As Robinhood, Kraken, and Bybit announced their plans to tokenize U.S. stocks, Chainlink, Jupiter and other major ecosystems announced their support for tokenized stock trading of Apple, Tesla, Nvidia and other companies. This "breaking the wall" concept became popular overnight in the cryptocurrency circle. Among them, crypto-native exchanges Kraken and Bybit chose to adopt the underlying architecture of the stock tokenization platform xStocks based on Sol, while digital brokerage Robinhood chose Arbitrum as the token issuance chain.

While the enthusiasm for ecosystems is rising, a piece of news came from the market that "poured cold water". According to LinkedIn data, the three co-founders of Backed Finance, an Israeli company behind the stock tokenization platform xStocks, Adam Levi Ph.D., Yehonatan Goldman, and Roberto Klein, have all been confirmed to have worked at the bankrupt DAOstack.

Among them, Adam Levi Ph.D. served 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 work at DAOstack.

According to ICO Drops data, DAOstack raised approximately $30 million in multiple rounds of financing from the fourth quarter of 2017 to May 2018, and was closed due to fund exhaustion at the end of 2022. The DAOstack team was accused of "soft RUG PULL".

According to crypto KOL @cryptobraveHQ, DAOstack issued the token $Gen in 2019, and allowed the token to "free fall" after the 2021 bull market. "The team was too lazy to even go to a small exchange, and just let the token go to zero after issuing it."

How xStocks works

However, in terms of operating mechanism, at least for now, xStocks provides an operational path.

xStocks is operated by Backed Assets, a parent company registered in Switzerland and controlled by the issuer in Jersey. Backed Assets buys stocks in the US stock market through the IBKR Prime channel under Interactive Brokers, and then transfers them to the segregated account of Clearstream, a depository affiliated with the German Stock Exchange.

When the "three-step" operation of buy-transfer-deposit is completed, the issuer Backed Assets will trigger the contract deployed on the Solana chain, corresponding to the issuance of stock tokens. That is, for every 1,000 Tesla shares purchased and stored, 1,000 TSLAx tokens will be minted on the chain at a 1:1 ratio. The control address of the token contract belongs to the issuer Backed. After that, third-party exchanges such as Kraken, Bybit, Jupiter, etc. can directly list the spot and contracts of these tokens.

If investors or market makers actually buy TSLAx tokens greater than or equal to 1, they can apply to Backed to exchange them for actual Tesla shares under the brokerage. At the same time, dividends will automatically airdrop more of the same tokens after the snapshot.

During the closed market, the stock token prices of the entire network will refer to Chainlink's oracle. If they deviate significantly from the US stock prices, arbitrageurs can make profits by buying and selling tokens on the xStocks platform or Kraken, Bybit, thereby pushing prices back to a reasonable range.

Potential concerns

However, in addition to the founder’s previous “soft RUG PULL” record mentioned above, community users still reflect that xStocks has many shortcomings, and some of them are difficult to substantially improve. Some users bluntly stated: “On-chain stock tokens are just castrated stocks created for tax avoidance.”

For example, users generally believe that the liquidity of xStocks is very thin. Currently, only 6,000 tokens are supplied for each stock listed, and fluctuations on the chain have significantly exceeded the actual situation of US stocks.

Secondly, the fees are too high. The on-chain tokenized stocks on xStocks have a burn rate of up to 0.50% + and an annual management fee of 0.25%, which makes holding US stocks on the chain more expensive than holding real shares.

In addition, some community members believe that the mortgaged stocks are held by off-chain custodians, lack public audits, and are at risk of bankruptcy. On-chain stocks do not have the voting rights of shareholders, and what is actually held is unsecured notes, which is also worrying. The actual experience of slow purchase and redemption is unbearable for those who experience it.

To quote the comment of a KOL who broke the news about the xStocks founder scandal, “The Israeli web3 project has both the ‘Buddhist’ temperament of European projects and the capitalized operation capabilities of American projects; in summary, it is irresponsible to users from beginning to end.”