Author: RickyW, member of the investment team at YZi Labs
Compiled by: Jiahuan, ChainCatcher
Recently, I have been diving deep into on-chain stocks, and one idea keeps lingering in my mind.
If I am bullish on a certain development trend, why can't I turn this judgment into an investment portfolio, buy it with cryptocurrency, and let others follow along?
For example, if I believe AI will significantly drive up electricity demand, then I might want to invest in power generation, power grids, and related equipment manufacturing companies. What I want is not just to have a chatbot give me five stock tickers, but to understand exactly what this portfolio is invested in, buy this set of assets, and continuously adjust and use it as my judgment changes.
Such a product, I really do want to try.
But then I kept asking myself: can't such a product be built directly on top of an ordinary securities account? What exactly does putting it on-chain improve?
Before getting excited about these products, I want to first understand how they work underneath. Who holds the stocks? What do the tokens represent? How do you get your money back? And where can startups build a real business?
What exactly are you buying?
Buying stocks has long felt very digital. Open an app, press a button, and a number changes. What made stocks digital was not the blockchain.
Behind this button, brokers process your order, trading venues match buyers and sellers, the clearing and settlement system calculates the funds and securities receivable and payable by each party and completes delivery, while custodians and registrars are responsible for safekeeping securities and maintaining ownership records. Some institutions perform several of these functions at the same time.
In a common securities account arrangement, you are the actual beneficial owner of the stock, while the holder of record is an intermediary or nominee holder. Between you and the listed company, there is already a whole set of records and legal relationships. Investor.gov has a simple explanation of this distinction.
"On-chain stocks" may refer to several different things:
Tokens linked to actual share ownership, or to legally recognized indirect securities interests.
Products issued by third parties and backed by stocks custodied elsewhere.
Derivatives that track stock prices but do not confer stock ownership.
The second category is the most confusing. Even if a product is fully backed by stocks, it may still just be a certificate issued by another company, rather than equity in the company corresponding to the token's name.
For example, xStocks describes its products as fully collateralized tracking certificates rather than direct equity, and explicitly states that these products do not give holders shareholder voting rights. An overview published by U.S. Securities and Exchange Commission (SEC) staff also explains why different tokenized structures give investors different rights.
Therefore, I will break the question into two: What assets back this token? As a holder, what rights can I actually claim?
The token having Apple's name on it does not answer either question. Moreover, what happens to your rights if the issuer goes bankrupt?
How does a share of stock become a token?
Let's use a simplified stock-backed product to illustrate. Suppose one share of Apple stock is worth $100. This is just an example, not the current stock price.
The issuer arranges for the real stock to be held in a designated securities account or custody account. The issuer is responsible for setting up the product, the broker assists with buying and selling the stock, and the custodian is responsible for safekeeping the assets. Apple itself is not necessarily the issuer of the token.
Subsequently, the issuer creates, or "mints," tokens according to the product terms. Suppose initially one token corresponds to one share of stock. This does not mean another share of Apple stock has been created, but rather a token representing rights related to the existing asset has been created. Dividends, stock splits, and product design may all cause this conversion ratio to change over time.
Some systems allow authorized institutions to convert between stock and tokens. Other systems allow eligible clients to directly subscribe to and redeem tokens after completing account opening and review. Alpaca's authorized participant guide is a specific example.
Next is distribution. Exchanges or investment apps offer these products to eligible users. Market makers provide bid and ask quotes and bear risk with their own inventory and funds. The exchange is the trading venue, and market makers are one of the participants in it.
You can hold tokens through a platform, or, if the product supports it, hold tokens in your own wallet. But holding tokens yourself does not mean the underlying custodian disappears. The blockchain can show token balances, but it cannot independently prove that the corresponding stock is actually held in a securities account.
Finally, you have two ways to exit, and they are not the same:
Sell: another buyer takes over your existing tokens.
Redeem: follow the issuer's process, the tokens are removed from circulation, and you receive the assets specified in the product terms, which may be cash, stablecoins, or securities.
Being able to buy a certain token does not mean you automatically qualify for direct redemption. Minimum amounts, fees, processing times, and eligibility requirements all matter.
Moreover, if a token changes hands ten times, it does not mean ten new shares of stock have been bought in the market. Trading volume and the size of the assets behind the product are two different numbers.
What keeps the token price close to the stock price?
Suppose the stock price is $100 and the token price is $105. Eligible institutions might be able to buy the stock, create tokens, and then sell the tokens. If the spread is enough to cover costs and risk, the trade is profitable. An increase in token supply helps push its price back down. When the token price is too low, buying and redeeming can also work in the opposite direction.
This is arbitrage. The key is whether these trades can actually be executed, not just whether there is a live price on the screen.
Now, suppose it is Sunday. The token is still trading, but the underlying stock market is closed. How easily can market makers hedge their risk? Is anyone available to process redemptions? At what price?
Therefore, I would not equate "24/7 trading" with being able to execute at a reasonable price at any time. Bid-ask spreads may widen, and the token price may deviate from the stock price. On this point, xStocks' explanation of the primary and secondary markets is worth reading. ()
In this industry, what is each party responsible for?
The simplest breakdown I have found so far is:
Stocks → Brokerage and custody → Legal structure and token issuance → Trading and distribution → Portfolios, lending, and other applications.
The upstream is responsible for the assets and their corresponding rights. The midstream converts these rights into products that people can access and trade. The downstream is responsible for building applications that people are willing to use.
In addition, there is the work that supports the operation of the entire system:
- Blockchains and smart contracts record balances and enforce preset rules.
- Stablecoins and payment channels handle the flow of funds, while also bringing their own issuer risk and redemption risk.
- Wallets and security systems manage keys, authorizations, and permissions.
- Market data and oracles feed prices and external information into applications. A price oracle is not the same as proof of reserves.
- Compliance systems determine who can buy, hold, transfer, and redeem according to the relevant rules.
- Lifecycle services handle events such as dividends, stock splits, and mergers. Reconciliation is used to verify whether token balances, custody records, and client accounts are consistent.
A transfer being finalized on-chain does not mean that all the underlying securities or banking steps involved have also completed settlement at the same moment. There are still institutions, business processes, and legal obligations behind it.
Moreover, every participant needs a business model. Brokerages and custodians charge service fees; issuers may charge product fees, or subscription and redemption fees; exchanges charge trading fees; market makers earn the bid-ask spread while managing risk; infrastructure companies sell software; and applications need to generate revenue through users or distribution channels.
As an investor, what I focus on is: who is solving the problem, and who is getting paid for it? A large volume of transactions passing through a certain network does not automatically mean it can generate a large amount of revenue; a company operating well does not automatically mean its token holders can share in the profits.
Why must these things be put on-chain?
Traditional brokerages have long offered fractional share trading, portfolios, and securities-backed loans. These are not inventions of the crypto industry.
What really interests me is: what happens when people can invest in stocks through the same infrastructure while also holding stablecoins, trading, lending, and building financial products?
In my view, there are five reasons worth paying attention to.
1. Using stablecoins to fund investments makes assets more accessible.
Not everyone around the world can easily open a usable securities account. For those who already hold stablecoins, first converting stablecoins into fiat currency in a bank account and then transferring funds to another account adds another layer of hassle.
Tokenized stocks can provide eligible investors with a more direct path from holding stablecoins to investing in stocks. This makes investment products easier to sell across different markets, especially to people who are already using cryptocurrencies. It does not eliminate local regulations or account-opening review requirements, and specific products still have geographic restrictions, but it can indeed significantly simplify the process of funding and product distribution.
2. Developers can build more products without having to build everything from scratch.
Suppose you want to build a portfolio around the thesis that "AI will drive electricity demand." You need more than just a list of companies; you also need to be able to buy assets, hold assets, adjust allocations, and access financing services when needed.
With interoperable tokens and protocols, developers can reuse existing wallets, trading venues, lending infrastructure, and smart contracts. This creates room for indices, derivatives, automated portfolios, and products we haven't thought of yet.
The advantage is that the startup cost of trying new products is lower. A small team can focus its energy on doing well the part of the experience where it is differentiated.
3. Investors can move positions, not just move funds.
If I find a better app, I would rather transfer my existing positions directly there than first sell, withdraw cash, and then buy again somewhere else.
Traditional brokerages already support transferring positions directly without selling the assets. The opportunity on-chain is to make positions easier to transfer and use across compatible wallets, apps, and protocols.
Transferable stock tokens have the opportunity to achieve this across compatible wallets and platforms. For example, xStocks is designed to support use across wallets, exchanges, and DeFi protocols.
Compatibility still matters. But being able to leave with your assets changes the relationship between investors and apps. Apps must continue to provide value in order to keep your business.
4. Positions don't have to just sit in an account.
Eligible stock tokens can be used as collateral for borrowing or as margin. This is already happening: Kamino supports users borrowing USDC against some xStocks products.
Where the relevant products and platforms support it, holders can also lend out tokens and collect interest paid by borrowers; they can also provide liquidity to automated market makers and earn trading fees. These fees come from real trading activity, as illustrated by Uniswap's fee mechanism.
These are additional options, not cost-free yield. Borrowing brings liquidation risk, and lending assets or providing liquidity also introduces risks beyond simply holding the asset.
5. Trading and settlement can run continuously like the internet.
News doesn't stop when the stock exchange closes. Token markets that support extended trading hours can continue running at night and on weekends, allowing investors to react to news without waiting for the next market open.
There is also a separate benefit on the settlement side: stock tokens and stablecoins can be exchanged in the same atomic on-chain transaction, meaning delivery by both sides either happens at the same time or not at all. This reduces the risk in a transaction that one party has already delivered the asset but has not received the other party's asset.
The distinction here is important: round-the-clock token trading does not guarantee that investors can access the underlying stock market around the clock, nor does it guarantee that primary-market token subscriptions and redemptions are open at all times. A market that stays open also does not mean the bid-ask spread must be small.
Taken together, these are the reasons I am bullish on this direction. More people can access these assets, developers can build products around them, and investors can make their positions more useful.
Returning to the portfolio idea from the beginning, this means the path from "I believe the world will develop in this direction" to owning a portfolio that can be bought, transferred, and used can be shorter.
Compared with just putting a ticker symbol in a crypto wallet, this opportunity is much more interesting.
Where are the opportunities for startups?
Three areas are especially worth watching: turning investment ideas into investable products, enabling business operations to scale, and providing genuinely useful financing support.
1. Turning investment ideas into portfolios that people can actually buy.
A judgment like "AI will drive electricity demand" still leaves users with a great deal of work: choosing assets, understanding risk, executing trades, and continuously updating the portfolio. Startups can integrate these steps and, where rules allow, let others invest by following this strategy.
The opportunity lies in delivering a complete user experience for a specific group. An AI-generated list of stock tickers is easy to copy, but distribution channels, a credible track record, and a product users are willing to keep putting money into are much harder. Going on-chain must genuinely improve how the portfolio is held, transferred, or used in other scenarios.
2. Enabling tokenized stock businesses to scale across service providers.
Even when trades fail, redemptions are delayed, or stocks pay dividends or split, records must remain consistent across issuers, brokers, custodians, and applications. Startups can provide software to reconcile these records, coordinate information updates, and help operations staff handle exceptions.
A pragmatic entry point is to find a business process that is costly and has clear paying customers. Supporting multiple service providers can make an independent product more useful than a single issuer's internal system. Reliable system integration and experience handling complex situations can raise the cost for customers to switch providers; but if every customer requires endless customization work, it cannot become a scalable software business.
3. Enabling eligible stock tokens to be used as collateral.
Only when lenders can value stock tokens, understand the legal rights they correspond to, and recover funds by disposing of collateral when borrowers fail to repay can it count as useful collateral. Market closures, redemption restrictions, and differences between issuers all make this far more complex than plugging into a stock price data source.
Startups can develop collateral valuation, risk management, and liquidation tools for lending platforms without becoming lenders themselves. The value lies in helping platforms decide which collateral to accept, how much can be lent, and how to exit when the market is under stress. This depends on reliable data and genuinely available liquidity; smart contracts alone are not enough.
These are three different businesses: user-facing investment products, operations software for financial institutions, and infrastructure serving lending. Each requires a clear customer and a reason to exist beyond "putting tokens on-chain."
