Suddenly, the Pond is Covered

Maybe you’ve heard the riddle before…

There is one lily pad sitting on a pond. The number of lily pads doubles every day. On day 30, the pond is completely covered.

The riddle: On which day is the pond half-covered?

Most people assume the answer is day 15. But it’s not. It’s day 29.

Here’s the part that really drives the point home…

As late as day 27, the pond is only about 12% lily pads. When the big growth happens, it happens fast.

The riddle is a classic example of exponential growth, and a good way to visualize how big, consequential changes can sneak up on you. It starts small. Then, one day, it’s done…and you never saw it coming.

Keep that in mind. It’ll be useful context for what I’m about to show you.

Three weeks from now, how we trade stocks will change forever.

And hardly anybody sees it coming.

On November 3, the tokenization trend will accelerate. Understanding why that is and what comes next is the purpose of today’s essay.

Consider this…

Tokenized stocks represent nearly $3.4 billion of value sitting on public blockchain networks. Sounds big…until you consider the more than $60 trillion across the NYSE and Nasdaq. Global stock markets are roughly $130 trillion.

Against those numbers, $3.4 billion is a rounding error.

But remember the lily pads. It’s not the number that matters…it’s how rapidly it’s growing.

From the last week of June to today, the value onchain doubled. That’s about 3.5 months.

Before that, it took just over four months for that value to double. Before that period, it took nearly six months for the value to double.

Which is to say, the amount of tokenized stock onchain isn’t just growing. The rate of doubling is accelerating. What took six months is now taking nearly three.

If we extend the trend out, we could expect nearly $7 billion onchain by the end of the year. And more than $100 billion by the end of 2027.

But here’s the thing…

What’s slated to happen the first week of November could make those estimates look conservative in hindsight.

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The Venue

The cryptocurrency exchange OKX is one of the top spot exchanges in the market, just behind Coinbase and Binance.

In March, Intercontinental Exchange (ICE), the parent company of the New York Stock Exchange, purchased a minority equity stake in OKX in a deal that valued the exchange at $25 billion. This gave ICE a seat on OKX’s board in the process.

More recently, the two deepened the relationship into a joint venture called OKXICE, owned 50-50 by the two companies.

Then, on October 4, OKXICE made a filing with the SEC…

The filing laid out plans to launch a tokenized stock exchange offering 24/7 trading of 63 major U.S. stocks. The list includes names such as Apple, Nvidia, and Tesla.

The exchange is what’s called a tokenized securities venue, or TSV. It’s a new category of trading venue the SEC created. TSVs are how tokenized versions of listed U.S. stocks can trade onchain.

TSV status allows the venue to go live without having to register as a national securities exchange and without liquidity providers having to register as dealers.

OKXICE’s TSV plans to use Uniswap v4 as the underlying technology.

For those unfamiliar, Uniswap is the largest decentralized exchange in crypto. It doesn’t use order books, where buyers and sellers list their bids and asks. It operates through pools of liquidity. Users deposit assets into a shared pool, and traders swap against it, with prices set automatically by the ratio of assets inside.

The assets providing liquidity to those pools are stablecoins. On Friday, we showed why the growth of tokenized stocks must coincide with the growth of stablecoins. We also showed why the U.S. Treasury and the current administration have one heck of an incentive to help that along.

Circle is the issuer of the USDC stablecoin, the second-largest stablecoin by market capitalization. And it’s also one of the 63 stocks slated for the venue. So, we shouldn’t be surprised to see USDC as one of the main pairs in these Uniswap pools.

So far, so interesting. But what makes me say a major catalyst for tokenization is three weeks away?

This:

On September 17, the SEC issued what it calls the Innovation Exemption. This is a five-year, conditional green light for trading tokenized versions of listed U.S. stocks through automated market maker liquidity pools.

The exemption comes with a specific sequence in how stocks can come onchain.

A TSV doesn’t need a company’s permission to list its stock in tokenized form. Instead, the venue notifies the company, and the company has 30 days to object.

If the company remains silent, then the stock gets listed.

OKXICE has already sent out these notices. So far, exactly one company has said no – the chipmaker Cerebras Systems. The 63 on the list remain, with potentially more added later.

The SEC requires a TSV to publicize its intent 30 days before opening its doors. OKXICE’s public notice landed October 4. Thirty days from that date is November 3, or just over three weeks from today.

That’s why the growth rate for tokenized stocks will accelerate even more. TSVs come online next month. And the first one should kick off something of a land rush as the major legacy exchanges try to stake their claim in the new frontier.

Each new TSV means more stock, more volume, more activity.

November 3 is the starting gun for the tokenization trend beginning on U.S. soil.

What’s After November 3

The first few days and weeks after OKXICE launches will likely see a subtle uptick in tokenized stocks, not a surge.

Users will need to complete paperwork so the entities behind the TSV can run the know-your-customer (KYC) and anti-money-laundering (AML) checks the SEC requires. Once a user clears the checks, they receive what’s called a soulbound token.

The term might be new to some, but we can think of it as a non-fungible token (NFT) that cannot be transferred. It sits in your wallet and signals to protocols that you are cleared to trade U.S. securities.

That’s where Uniswap v4’s technology fits in. Version 4 introduced a feature called “hooks.” It’s a way for custom code to be attached to a liquidity pool that adds rules to how the pool behaves.

OKXICE is using hooks for compliance. Only wallets holding the soulbound token can trade against the pools or deposit liquidity into them.

This is where this entire onchain experience gets interesting…

Once you pass your check, you can place your tokenized shares into a pool and start earning a type of yield on your equity that has never existed before…at least not for retail investors.

The yield will be trading-fee income that market makers and brokers have historically kept for themselves. Every swap against the pool pays a fee, and that fee can now flow to the people who supplied the assets – you.

This is what decentralized finance (DeFi) enables.

Users can earn more on the assets they already own. What was once your broker’s margin becomes your yield. That’s bad news for broker-dealers who don’t upgrade their services to compete.

And compliance for these protocols is set to get much easier.

The SEC is fielding conversations with zero-knowledge (ZK) identity providers, such as Aztec. ZK is a tool that lets a user prove they are who they say they are without handing over all their personal information to every venue that asks.

It’s a privacy upgrade layered for the new financial system. It’ll make onboarding progressively more seamless.

As friction melts and capital naturally comes to public, permissionless rails, the market will iterate even faster to bring new products.

The total value of tokenized assets is still small…but it’s growing quickly.

One day, you’ll wake up, and the pond will be covered in lily pads.

Onchain we go.

Your Pulse on Crypto,

Ben Lilly
Editor, Chain of Thought