchain like Aave lending, providing liquidity, etc.
They are permisionless protocols, I don’t see how they can even forbid it. It shows a level of ignorance or ingenuity which I can comprehend.
There are also memecoins which as they rise, buy the underlying stock.
Being totally naive and asking an honest question: who or are they protecting themselves from? These instruments in reality are at most paired assets but most times have nothing to do with the real stock.
So that people with off the books defi assets can diversify their holdings as if they bought into the non-defi world, without any of those pesky taxes or KYC requirements.
By definition nothing onchain is off the books. You can download any public chain's history from genesis. Very traceable. Meanwhile KYC is pesky and onerous, but there is nothing precluding an onchain protocol from implementing KYC. Most protocols that deal with real world assets retain the ability to freeze and seize funds if required by law.
Which most governments will be strongly incentivised to prevent.
The ones that aren’t (basically rogue states under sanctions like Russia or DPRK) will have the rest of the governments very interested in preventing them from owning these securities.
My understanding is that it's possible there will be / is a country that you don't have low cost or easy access to US stocks, but can have access to tokenized stocks. If Coinbase and others are smart, they'll collect the KYC info the US requires, regardless of where the person is in the world. In fact, that seems like the other part of this line in the article: "provided the tokens carry the same rights and privileges as the underlying shares, including dividends and voting rights."
It sounds enough like real investing that it might make some more people put real money into crypto, while still being unregulated and vague enough that you can outright steal the money or take risks a regulated market wouldn't allow
Or you meant an argument for the person putting their money into it? No idea.
Like all cryptocurrency, it's optimised for evading laws and law enforcement. Fraud, evading sanctions, doing things with fake stock that would be prosecuted by financial watchdogs if it were real stock, grifting people into thinking they're buying real stocks, the list goes on.
I suppose it also allows for trading stock without paying brokerage fees (though you need to pay the network in other ways) and it permits trading for people who cannot get access to dollars or the market of origin because of local laws and/or corruption.
Honestly, it's kind of genius. All of the tools that caused the Great Depression combined with cryptocurrency grifting. Someone will make a lot of money off this.
- 24 x 7 trading is open to retail (no more waking up finding out the market moved out of hours and your stop loss didn't execute because the price moved 'though' it)
- Fractionalization (you can buy $12 worth of NVDA easily)
- Fundraising (you can raise public money without needing the large caps of traditional public markets)
- Distribution - smart people that know math publish a whitepaper and get investors into their strategy immediately rather than waiting for a hedge fund or bank to get them to market.
- Composability - eg, I invested in an app that let's people use the HNWI
'buy/borrow/die' technique as a wealth building strategy - talk into any shop, buy somethng, pay using as small loan taken out of your share holdings.
Stocks are already tokens. "Tokenizing" stocks makes no sense, if one assumes quite reasonably that "tokenization" involves giving token-ness to something that was not already a token. What it is is wrapping what is already a token in another token, mostly so the second token can get around the limitations of the first. But some of those limitations are incidental and can be eliminated at any time by the underlying token provider, mostly because nothing stops a conventional stock market from being tradeable 24/7. They already are if you're in the club anyhow, per all the "aftermarket" and "pre-market" trading you hear about around quarterly release times.
The rest of the limitations are regulatory, and if the wrapping token can get access to regulatory approval to do their thing, so can the stocks.
The whole thing feels skeevy as all get out to me. It feels like someone telling me that they'll be happy to hold my mortgage between me and the current holder. There is no good reason for that. Frankly there is already a disturbing amount of indirection in the way you don't actually own the stocks you think you do, but they're held on behalf of you on behalf of your broker at the Depository Trust & Clearing Corporation. Adding another layer of indirection makes me worry about the motives of the people who are very excited about being that layer.
Again, that's not true. As a matter of law, a bank balance is a debt the bank owes to you. An NFT or a bitcoin is a row in a spreadsheet that records the exchange of notional nothings.
It's a growth play for financial services to find trading volume they otherwise cannot create. Young retail has no cashflow to speak of, so Coinbase and Robinhood target them for the house rake of trading meme stocks and crypto. The rest is institutional, broker dealer, traditional retail brokerages, etc but there's only so much revenue to be had moving existing securities around amongst those who can obtain exposure to them, managing pensions and 401ks, etc. ~93% of equities are held by the top ~10% of US households, for example.
Lots of cost inefficiency to squeeze out, but everyone is incentivized to not cannibalize other participants or their own business. "Its a big club and you're not in it" and "If you're playing a poker game and you look around the table and and can't tell who the sucker is, it's you."
If I recall, the most optimal equities market operating model is a short auction window at the open and the close to process order books, but again, no appetite for efficiency over revenue, I'll have to find the paper.
Most ideal equities markets operating model would be a short auction period at the open and the close
This is almost exactly aligned with real life trading experience with retail traders. Retail trader P&L map by weekday and time of day shows that the overwhelming majority of retail losses fall into one of two categories - either choppy hours during the day where liquidity is low (noise from overtrading) or 15 minutes after the NY open where the volatility spike happens and stop hunts take place.
Extending equities to 24/7 with tokenization only increases the amount of low liquidity chop, which is good for exchange fees, but not for retail expectancy.
Blockchain makes a ton of sense as a replacement for the NSCC which is the entity that actually keeps track of the ledger for ownership. But again whenever I say things like that the people that come out of the woodwork are crypto bros vs skeptics which this isn't about the cyberpunk antigovernment anonymous future but just a better cryptographically proven multiparty database.
I would probably make trade settlement faster and lower overhead costs.
Clearing equities trades with a blockchain between brokers would be beneficial in plenty of ways that are really only all that interesting to very large banks and broker services companies. (like Citadel for example)
They already found it with money laundering, but boosters just don't want to admit it and keep saying there will eventually be something better to be found.
The whole raison d'etre of hyperliquid and defi in general is getting around "kyc or something". More realistic risk is poor opsec allowing govs to persecute people who use/host the service.
KYC definitely won't happen. But that aside the funny thing is, HyperLiquid isn't actually decentralized in a traditional sense. They have like 5 validating nodes and all operated by HyperLiquid affiliates.
Also the XYZ markets that the stock tokens "live on" is not managed by HyperLiquid as far as I know.
As much teeth as they want to have. If you're having to center your business model around using a VPN to avoid regulation, you're opening the door to a great white shark.
What the fuck? How can you just turn someone else’s stock into a “token” and then list it on a stock exchange and sell it 24/7?
This would be like me printing out my own pieces of paper I call Munchkin Shares, and selling you Munchkin Shares in Google. Come buy shares in Google! 100% authentic munchkin shares!
Stock is owned by Cede & Co anyway. So everything downstream is just ledgers. What differs is how much you trust the record-keeper, and what legal rights the entry gives you.
This is ridiculous. Every investment bank have been issuing wrapper instruments like 144a/regS notes/0 strike calls & warrants/swaps/fully collateralised performance notes etc etc against public equity since forever. This is not new and displays a large degree of illiteracy by large corporates and the public in general.
"Goldman Sachs doesn't know what they are talking about" in reference to a stock maneuver is pretty unlikely to be true.
Even beyond GS, some of these companies are among the most sophisticated financial institutions on the planet.
The article says 22 companies have commented, but more have commented since it was written, or maybe the original article missed a few. Those companies include the list below.
Also, the company will grow a balance sheet out of the funds created by the owners of the tokens and they frequently will give you some sort of yield on your position.
[1] Open Market hours and usually accompanied by a fee.
One of the primary benefits for traders is 24/7 liquidity and the ability to plug the token into other products onchain, like lending markets.
Stock broker customers have SIPC to reduce risk. Is there an equivalent entity for the crypto token space?
Somehow every time I try to make this argument about stock buybacks, some people vigorously defend them as not just somehow a glorified Ponzi scheme.
How do you see that as a Ponzi scheme?
Buybacks raise the EPS/earning-per-share by lowering the denominator (number of outstanding shares).
I guess the appeal of tokenized stock is to do things regulators don't want you to do (e.g. evade capital controls). Otherwise one can just access market directly through a broker.
Otherwise when the market goes bankrupt you'll be left with nothing and you won't have gotten compensated for the risk of holding the perpetual future or tokenized share.
I see he still has trouble with the concept of "consent".
There are also memecoins which as they rise, buy the underlying stock.
Being totally naive and asking an honest question: who or are they protecting themselves from? These instruments in reality are at most paired assets but most times have nothing to do with the real stock.
Isnt this offset by large taxes when you have to convert your coin back to real currency?
The ones that aren’t (basically rogue states under sanctions like Russia or DPRK) will have the rest of the governments very interested in preventing them from owning these securities.
Or you meant an argument for the person putting their money into it? No idea.
I suppose it also allows for trading stock without paying brokerage fees (though you need to pay the network in other ways) and it permits trading for people who cannot get access to dollars or the market of origin because of local laws and/or corruption.
Honestly, it's kind of genius. All of the tools that caused the Great Depression combined with cryptocurrency grifting. Someone will make a lot of money off this.
- Fractionalization (you can buy $12 worth of NVDA easily)
- Fundraising (you can raise public money without needing the large caps of traditional public markets)
- Distribution - smart people that know math publish a whitepaper and get investors into their strategy immediately rather than waiting for a hedge fund or bank to get them to market.
- Composability - eg, I invested in an app that let's people use the HNWI 'buy/borrow/die' technique as a wealth building strategy - talk into any shop, buy somethng, pay using as small loan taken out of your share holdings.
The rest of the limitations are regulatory, and if the wrapping token can get access to regulatory approval to do their thing, so can the stocks.
The whole thing feels skeevy as all get out to me. It feels like someone telling me that they'll be happy to hold my mortgage between me and the current holder. There is no good reason for that. Frankly there is already a disturbing amount of indirection in the way you don't actually own the stocks you think you do, but they're held on behalf of you on behalf of your broker at the Depository Trust & Clearing Corporation. Adding another layer of indirection makes me worry about the motives of the people who are very excited about being that layer.
If it's not happening on a GPU, is it really a "token"? ;-)
Crypto tokens are just some meaningless entries on a blockchain.
Lots of cost inefficiency to squeeze out, but everyone is incentivized to not cannibalize other participants or their own business. "Its a big club and you're not in it" and "If you're playing a poker game and you look around the table and and can't tell who the sucker is, it's you."
If I recall, the most optimal equities market operating model is a short auction window at the open and the close to process order books, but again, no appetite for efficiency over revenue, I'll have to find the paper.
(thoughts and opinions always my own)
This is almost exactly aligned with real life trading experience with retail traders. Retail trader P&L map by weekday and time of day shows that the overwhelming majority of retail losses fall into one of two categories - either choppy hours during the day where liquidity is low (noise from overtrading) or 15 minutes after the NY open where the volatility spike happens and stop hunts take place.
Extending equities to 24/7 with tokenization only increases the amount of low liquidity chop, which is good for exchange fees, but not for retail expectancy.
I would probably make trade settlement faster and lower overhead costs.
Clearing equities trades with a blockchain between brokers would be beneficial in plenty of ways that are really only all that interesting to very large banks and broker services companies. (like Citadel for example)
https://en.wikipedia.org/wiki/Depository_Trust_%26_Clearing_...
asset tokenization doesn't have to be tied to crypto.
the legit use cases for crypto i.e people in poor countries etc are not exactly a demographic for VCs or investors to pump money into.
Where to issue, what are the costs and what system to use?
Also the XYZ markets that the stock tokens "live on" is not managed by HyperLiquid as far as I know.
This would be like me printing out my own pieces of paper I call Munchkin Shares, and selling you Munchkin Shares in Google. Come buy shares in Google! 100% authentic munchkin shares!
Do they actually have a legal say in the matter?
Even beyond GS, some of these companies are among the most sophisticated financial institutions on the planet.
The article says 22 companies have commented, but more have commented since it was written, or maybe the original article missed a few. Those companies include the list below.
Alphabet
AppLovin
Applied Digital
Applied Optoelectronics
Arm Holdings
Caterpillar
Cerebras
Cisco Systems
CoreWeave
Goldman Sachs
Intuit
Marvell Technology
McDonald's
Microsoft
Moderna
Qualcomm
Rocket Lab
UnitedHealth Group
Verizon
Wells Fargo