Robinhood Stock Tokenization: Marketing Over Innovation?

Recently, a trading platform launched a stock tokenization product, sparking heated discussions in the Web3 community. As a long-time observer of blockchain technology, I believe it is necessary to conduct an in-depth analysis of the substance of this product. Frankly speaking, this feels more like a carefully planned marketing campaign rather than a genuine technological innovation.

Core Insights

The platform's stock tokenization product is essentially a marketing campaign. It aims to seize the high ground of the hot topic of RWA, but from the perspective of actual innovation, there are not many highlights. In short, it treats blockchain technology as a branding tool and does not fully leverage the core advantages of blockchain's decentralization and composability.

The "synthetic packaging" model adopted by the platform has deficiencies in legal structure and functionality compared to the "digital twin" model of certain trading platforms. It only provides users with a derivative contract, rather than true ownership of the underlying asset. Although it claims to offer EU clients exposure to US stocks, this can be easily achieved through traditional financial instruments without such complex operations. Additionally, grand visions such as "24x7 trading" and "retail investment in private equity" are difficult to realize in reality.

Although the platform has successfully shaped the image of an industry innovator with this product, its true significance lies in pointing out a possible path for the integration of traditional finance and decentralized finance. This path is likely to be led by Web2 companies that can simplify the complexities of Web3 and encapsulate them within a controllable ecosystem.

Four Models of Stock Tokenization

Before delving into an analysis of the platform's products, we need to understand the several main ways of stock tokenization:

synthetic asset

• This is a pure DeFi model. There is no need to hold actual stocks, but rather by over-collateralizing crypto assets ( such as ETH ) in smart contracts, tokens can be created that track the prices of any real-world asset ( including stocks ).
• Users trust in the code and economic model, betting on the robustness of the smart contract system and the stability of collateral prices.
• Representative Project: Some DeFi platforms.

synthetic packaging

• Essentially, it is a derivative model. The tokens purchased by users represent a contract signed with the platform, where the platform promises to pay returns equivalent to the fluctuations in the corresponding stock price.
• Platforms typically purchase actual stocks as a hedge, but this is not a legal obligation. Theoretically, as long as regulatory approval is obtained, stocks can also be replaced by other derivatives.
• Users fully trust the trading platform and the regulatory bodies behind it.
• Representative project: The trading platform discussed in the text.

digital twin

• The currently most recognized model. For each Token issued by the issuer, a corresponding share of actual stock must be deposited in a regulated custodian bank.
• Users need to trust the issuer, the custodian bank, and the regulatory agency at the same time, but there are usually on-chain tools available to verify the stock reserves.
• Representing projects: Stock token products on certain exchanges.

Native Digital Securities

• The most revolutionary model. Stocks are issued directly on the blockchain, and the blockchain itself becomes the statutory record of ownership.
• Users trust the blockchain network itself and the legal framework that recognizes this form.
• Representative projects: Digital bonds issued by certain banks on private blockchain platforms.

Comparative Analysis with Competitors

Synthetic Packaging vs. Synthetic Assets

Commonality: Both provide users with economic exposure to stocks rather than direct ownership. Essentially, they are both derivatives designed to replicate the price performance of stocks.

Differences: The core distinction lies in the foundation of trust.

• The trust in the synthetic packaging model comes from institutions and regulations. Users believe that regulated companies will fulfill their contractual obligations.
• The trust in synthetic asset models comes from code and economic games. Users believe that the robustness of the code and over-collateralization can ensure the stable value of synthetic assets.

Synthesis Packaging vs. Digital Twin

Commonality: The issuers of both models theoretically hold real stocks as support.

Differences:

• The purpose of holding stocks is different: in the synthetic packaging model, holding stocks is to hedge one's own risks and does not constitute a direct legal obligation to the users. In the digital twin model, there is a legal obligation to hold and custody actual stocks on a 1:1 basis for each Token.
• Ownership and risk differ: In the synthetic encapsulation model, stocks belong to the platform company's assets, and users are merely unsecured creditors. In the digital twin model, stocks are kept in isolated custody accounts established for the benefit of users, which theoretically can be isolated from the bankruptcy risk of the issuer.
• On-chain utility differs: Tokens in the synthetic encapsulation model are restricted within the platform and cannot interact with external DeFi protocols. Tokens in the digital twin model can be withdrawn to personal wallets for DeFi lending, trading, etc., offering true composability.

Doubts about the platform's products

1. Product functions can be realized without blockchain. European users can fully enjoy US stock returns through traditional derivatives such as Contracts for Difference (CFD), without using blockchain. The use of blockchain is more for marketing considerations, to attract attention and shape an innovative image.

2. It goes against the "Lego" spirit of DeFi. The platform's stock tokens are restricted within its App, unable to be withdrawn to personal wallets or used for DeFi operations, sacrificing the openness of blockchain and creating a "walled garden."

3. It deviates from the original intention of blockchain's "trustlessness". Users must trust the platform 100%. Blockchain can only prove that users purchased contracts from the platform, but cannot prove whether the platform genuinely holds the stocks or has the ability to fulfill its obligations. This contradicts the original intention of blockchain to eliminate trust in centralized institutions.

Overhyped "Revolutionary" Features

1. 24/7 trading is difficult to achieve. During weekends, global financial markets are closed, making it impossible for market makers to hedge risks, which leads to poor liquidity and high trading costs. Even during weekdays at night, due to the closure of real stock markets, market makers can only hedge imperfectly through instruments like stock index futures, which similarly increases trading costs.

2. Retail investors face risks in private equity investment. Private equity investments have traditionally high thresholds and are only open to "qualified investors" due to their significant risks and high information asymmetry. Tokenization of such assets may seem like "broadening opportunities," but in reality, it is about "spreading risks."

Marketing Victory and Future Outlook

Although the product itself lacks technological innovation, the platform has achieved victory in brand recognition and market presence, successfully tying itself to the grand narrative of "the future of finance." This paves the way for future development.

The platform has announced plans to establish its own Layer 2 blockchain and support users in "self-custody" of assets. This means that the current "walled garden" may just be a transitional phase for user accumulation, technology testing, and communication with regulators.

Finally, this event indicates that the large-scale adoption of Web3 may not be possible without the participation of traditional internet brokers. They are skilled at simplifying complex technologies, making them easier for ordinary users to use, and play the role of "interpreter" between Web3 and the public.

Conclusion

The platform's tokenization products for stocks at the current stage are more of a successful marketing hype, with symbolic significance outweighing practical significance. However, it also opens a door for the integration of traditional finance and blockchain, taking a pragmatic first step.

For ordinary investors, staying clear-headed and understanding the essence, neither being misled by glamorous narratives nor holding a skeptical attitude towards future possibilities, is the wisest choice.