On-chain stocks sector heats up: what can startups do?

In recent months, on-chain stocks have consistently drawn attention, and a question keeps resurfacing.

If you believe the world is moving in a certain direction, why not package that thesis into a basket, purchase it with cryptocurrency, and let others follow?

For example, if you believe artificial intelligence will significantly drive up electricity demand, you might want to be simultaneously exposed to companies in power generation, grid infrastructure, and equipment manufacturing. The key isn't just asking a chatbot for five tickers, but understanding that exposure, buying a basket of assets, and continuing to manage it as your view evolves.

That is the product form truly worth building.

The question that follows is: Can this be done directly in a traditional brokerage account? What exactly does putting it on-chain add?

Before the product gets exciting, we need to see the underlying mechanics clearly: Who holds the stocks? What do the tokens represent? How can funds be withdrawn? Where do startups create real business along the chain?

First: What exactly are you buying?

Purchasing stocks is already highly digital. Clicking a button in an app changes the numbers in your account. It wasn't blockchain that digitized stocks.

Behind the button, brokers process orders, exchanges match buyers and sellers, clearing and settlement arrange what parties owe and complete deliveries, while custodians and registrars safeguard securities and ownership records. Some institutions handle multiple functions.

In a typical broker structure, investors are beneficial owners, while intermediaries or nominee holders are the registered owners. Investors are separated from the company by a layer of record-keeping and legal relationships. Investor.gov provides a brief explanation of this distinction.

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

• Tokens linked to actual shareholding or recognized indirect security interests;
• Third-party products backed by stocks held elsewhere;
• Derivatives that only track stock prices and do not confer ownership of those stocks.

The second type is the easiest to confuse. A product can be 100% collateralized by stocks, but it remains a voucher issued by another company, not equity in the company named by the token.

For example, xStocks defines its product as a fully collateralized tracking certificate, not direct equity, nor does it grant shareholder voting rights. An SEC staff summary also notes that different tokenization structures grant investors different rights.

Therefore, it can be split into two questions: What backs this token? As a holder, what rights can you actually claim?

Even if the token name includes Apple, these two questions may still lack answers. What happens to holder claims if the issuer goes bankrupt?

How do stocks become tokens?

Take a simplified stock-backed product as an example. Assume Apple's stock price is $100, purely for illustration, not the current price.

The issuer arranges for real stocks to be placed in designated broker or custody accounts. The issuer creates the product, the broker facilitates stock trading, and the custodian holds the positions. Apple itself does not need to be the token issuer.

Subsequently, the issuer creates or "mints" tokens according to the product terms. Assume initially one token equals one share. This doesn't create an extra Apple share; it merely creates a representation of rights linked to existing assets. Dividends, stock splits, and product design will change the conversion ratio over time.

Some systems allow authorized entities to convert between stocks and tokens, while others allow qualified clients to issue and redeem directly after onboarding. Alpaca's Authorized Participant Guide is a concrete example.

Next is distribution. Exchanges or investment apps open the product to qualified users. Market makers quote bid and ask prices, taking on risk with their own inventory and capital. The exchange is the venue, market makers are participants.

Tokens may be placed on platforms or, where supported, moved to personal wallets. But self-custodying tokens does not mean the underlying custodian disappears. On-chain balance displays cannot independently prove that stocks are indeed stored in a broker account.

Ultimately, there are two exit paths, and they are not the same:

• Selling: Another buyer takes over an existing token.
• Redeeming: Following the issuer's process, tokens exit circulation, and holders receive cash, stablecoins, or securities per the terms.

Being able to buy tokens does not automatically qualify you for direct redemption. Thresholds, fees, timing, and eligibility matter.

Furthermore, a token changing hands ten times does not equal ten new shares created. Trading volume and the asset quantity backing the product are two distinct metrics.

How is the price anchored to the underlying stock?

Assume the underlying stock is $100, and the token is $105. Qualified institutions might buy the underlying, mint tokens, and sell them. If the spread covers costs and risks, the trade works. Increased token supply helps push the price back down. When tokens are too cheap, buying and redeeming reverses the process.

This is arbitrage. The key is whether these trades can actually execute, rather than just having a price source visible on a screen.

Now imagine Sunday: tokens are still trading, but the underlying stock market is closed. How difficult is it for market makers to hedge? Is there anyone who can redeem? At what price?

Therefore, "24/7 trading" does not equal "trading at good prices around the clock." Spreads widen, and prices deviate. xStocks' explanation of primary and secondary markets is worth referencing.

What are each link in the industry doing?

It can be summarized with a simple chain:

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

The upstream deals with assets and rights. The middle layer converts these rights into something people can access and trade. The downstream builds the products users want to use.

Supporting the entire chain are also:

• Blockchains and smart contracts recording balances and executing written rules.
• Stablecoins and payment channels moving funds, which carry issuance and redemption risks themselves.
• Wallets and security systems managing keys, authorizations, and permissions.
• Market data and oracles feeding prices and external info into applications. Price oracles are not proof of reserves.
• Compliance systems determining who can buy, hold, transfer, and redeem based on relevant regulations.
• Services handling dividends, splits, M&A, and other corporate actions. Reconciliation checks verify whether token balances, custody records, and client accounts align.

Final on-chain transaction confirmation does not mean every underlying security or banking step completes simultaneously. Institutions, operational workflows, and legal obligations remain.

Each participant needs a business model. Brokers and custodians charge fees, issuers may levy product or issuance/redemption fees, exchanges charge trading fees, market makers profit from spreads while managing risk, infrastructure firms sell software, and apps monetize through users or distribution.

From an investor's perspective, the key is who earns revenue for solving problems. High volume flowing through a network does not equal high revenue; strong business performance does not necessarily mean token holders share profits.

Why put it on-chain?

Traditional brokers already offer fractional shares, portfolios, and securities margin loans. These are not crypto inventions.

What matters is the change when stock exposure appears through the exact same infrastructure users already employ for holding stablecoins, trading, lending, and building financial products.

From a market perspective, its importance shows in five areas.

1. Easier asset access, stablecoins become the funding rail.

Good brokerage accounts aren't equally easy to open everywhere. For those already holding stablecoins, first converting back to bank funds, then funding another account adds friction.

Tokenized stocks provide a more direct path for qualified investors: from stablecoins to stock exposure. Investment products thus distribute more easily across markets, especially for those already using crypto. It won't eliminate local rules and onboarding requirements—single products still face geographic restrictions—but it noticeably simplifies funding and distribution experiences.

2. Developers reduce redundant building, focus on product development.

Imagine building a portfolio around the thesis "AI will drive up electricity demand." What's needed isn't just a list of companies, but the ability to buy assets, hold, rebalance, and potentially access financing.

With compatible tokens and protocols, developers can reuse existing wallets, venues, lending facilities, and smart contracts. Indices, derivatives, automated portfolios, yet-unseen products all find space.

The advantage is lower startup costs for trial and error. Small teams can focus energy on the experience segments they differentiate.

3. Investors migrate positions, not just funds.

If finding better applications, investors might want to move existing positions over instead of first selling, withdrawing cash, and buying again elsewhere.

Traditional brokers already support physical transfers. The on-chain opportunity lies in making positions easier to move and use across compatible wallets, apps, and protocols.

Transferable stock tokens could enable this across compatible wallets and platforms. For instance, xStocks is designed for use across wallets, exchanges, and DeFi protocols.

Compatibility still matters. But "assets can follow" changes the investor-application relationship. Apps must continuously deliver business value.

4. Positions can be more than just sitting in an account.

Qualified stock tokens can be used for collateralized lending or margin. This is already happening: Kamino supports borrowing USDC using selected xStocks.

Where supported, holders can also lend tokens out to earn interest paid by borrowers, or provide liquidity to AMMs to earn trading fees. These fees come from real trades; Uniswap's fee mechanism is an example.

This is an additional option, not free yield. Lending carries liquidation risk, while lending out or providing liquidity introduces risks beyond simple holding.

5. Trading and settlement run on internet time.

News doesn't wait for market close. Supported token markets can continue trading nights and weekends, letting investors react without waiting for the next opening bell.

There's another independent settlement benefit: stock tokens and stablecoins can be swapped in a single atomic on-chain transaction—both happen or neither happens. This reduces the risk of handing over one side but receiving the other.

The distinction matters: 24/7 token trading does not guarantee the underlying stock market or primary token issuance/redemption is also open around the clock. Markets open does not guarantee narrow enough spreads.

Taken together, these factors form the case for bullishness on this direction. More people can access assets, developers can build products around them, and investors can do more with their positions.

Back to the initial portfolio: the path from "believing the world moves in a certain direction" to a buyable, movable, usable portfolio becomes shorter.

This carries more meaning than simply stuffing stock tickers into a crypto wallet.

Where are the opportunities for startups?

Three clear blocks: turning ideas into investable products, scaling operations, and enabling financing.

1. Turn investment theses into real baskets others can buy.

Theses like "AI will drive up electricity demand" still mean massive work for users: selecting assets, understanding risks, placing orders, maintaining portfolio updates. Startups can bundle these steps and let others follow strategies within permitted bounds.

The opportunity lies in owning this experience for specific audiences. AI-generated ticker lists are easy to copy. Distribution, credible performance records, and products users keep funding are much harder to replicate. Going on-chain must improve how portfolios are held, transferred, or used elsewhere.

2. Scale tokenized stock operations across providers.

Issuers, brokers, custodians, and apps need aligned records, even when trades fail, redemptions delay, or stocks pay dividends/split. Startups can sell software to handle reconciliation, coordinate updates, and help operators manage exceptions.

The pragmatic entry point is a high-cost, clear-buyer workflow. Supporting multiple providers lets standalone products exceed a single issuer's internal systems. Reliable integrations and handling edge cases build switching costs; endless custom solutions for each client don't scale.

3. Enable qualified stock tokens as collateral.

For stock tokens to serve as useful collateral, lenders must price them, understand legal rights, and recover value if borrowers default. Market closures, redemption limits, and differences between issuers make this more complex than just integrating a stock price feed.

Startups can provide collateral valuation, risk management, and liquidation tools for lending platforms without becoming lenders themselves. The value lies in helping platforms decide what to accept, how much to lend, and how to exit under stress. This relies on reliable data and real liquidity, not just a smart contract.

These are three distinct businesses: user-facing investment products, operational software for financial institutions, and infrastructure for lending. Each requires specific customers and a reason to exist beyond "putting tokens on-chain."

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