With Robinhood, Kraken, and Bybit announcing their plans to launch U.S. stock tokenization, major ecosystems like Chainlink and Jupiter have also announced support for tokenized stock trading of companies like Apple, Tesla, and Nvidia. This “breaking the wall” concept has exploded in popularity overnight in the crypto space. Among them, the crypto-native exchanges Kraken and Bybit have chosen to adopt the stock tokenization platform xStocks based on the Sol underlying architecture, while digital broker Robinhood has selected Arbitrum as the token issuance chain.

As enthusiasm across various ecosystems remains high, the market has received a “cold water” message. According to LinkedIn information, the three co-founders of the stock tokenization platform xStocks, Adam Levi Ph.D., Yehonatan Goldman, and Roberto Klein from the Israeli company Backed Finance, have all been confirmed to have worked at the now-bankrupt DAOstack.

Among them, Adam Levi Ph.D. serves as a co-founder of DAOstack to provide endorsement, Yehonatan Goldman was the Chief Operating Officer of DAOstack, and Roberto Klein was responsible for legal and regulatory matters at DAOstack.

ICO Drops data shows that DAOstack raised approximately $30 million through multiple rounds of financing from Q4 2017 to May 2018, and closed at the end of 2022 due to depletion of funds. The DAOstack team has been accused of “soft RUG PULL.”

According to crypto KOL @cryptobraveHQIt was revealed that DAOstack issued the token $Gen in 2019, and after experiencing the bull market of 2021, the token was left to “free fall.” “The team couldn’t even be bothered to maintain a small exchange; they just let the token go to zero after issuing it.”

xStocks operating mechanism

However, at least currently, xStocks provides a workable path in its operational mechanism.

xStocks is operated by Backed Assets, a publisher registered in Switzerland and controlled in Jersey. Backed Assets purchases stocks in the US stock market through the IBKR Prime channel under Interactive Brokers and then transfers them to a segregated account at Clearstream, a custodian affiliated with the Frankfurt Stock Exchange.

After the “three-step” operation of buying - transferring - depositing is completed, the issuer Backed Assets will trigger the contract deployed on the Solana chain to issue corresponding stock tokens, that is, for every 1000 shares of Tesla stock purchased and stored, 1000 TSLAx tokens will be minted on a 1:1 basis on the chain. The control address of the token contract is owned by the issuer Backed. Subsequently, third-party exchanges such as Kraken, Bybit, Jupiter, etc., can directly list these tokens for spot and contract trading.

If investors or market makers actually buy TSLAx tokens greater than or equal to 1, they can apply to Backed to convert them into actual Tesla stocks from the broker. At the same time, dividends will automatically airdrop more of the same tokens after the snapshot.

During the market closure, the prices of all stock tokens will refer to Chainlink’s oracle. If there is a significant deviation from the US stock prices, arbitrageurs can profit by trading tokens on the xStocks platform or on Kraken and Bybit, thereby pushing the prices back to a reasonable range.

Potential concerns

However, besides the aforementioned founder’s history of “soft RUG PULL”, community users still reflect that there are many shortcomings of xStocks, and some are difficult to improve substantively. Some users candidly stated: “On-chain stock tokens are just a castrated version of stocks created to avoid taxes.”

For example, users generally believe that the liquidity of xStocks is very thin, with each stock currently online only supplying 6000 Tokens, and there have been significant fluctuations on the chain that exceed the real situation of US stocks.

Secondly, the fees are excessively high. The on-chain tokenized stocks on xStocks have a destruction fee of up to 0.50% + and an annual management fee of 0.25%, making it more expensive to hold US stocks on-chain than to hold real shares.

In addition, some community members believe that the collateralized stocks are held by off-chain custodians, lacking public audits and posing a risk of defaults. On-chain stocks do not have shareholder voting rights, and what is actually held are unsecured notes, which raises concerns. Moreover, the slow actual experience of purchasing and redeeming has led users to express their inability to tolerate it.

Borrowing the KOL comments on the scandal of xStocks founder, “the Israeli web3 project has the ‘Buddhist’ temperament of European projects and the capital operation ability of American projects; in summary, it is completely irresponsible to users from start to finish.”

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