There is a new type of investment product becoming popular among crypto traders. In this tokenized asset-based investment product, traders can place trades on the price movement of popular stocks available in the traditional financial world, such as Tesla or Nvidia. They can place a trade based on their intuition whether the stock price will go up or down.
Apart from this, these traders can use leverage on these trades at any time of the day. This is known as tokenized stock perpetuals, or perpetual futures stocks.
Tokenized stock perpetuals are synthetic derivatives, where traders do not hold real shares like in the traditional world.
By using blockchain technology, they create a system where they can connect traditional stock markets with the crypto trading that comes with elements like leverage and faster execution of trades at any time of day. Apart from this, it is linked to the growth in tokenized equities, in which real-world assets are converted into digital tokens on the blockchain to create easy access to the asset or commodities like a company’s shares.
Amid growing regulatory clarity, these new types of crypto investments have become very popular among traders who need round-the-clock exposure to major United States Technology companies and stock indexes. These kinds of products are also allowing them to use high levels of leverage that are not available in the traditional finance world.
How tokenized stock perpetuals work — the mechanics
Perpetual futures or perps are nothing but contracts that allow traders to predict and trade on the price movements of the underlying assets.
In traditional futures contracts, there are some limitations like expiry dates. But, there is no such thing as expiration dates in tokenized perps stock. These assets are allowing investors to hold them as long as they want without any expiry dates.
In the tokenized perps stock, crypto trading platforms rely on a mechanism known as the funding rate. This helps the platforms to move money between traders with different long and short positions.
These blockchain-based platforms are using a price oracle like Chainlink. These oracles are like a database or server that allows platforms to get a correct price feed of stocks present in the real world.
Apart from this, the platform for tokenized perpetual stocks is using features like smart contracts in order to manage the trading positions by using various liquidity pools and order books.
When traders place stock perps, they are not buying actual stock or tokenized versions of it. Instead of that, they are placing a trade on the price movement, which is linked to the stock price. In order to settle these transactions, traders mostly use stablecoins such as USDT or USDC.
Here is the simplest process to trade stock perps on the blockchain-based technology.
- It needs a crypto wallet to connect with platforms that provide services for stock perps.
- After connecting the wallet, traders have to decide what kind of stock they are planning to invest in, such as TSLA, NVDA, SPY, or others.
- These platforms are also allowing traders to decide their leverage, such as 20x to 50x, based on the value of their trade.
- They will also have to decide whether they want a long or short place.
- Open the position based on the funding rates.
This kind of process is creating on-chain stock trading and synthetic stock perps.
Funding rate — the cost of holding a position
The funding rate is the main element of this ecosystem that keeps the contrast linked to the real world. If large numbers of traders decide to trade on prices going up and increase the contract price above the actual stock price, then traders who trade on price increases have to pay a fee to those who trade on price decreases.
The same thing also happens in the opposite direction if too many traders decide to trade on price decreases. These payment systems are calculated every hour or every 8 hours. This mechanism allows traders to correct the price difference, and this allows them to prevent the contract price from staying too far from the real price for a longer period of time.
Tokenized stock perps vs. spot tokens vs. traditional stocks — key differences
| Tokenized Stock Perps | Spot Tokens | Traditional Stocks | |
| Ownership | No | No | Yes |
| Settlement | Almost Instant | Instant | T+1 or T+2 |
| Leverage | High Leverage | Limited | It requires a margin account |
| Dividends | No | Sometimes it passes through. | Yes |
| US Availability | Restricted | Restricted | Yes |
| 24/7 Trading | Yes | Yes | No |
Where crypto traders are actually using stock perps
There are many popular platforms around the world that are offering stock perps with various features.
1. dYdX
This is one of the leading decentralized perpetual exchanges, which is known for impressive liquidity and features. dYdX provides access to stock markets only on a limited basis. This is a perfect choice for those traders who want to execute trades on the blockchain without losing control of their funds. It is developed on Cosmos technology.
2. Hyperliquid
Hyperliquid has become one of the leading platforms for on-chain perpetual futures by using an order book model. This decentralized platform is popular for a vast number of synthetic stocks and commodities through its own Layer-1 blockchain and a framework known as HIP-3, which allows developers to create new markets.
For example, trade.xyz has used this HIP-3 framework to roll out markets for Tesla, Nvidia, and stock market indexes.
3. GMX-style liquidity pools
GMX style is based on the liquidity pools models that come with synthetic exposure by using pools that work like automated market makers (AMM). It is known for markets such as synthetic SpaceX perpetual futures.
4 Ways Traders Are Using Tokenized Stock Perpetual
Smart traders are leveraging various tools in the tokenized stock perpetual trading that do not exist in any traditional platforms. There are so many benefits of a tokenized perpetual stock.
- These tokenized stock perpetual trading platforms are allowing shorting of US equities from restricted jurisdictions.
- This allows the user to hedge spot crypto positions against correlated tech stock movements.
- This entire tokenized based perpetual stock market exists on the blockchain-based platforms, and that is why it stays open all the time (24/7).
- Traders can also use stock perps as collateral in DeFi lending protocols, which is not present in traditional financial markets.
Risks Specific To Tokenized Stock Perpetuals
Trading tokenized stock perpetuals is not only about rainbows and unicorns. These tokenized stock perpetuals have so many risks apart from tokenized equity concerns.
One of the biggest risks in this ecosystem is leveraged positions that make tokenized stock perpetual trading more dangerous. For example, a 10x leveraged position could face liquidation and forced closing if the price of trades moves against the trader’s expectations. For example, if the trader has placed long positions on perps and the underlying asset price drops by 10%, then it could liquidate the trader’s position in a faster manner.
Apart from this, there is also fear of wrong price feed if the oracle fails to fetch the correct data due to a bug on the platform.
Conclusion
Tokenized stock perpetuals are a complex investment product that currently exists in the world of tokenized stocks. It has various benefits, like leveraged and 24-hour trading access.
The tokenised equities market is expected to grow along with the growing demand for tokenised assets.
