YZi Labs Investor: Three Major Entrepreneurial Opportunities Brought by Stock Tokenization

Author: RickyW, member of the YZi Labs investment team

Compiled by: Jiahua, ChainCatcher

Recently, I have been delving into on-chain stocks, and one idea has been lingering in my mind.

If I am optimistic about a certain development trend, why can't I turn that judgment into an investment portfolio, buy in with cryptocurrency, and let others follow suit?

For example, if I believe AI will significantly increase electricity demand, I might want to invest in power generation, the grid, and related equipment manufacturing companies. What I want is not just for a chatbot to provide five stock codes, but to understand what this portfolio specifically targets, to buy this set of assets, and to continuously adjust and use it as my judgment changes.

I really want to try such a product.

But then I keep asking myself: can't such a product be created directly on the basis of a regular securities account? What exactly does putting it on-chain improve?

Before getting excited about these products, I want to clarify how they operate at their core. Who holds the stocks? What do the tokens represent? How can funds be retrieved? Where can startups actually conduct real business?

What exactly are you buying?

The act of buying stocks has long felt digital. Open the app, press a button, and a number changes. It is not blockchain that digitizes stocks.

Behind this button, brokers process your orders, trading venues match buyers and sellers, and clearing and settlement systems calculate the funds and securities owed to each party and complete the delivery, while custodians and registrars are responsible for safeguarding securities and maintaining ownership records. Some institutions may perform multiple functions simultaneously.

In a common securities account arrangement, you are the actual beneficial owner of the stock, while the registered holder is an intermediary or nominee holder. There is already a complete set of records and legal relationships between you and the listed company. Investor.gov provides a simple explanation of this distinction.

"On-chain stocks" may refer to several different things:

Tokens linked to actual share ownership or legally recognized indirect securities interests.

Stocks held elsewhere as collateral, with products issued by third parties.

Derivatives that track stock prices but do not confer stock ownership.

The second type is the most confusing. A product may have sufficient stocks as collateral but could merely be a certificate issued by another company, rather than equity in the company corresponding to the token name.

For example, xStocks describes its products as fully collateralized tracking certificates rather than direct equity and explicitly states that these products do not grant holders shareholder voting rights. The overview published by staff of the U.S. Securities and Exchange Commission (SEC) also explains why different tokenization structures grant investors different rights.

Therefore, I will break the question into two: what assets back this token? What rights can I claim as a holder?

The name Apple written on the token does not answer either of these questions. Moreover, what happens to your rights if the issuer goes bankrupt?

How does a share of stock become a token?

Let’s illustrate with a simplified stock-backed product. Suppose one share of Apple stock is worth $100. This is just an example and not the current stock price.

The issuer arranges for the real stock to be held in a designated securities account or custodial account. The issuer is responsible for setting up the product, brokers assist in buying and selling stocks, and custodians are responsible for safeguarding the assets. Apple itself may not necessarily be the issuer of the token.

Subsequently, the issuer creates, or "mints," the token according to the product terms. Suppose initially one token corresponds to one share of stock. This does not mean that another share of Apple stock has been created, but rather that a token representing the rights associated with the existing asset has been created. Dividends, stock splits, and product design may cause this exchange ratio to change over time.

Some systems allow authorized entities to convert between stocks and tokens. Other systems allow qualified customers to directly subscribe and redeem tokens after completing account opening and verification. Alpaca's authorized participant guide is a specific example.

Next comes distribution. Exchanges or investment applications offer these products to qualified users. Market makers provide buy and sell quotes and take on risks with their own inventory and funds. Exchanges are trading venues, and market makers are one of the participants.

You can hold tokens through the platform or, if supported by the product, place the tokens in your own wallet. However, holding tokens yourself does not mean the underlying custodial institution disappears. Blockchain can show token balances but cannot independently prove that the corresponding stocks are indeed held in a certain securities account.

Finally, you have two ways to exit, which are not the same:

Sell: Another buyer takes over your existing tokens.

Redeem: Follow the issuer's process, the tokens exit circulation, and you receive the assets stipulated in the product terms, which may be cash, stablecoins, or securities.

Being able to buy a certain token does not automatically mean you qualify for direct redemption. Minimum amounts, fees, processing times, and eligibility requirements are all important.

Additionally, if a token changes hands ten times, it does not mean that ten shares of stock have been newly bought in the market. Trading volume and the scale of the assets behind the product are two different numbers.

What makes token prices close to stock prices?

Suppose the stock price is $100, and the token price is $105. Qualified institutions may buy stocks, generate tokens, and then sell the tokens. If the price difference is enough to cover costs and risks, this transaction can be profitable. An increase in token supply helps push the price back down. When token prices are too low, buying and redeeming can also have a reverse effect.

This is arbitrage. The key is whether these transactions can actually be executed, not just whether there is a real-time price on the screen.

Now, suppose it is Sunday. Tokens are still trading, but the underlying stock market is closed. How easily can market makers hedge their risks? Is there anyone who can process redemptions? At what price can they redeem?

Therefore, I do not equate "24/7 trading" with being able to transact at reasonable prices at any time. The bid-ask spread may widen, and token prices may deviate from stock prices. On this point, xStocks' explanation of the primary and secondary markets is worth reading.

What are the responsibilities of each party in this industry?

The simplest division I have found so far is:

Stocks → Brokerage and Custody → Legal Structure and Token Issuance → Trading and Distribution → Portfolio, Lending, and Other Applications.

Upstream is responsible for the assets and their corresponding rights. Midstream transforms these rights into products that people can access and trade. Downstream is responsible for creating applications that people are willing to use.

Additionally, there are functions that support the entire system's operation:

• Blockchain and smart contracts record balances and execute preset rules.
• Stablecoins and payment channels facilitate the flow of funds, while also bringing their own issuer risks and redemption risks.
• Wallets and security systems manage keys, authorizations, and permissions.
• Market data and oracles bring prices and external information into applications. Price oracles do not equal proof of reserves.
• Compliance systems determine who can buy, hold, transfer, and redeem based on relevant rules.
• Ongoing services handle events such as dividends, stock splits, and mergers. Reconciliation is used to verify whether token balances, custody records, and customer accounts are consistent.

A transfer that has been finally confirmed on-chain does not mean that all underlying securities or banking processes have settled at the same moment. This still involves institutions, business processes, and legal obligations.

Moreover, each participant needs a business model. Brokers 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 risks; infrastructure companies sell software; applications need to generate revenue through users or distribution channels.

As an investor, I am concerned about: who is solving the problem and thus getting compensated? A large volume of transactions passing through a network does not automatically mean it can generate substantial revenue; a company performing well does not automatically mean its token holders can share in the profits.

Why must these be put on-chain?

Traditional brokers have long provided fractional share trading, portfolios, and securities-backed loans. These are not inventions of the crypto industry.

What truly interests me is: what happens when people can invest in stocks through the same infrastructure while holding stablecoins, trading, lending, and building financial products?

In my view, there are five reasons worth noting.

1. Investing with stablecoins makes assets more accessible.

Not everyone around the world can easily open a good securities account. For those who already hold stablecoins, converting stablecoins to fiat currency in a bank account and then transferring funds to another account adds another layer of hassle.

Tokenized stocks can provide a more direct path for qualified investors to transition from holding stablecoins to stock investments. This makes investment products easier to market to different markets, especially to those already using cryptocurrencies. It does not eliminate local regulations or account opening review requirements, and specific products still have regional restrictions, but it can significantly simplify the process of transferring funds and distributing products.

2. Developers can create more products without building everything from scratch.

Suppose you want to build an investment portfolio around the judgment that "AI will drive electricity demand." You need more than just a list of companies; you need the ability 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 space for indices, derivatives, automated portfolios, and products we have yet to think of.

The advantage is that the startup costs for trying new products are lower. A small team can focus on delivering the differentiated part of their experience.

3. Investors can transfer holdings, not just transfer funds.

If I discover a better application, I would prefer to directly transfer my existing holdings rather than sell, withdraw cash, and then buy again elsewhere.

Traditional brokers already support transferring holdings without selling assets. The opportunity on-chain lies in making it easier to transfer and use holdings across compatible wallets, applications, and protocols.

Transferable stock tokens have the potential to achieve this across compatible wallets and platforms. For example, xStocks' design supports use across wallets, exchanges, and DeFi protocols.

Interoperability remains important. But being able to take assets away will change the relationship between investors and applications. Applications must continuously provide value to retain your business.

4. Holdings do not have to just sit in accounts.

Eligible stock tokens can be used as collateral for loans or margin. This is already happening: Kamino supports users in collateralizing part of their xStocks products to borrow USDC.

In cases where relevant products and platforms support it, holders can also lend tokens and earn interest paid by borrowers; they can also provide liquidity to automated market makers and earn trading fees. These fees come from real trading activities, as demonstrated by Uniswap's fee mechanism.

These are additional options and not risk-free gains. Borrowing brings liquidation risks, while lending assets or providing liquidity introduces risks beyond merely holding assets.

5. Trading and settlement can operate continuously like the internet.

News does not stop when the stock exchange closes. Token markets that support extended trading hours can continue to operate during nights and weekends, allowing investors to react to news without waiting for the next opening.

There is also an independent benefit in settlement: stock tokens and stablecoins can be exchanged in the same on-chain atomic transaction, meaning that delivery by both parties either occurs simultaneously or not at all. This reduces the risk of one party delivering assets without receiving the other party's assets.

The distinction here is important: tokens trading around the clock does not guarantee that investors can access the underlying stock market at all times, nor does it guarantee that primary market token subscriptions and redemptions are always open. A continuously open market does not necessarily mean that the bid-ask spread will be small.

Overall, these are the reasons I am optimistic about this direction. More people can access these assets, developers can build products around them, and investors can make their holdings serve more purposes.

Returning to the initial investment portfolio concept, this means that the path from "I believe the world will move in this direction" to having a portfolio that can be bought, transferred, and used can be shorter.

This opportunity is much more interesting than simply placing a stock code in a crypto wallet.

Where are the opportunities for startups?

There are three areas particularly worth focusing on: turning investment ideas into investable products, enabling scalable business operations, and providing truly useful financing support.

1. Turning investment ideas into portfolios that people can actually buy.

Judgments like "AI will drive electricity demand" still leave users with a lot of work: selecting assets, understanding risks, executing trades, and continuously updating portfolios. Startups can integrate these steps and, where regulations allow, enable others to invest following this strategy.

The opportunity lies in providing a complete user experience for a specific group. AI-generated stock code lists are easy to replicate, but distribution channels, credible historical performance records, and a product that users are willing to continuously invest in are much rarer. On-chain must genuinely improve the way portfolios are held and transferred, or enable them to be used in other scenarios.

2. Enabling tokenized stock businesses to scale across service providers.

Even if trades fail, redemptions are delayed, or stocks undergo dividends or splits, records among issuers, brokers, custodians, and applications must remain consistent. Startups can provide software to verify these records, coordinate information updates, and help operators handle exceptions.

A pragmatic entry point is to find a costly business process with clear paying customers. Supporting multiple service providers can allow the utility of independent products to extend beyond a single issuer's internal system. Reliable system integration and experience in handling complex situations can increase the cost for customers to switch service providers; however, if every customer requires endless customization work, it will be impossible to build a scalable software company.

3. Allowing eligible stock tokens to be used as collateral.

Only when lenders can value stock tokens, understand their corresponding legal rights, and recover funds by disposing of collateral when borrowers default can they be considered useful collateral. Market closures, redemption restrictions, and differences among issuers make this far more complex than simply accessing a stock price data source.

Startups can develop collateral assessment, risk management, and liquidation tools for lending platforms without having to become lenders themselves. The value lies in helping platforms decide which collateral to accept, how much funding can be lent, and how to exit during market pressure. This relies on reliable data and real usable liquidity; merely having smart contracts is not enough.

These are three different businesses: user-facing investment products, operational software for financial institutions, and infrastructure serving lending. Each requires clear customers and a reason for existence that goes beyond "putting tokens on-chain."