Putting anything on the blockchain is a great idea until you start getting into the weeds of execution. Tokenized stocks are no exception, and the problems emerge once you start looking at liquidity and boring legal onchain vehicles.

Let’s look at all that in today’s edition.

— Donovan

Base sees record net outflows as Binance unwinds to Ethereum:

Arbitrum had a moment yesterday, notching inflows following this week’s Robinhood news. But net flows are still negative when considering the full-week timeframe.

The standout here, though, is Base, which recorded the largest seven-day net capital exodus among tracked chains. Over $1.3 billion has been withdrawn from Base to Ethereum, dwarfing other bridge routes, according to Artemis.

Blockworks Research’s Dan Smith attributes this dramatic shift to Binance consolidating ETH liquidity: The exchange reportedly moved about $2.3 billion of ETH off Base using a hot wallet, with the move nearly emptying Binance’s wallet on Base.

Zooming out to a one-month view, the net outflow from Base jumps to a whopping $5b. Smith told me Binance did something similar with Arbitrum funds recently.

The event highlights how exchange treasury decisions can swing bridge flow metrics in a big way, masking or distorting organic user trends.

— Macauley Peterson

Blockchain is shaping a radically different economy, with 10% of global GDP predicted to be tokenized onchain by 2027. The technology is disrupting key industries worldwide — upending the conventional way of doing business while transforming customer experiences.

How might this evolution play out over the next quarter century? A new special report from Blockworks Research and OKX answers this question, drawing from interviews and research conducted across the leaders of finance, technology, retail, and entertainment. 

Stonks on a blockchain

You can finally trade traditional stocks on a blockchain!

That’s thanks to “xStocks”, the new tokenized stocks product brought to you by Kraken and Backed Finance (and soon Robinhood).

24/7 trading, instant settlement, tokens composable with decentralized finance, dividend payments flowing directly to your wallets and best of all, a legal claim on the underlying stock.

Nice! Maybe my mom will finally understand the industry I work in.

But wait…there are nuances.

Anybody with a wallet can buy xStocks on Solana, yes.

But only qualified, KYC’d, non-US Kraken investors will be able to mint and redeem the underlying tokenized xStocks.

That’s because Backed issues each asset out of a Liechtenstein-domiciled SPV (special purpose vehicle). The SPV buys (or sells) the underlying shares on a regulated exchange during US market hours after a mint or burn request.

That takes us to the liquidity and price peg problems with tokenized stocks.

Stocks trade Monday to Friday from 9:30 am ET to 4 pm. But tokenized stocks trade 24/7.

While Wall Street is open, a primary-market arbitrage keeps xStocks pegged to the cash price.

What happens to the peg when the trading day closes?

If Tesla finishes Friday at $300 and TSLAx changes hands at $290 on Sunday, price convergence only happens when someone is willing to burn tokens for shares after the market reopens.

But since market makers can’t hedge a Sunday fill until the bell rings on Monday, they’ll have to protect themselves by quoting wide spreads and small size, as Dragonfly Capital’s Rob Hadick pointed out in an excellent tweet.

This is somewhat echoed by Wintermute CEO Evgeny Gaevoy, who acknowledges that market makers “are generally not the biggest fans of providing liquidity on AMMs, let alone on weekends.”

This probably won’t matter so much for smaller trades. But the current lack of liquidity undermines the value proposition of tokenized equities.

You can play around on Jupiter to see for yourself how a six-figure trade would eat a high price impact of up to a triple-digit BPS.

The silver lining is that equities are far less volatile than crypto, so maybe some market makers would be willing to stomach that risk.

But until these issues get better, you can probably get much better execution and cheaper delta exposure with synthetic perps using Ostium, a perps DEX on Arbitrum that I’ve touched on previously.

Ostium’s co-founder, Kaledora Linn, notes that opening a $250k TSLA position through Ostium’s synthetic perps is roughly 100x cheaper than what you’d pay for a tokenized stock right now.

The only trade-off is that Ostium’s synthetic assets don’t enjoy the same capital efficiency of tokenized stocks (because they’re tokenized!). 

You can now put your tokenized stocks on a money market like Kamino and borrow stablecoins against them.

It’s not clear if Robinhood will enable that composability, though. 

An early peek under the hood (thanks to Ren of Electric Capital) of Robinhood’s tokenized stock contracts reveals requirements of KYC/AML checks that limit transfers to approved addresses.

We’ll have to wait and see.

— Donovan Choy

Vlad knows his crypto

Robinhood CEO Vlad Tenev isn’t just parroting buzzwords. He’s deep in the weeds on blockchain architecture, if a recent chat on the Odd Lots podcast is any indication.
Speaking to Joe Weisenthal and Tracy Alloway on the latest episode, Tenev breaks down why Robinhood’s tokenized stocks are launching on Arbitrum:

• “We’re actually rolling out our own blockchain…it’s a layer-2 on top of Ethereum.”

• “Ethereum is the base layer-1, and the problem with transacting directly on Ethereum is that…the fees can be quite high.”

• “Arbitrum…consolidates lots and lots of transactions and syncs up to the base layer-1 chain at an infrequent cadence…you can split up what would be a large transaction fee into lots and lots of small transactions and get the cost down to a handful of cents.”

• “The goal would be for this to be essentially transaction cost-free or very, very low cost.”

• “24/7 [trading] is coming over the next few months and we’ll also unlock full onchain capabilities…swapping, collateralized lending and borrowing, anything you can do in DeFi.”

• “Self custody is interesting…if the stock were to be tokenized…you just attach to your wallet [to move between brokers].”

• “Staking is interesting because, technically, staking is dedicating tokens and resources to support the network itself…which I think will be able to be done eventually.”

• “The chain will be a full-fledged developer platform made available to third parties.”

For a fintech CEO, Tenev sounds more like a protocol founder, with a decent understanding of Ethereum rollups, sequencers, data availability and onchain applications. He insists Robinhood’s chain will be designed to plug traditional finance straight into DeFi…which would be pretty neat!

— Macauley Peterson