Tokenized Stock
What Is A Tokenized Stock?
As the name suggests, tokenized stocks take traditional stocks and represent them as digital tokens on a blockchain. Aside from unlocking the advantages of blockchain assets, tokenization also enables fractionalization, which allows investors to purchase small fractions of expensive shares, rather than buying a whole share.
How Do Tokenized Stocks Work?
Tokenized stocks function by mirroring the market value of the underlying asset. They generally rely on a trusted third party or protocol to maintain the peg to the real-world stock price, primarily through two structures:
1:1 Backing
A third-party custodian holds the actual physical shares and issues digital tokens, with each token equivalent to a single share—similar to how stablecoins work.
Synthetic
Synthetic tokenized stocks are derivatives, meaning that they track the stock price without holding the physical share. While synthetic tokenized assets may not be backed by a real-world asset, they are usually backed by an overcollateralized crypto asset. This means that users lock up more value in a crypto asset than the synthetic asset is nominally worth, in order to offset the volatility of the collateralized asset.
Benefits of Tokenized Stocks
Instant Settlement
Traditional stock trades can take two days to settle. In contrast, tokenized stocks settle almost instantly.
24/7 Trading
While stock markets close on weekends and holidays, blockchains never sleep, meaning that you can trade tokenized stocks 24/7, every day of the year. This allows users to react quickly to price movements.
DeFi Integration
These tokens can be used within decentralized applications (dApps) and DeFi protocols, e.g., using a tokenized stock as collateral for a loan.
Security Considerations and Risks
The main challenges for tokenized stocks are around regulatory uncertainty, as laws can vary significantly by jurisdiction. What’s more, these tokens rely on the issuing custodian to manage them both honestly and competently, which introduces counterparty risk.
Because tokenized stocks are digital assets, they also require robust security. Leaving them on centralized exchanges also exposes you to counterparty risk, while software-only solutions leave them vulnerable to online threats. Ideally, they should be secured with a signer, keeping the private keys to your portfolio offline and under your control.
For more on tokenized assets, check out our article on Ledger Academy, or head to the Ledger blog to learn about how Ledger makes tokenized assets accessible through its integration with Ondo Finance.
