Tokenized Stocks See 56% Growth in Three Months: How Can Crypto Solve Liquidity Fragmentation?

Tokenized stocks are advancing on three fronts, but liquidity is being torn apart both vertically and horizontally.

Written by: @100y_eth

Compiled by: AididiaoJP, Foresight News

Key Points

Despite a slowdown in overall growth in the RWA sector over the past few months, tokenized stocks continue to expand at an extraordinary pace. Currently, the tokenized stock sector is primarily expanding through three channels:

• Linked Security tokenized stocks provided by Ondo, xStocks, Robinhood, etc.;
• Issuer-Sponsored tokenized securities provided by Securitize, Figure, Superstate, etc.;
• Growth of perpetual contract exchanges (strictly speaking, this does not belong to tokenization).

While the tokenized stock sector is growing overall, liquidity fragmentation has begun to emerge as a side effect. Even if the underlying stocks are the same, liquidity is being split along two dimensions:

• Vertically, between different tokenized structures;
• Horizontally, among different tokenized providers using the same structure.

From a more positive perspective, especially regarding accessibility, this phenomenon may not necessarily indicate fragmentation of existing liquidity. On the contrary, tokenized stocks may attract investors who previously had no access to the liquidity of the U.S. stock market, and fragmentation is merely a byproduct.

Regardless, the liquidity fragmentation of tokenized stocks is a real issue. Potential solutions may include:

• The emergence of orchestration or clearing platforms similar to those in the stablecoin sector;
• Industry consolidation into an oligopoly or monopoly structure driven by economies of scale.

Stagnation of Tokenized Government Bonds, but Tokenized Stocks are Racing Ahead

Market interest in RWA remains strong. It is no exaggeration to say that tokenized U.S. government bonds have been the main engine of RWA growth to date. From January 1, 2024, the total market capitalization of crypto has only grown from $1.65 trillion to $2.19 trillion, an increase of about 1.33 times; meanwhile, the tokenized U.S. government bond market has expanded from $695 million to $16.1 billion, a growth of 23 times.

However, the previously explosive growth of tokenized U.S. government bonds has recently begun to slow. This trend is not limited to government bonds. Other RWA categories such as stablecoins, private credit, and commodities have also shown signs of stagnation or even contraction recently. Within the RWA sector, however, one asset class has recently demonstrated rapid growth: tokenized stocks.

In the past three months, the tokenized stock market has grown from $1.2 billion to $1.88 billion, an increase of 56%. During the same period, tokenized U.S. government bonds grew only 7.3%, private credit grew 16%, and commodities declined 13%. These figures clearly illustrate the steep growth of tokenized stocks recently.

Several reasons contribute to the rapid growth of tokenized stocks. Fundamentally, due to the recent rise in AI and semiconductor-related stocks, stocks as an asset class have attracted more attention. Additionally, as the RWA market matures, the pathways and structures for stock tokenization have become quite clear. As a result, numerous tokenization platforms have begun to offer tokenized stock services, and the market has started to see scale growth.

The current growth of tokenized stocks is primarily achieved through three main channels:

The first channel involves offshore structures that tokenize debt instruments into Linked Securities, including platforms like Ondo Global Markets, Backed Finance xStocks, and Robinhood Stock Tokens. These stock tokens do not represent direct rights to the underlying shares. However, due to fewer compliance restrictions faced in secondary distribution, they can be actively used in on-chain DeFi protocols, allowing for rapid growth.

The second channel is the growth of platforms like Securitize, Superstate, and Figure. They tokenize existing shares directly through transfer agents. Since these platforms tokenize shares themselves while fully complying with securities laws, they face strict compliance restrictions in issuance and secondary trading. This results in fewer available stocks and more limited utility. However, when these platforms collaborate with companies to tokenize their shares, the number of stocks may be limited, but the scale of tokenization for each stock can be very large. Therefore, they have made significant contributions to the recent growth of the tokenized stock market.

The final channel is perpetual contract exchanges like Hyperliquid, Variational Omni, and QFEX. Strictly speaking, the stock products traded on perpetual contract exchanges are not tokenized stocks. Nevertheless, a large number of users can already trade products that track stock prices through perpetual contract exchanges, and the scale is substantial.

However, from the perspective of financial market development, the emergence and growth of tokenized stocks cannot be entirely viewed as positive. Just as growth always has its dark side, the expansion of tokenized stocks has also brought about several issues. This report focuses on one of these issues: liquidity fragmentation.

Liquidity Fragmentation of Tokenized Stocks

Even if the underlying stocks are the same, liquidity can be fragmented in both vertical and horizontal directions due to different tokenization structures and platforms.

Vertical Liquidity Fragmentation Between Different Tokenization Methods

There are many ways to tokenize stocks:

• Custodial Tokenized Stocks: Third parties tokenize rights to shares held in the DTC custody system. Representative examples include DTCC, Ondo, and Dinari.
• Issuer-Sponsored Tokenized Stocks: Issuers or transfer agents directly tokenize ownership of shares. Representative examples include Securitize, Figure, and Superstate.
• Linked Securities: Third parties issue and tokenize a separate security, providing economic exposure to the underlying stock. Representative examples include Robinhood Stock Tokens, Backed Finance xStocks, and Ondo Global Markets.
• Security-Based Swaps: Third parties tokenize a derivative contract that provides economic exposure to the underlying stock. A representative example is Robinhood Classic Stock Tokens.
• Stock Fund Tokenization: Tokenization of fund shares composed of stocks. Representative examples include Centrifuge and WisdomTree.
• Perpetual Futures: These platforms do not tokenize stocks but operate exchanges that provide trading of perpetual contracts tracking stocks. Representative examples include Hyperliquid, QFEX, Variational Omni, and Lighter.

Even if the underlying stocks are the same, liquidity fragmentation exists between different tokenization methods. Custodial tokenized stocks and issuer-sponsored tokenized stocks are based on original shares; while linked securities tokenize debt securities, security-based swaps tokenize derivatives, and stock fund tokenization involves fund shares. These tools are therefore not interoperable. Perpetual futures fundamentally do not tokenize stocks, thus trading in a separate market with independent liquidity.

Horizontal Liquidity Fragmentation Within the Same Tokenization Method

Even if the tokenization method is the same, liquidity can be fragmented due to different entities conducting the tokenization.

• Original Stocks: Even if the tokens are based on original shares, they may not be interoperable. Shares held in the DTC custody system and tokenized as custodial tokenized stocks differ from shares that are directly registered with a transfer agent and tokenized as issuer-sponsored tokenized stocks. Therefore, liquidity is fragmented among the following three categories: 1) shares held in DTC custody and custodial tokenized stocks; 2) shares with ownership directly registered through DRS; 3) issuer-sponsored tokenized stocks. Because these three categories are not interoperable.
• Linked Securities: Under this tokenization method, liquidity is fragmented between different tokenization platforms. Even if the underlying stocks and tokenization structures are the same, the final tokens generated may differ due to different tokenization entities, such as Robinhood, xStocks, or Ondo Global Markets.
• Stock Fund Tokenization: Under this method, liquidity is also highly fragmented, depending on the type of fund and managing entity. However, it is difficult to say that tokenization itself caused this fragmentation. Funds and ETFs composed of stocks have long existed in various forms in traditional financial markets, and their liquidity is also fragmented.
• Perpetual Futures: Following the success of Hyperliquid, numerous perpetual contract exchanges have emerged. Even if they list the same stock, that stock will be traded separately on different exchanges, each with fragmented liquidity.

A Hypothetical Scenario

Imagine a hypothetical scenario where TSLA shares are tokenized through each of the methods and platforms mentioned above. Then TSLA could be traded in the following forms:

• Original TSLA: TSLA shares traded on Nasdaq. Even in the traditional stock market, TSLA is not only traded on the U.S. Nasdaq but also on multiple public electronic exchanges, alternative trading systems, and over-the-counter markets. It is also traded on various overseas exchanges and in the form of depositary receipts. Its liquidity has therefore already been fragmented to some extent.
• Multiple Custodial Tokenized TSLA Products: These are products that tokenize rights to TSLA shares already held in existing DTC and brokerage account systems. DTCC can tokenize TSLA, and different brokerages can also tokenize their respective rights to TSLA shares. However, since these tokens merely represent rights within the traditional stock market system in the form of tokenized receipts, it is difficult to view their liquidity as being separate from the original shares.
• DRS TSLA: TSLA shares held through DRS, with ownership directly registered with Tesla or Tesla's transfer agent. This asset has already fragmented from the original TSLA shares.
• Issuer-Sponsored Tokenized TSLA: Tokenized TSLA shares with ownership directly registered in token form with Tesla or Tesla's transfer agent. To trade in the same liquidity pool as the original TSLA shares, ownership needs to be transferred back to the DTC custody system from direct registration.
• Multiple Linked Securities TSLA Products: Under this structure, tokenization platforms tokenize debt securities that are one-to-one backed by TSLA shares. Since platforms like Robinhood, Ondo, and xStocks can each tokenize TSLA into different tokens, liquidity fragmentation occurs.
• Multiple Security-Based Swap TSLA Products: Under this structure, tokenization platforms tokenize derivative contracts based on TSLA stock.
• Multiple Tokenized Stock Fund Shares Including TSLA: Under this structure, fund shares that include TSLA in their portfolio are tokenized.
• TSLA Traded on Multiple Perpetual Contract Exchanges: TSLA is traded separately on various perpetual contract exchanges, each with independent liquidity.

In summary, even if TSLA liquidity has already been fragmented within the traditional securities system, this fragmentation has historically been limited to alternative trading systems, DRS, and overseas exchanges. However, within the tokenized stock ecosystem, there may exist numerous forms of tokenized TSLA under different legal structures, including derivative contracts, debt securities, and fund shares. These products may also target entirely different investor groups, such as U.S. versus non-U.S. investors or retail versus institutional investors.

None of these products are interoperable, trading in markets with independent liquidity. The result is that tokenization may lead to a degree of liquidity fragmentation for TSLA far exceeding today.

The Paradox of Tokenized Stocks: How to Solve Liquidity Fragmentation?

The value proposition of tokenized stocks is clear. They offer benefits such as greater accessibility, 24/7 trading, faster settlement, and integration with smart contracts. Tokenization aims to provide better financial services to people around the world. However, in the case of tokenized stocks, it seems to have produced the paradoxical side effect of liquidity fragmentation.

In my personal view, this perspective is partially correct and partially incorrect. How this issue is interpreted depends on how one views the tokenized stock ecosystem.

If viewed from the current state, the tokenized stock ecosystem undoubtedly has a liquidity fragmentation problem. A stock may simultaneously experience vertical liquidity fragmentation between different tokenization structures and horizontal liquidity fragmentation among different platforms using the same tokenization structure.

However, if viewed from the perspective of enhancing accessibility, the situation is different. Rather than saying that tokenization has fragmented the liquidity of the existing stock market, it is more accurate to say that the newly created platforms have improved access to these markets, ultimately leading to liquidity fragmentation. Linked securities tokenization, security-based swap tokenization, and perpetual contracts have opened accessible pathways for investors who previously found it difficult to access U.S. stocks, thereby bringing new liquidity into the market.

Whether liquidity fragmentation is an inherent problem of tokenized stocks or a final byproduct of their growth process, if the market scale of tokenized stocks far exceeds current levels, this issue will become more serious. Therefore, addressing it will become important.

In the stablecoin sector, companies have attempted to address liquidity fragmentation through stablecoin orchestration platforms and clearinghouse-like services. So how can liquidity fragmentation of tokenized stocks be resolved? Two potential scenarios can be considered.

The first scenario is the emergence of a platform that plays a role similar to stablecoin orchestration or clearing in the tokenized stock sector. However, unlike stablecoins that typically adopt consistent tokenization methods and have relatively simple rights structures, tokenized stocks use a variety of tokenization structures, involve complex rights, and cover a far greater number of individual securities than stablecoins. Therefore, it is hard to imagine a single entity being able to handle all of this at scale.

The second scenario is market consolidation into an oligopoly. In the early stages of any industry, there are often numerous participants. However, factors such as liquidity and network effects are likely to lead to the eventual reorganization of the industry around a few dominant or monopolistic platforms. Tokenized stocks are unlikely to be an exception. As regulatory conditions become clearer and restrictions gradually lift, a specific stock tokenization structure or platform may grow significantly, leading to concentrated liquidity.

Tokenized stocks are just getting started. Following stablecoins and tokenized government bonds, how the tokenized stock market will evolve and whether it can provide investors with value consistent with the fundamental purpose of tokenized equity remains to be seen.