On-chain stock arbitrage mechanism: from the underlying structure to the three largest accounts for starting a business

According to Woofun AI, the on-chain stock circuit is undergoing a deep evolution from conceptual hype to the restructuring of the underlying mechanism. The core focus has shifted from simple token issuance to the substantial dismantling of asset authorization, closed loop arbitrage, and entrepreneurial business models. Market participants are no longer satisfied with simple price tracking, but are urgently seeking to transform macro-investment views into enforceable, transportable, and on-chain asset portfolios with complex financial functions. This trend is forcing the industry to re-examine the integration boundaries between traditional securities holding structures and decentralized financial infrastructure. With the gradual clarification of the regulatory framework and the maturity of the technology stack, how to transform the subjective judgment of “optimistic about the direction of world development” into standardized financial products driven by stablecoins and executed through smart contracts has become the most promising value creation link in the current Web3 field. At the same time, it also provides startups with multi-dimensional entry opportunities from front-end user experience to back-end operating infrastructure.

Before discussing on-chain stocks, it is necessary to clarify the essential differences between traditional stock holding structures and the definition of on-chain tokens. Traditional stock trading is already highly digitized, but the complexity behind the buttons far exceeds what it seems: brokerage firms handle orders, exchanges coordinate transactions, clearing and settlement agencies arrange for the settlement of parties' debts and debts, while custodian and registration agencies keep securities and ownership records. In this structure, investors are only beneficial owners, and intermediaries or nominal holders are registered holders in the legal sense of the word, and investors and listed companies are separated by a rich layer of records and legal relationships. Investor.gov clearly explains this distinction, which reveals the separation of ownership and control in traditional finance.

In contrast, “on-chain stocks” are not a single concept; they cover three distinct forms: first, tokens directly linked to actual holdings or recognized indirect securities interests; second, products supported by shares held elsewhere and issued by a third party; and third, derivatives that only track stock prices and do not grant ownership. Among them, the second category of products is most likely to cause confusion. For example, xStocks defines its products as fully collateralized tracking documents, not direct equity, and does not give shareholders voting rights. The SEC staff review also pointed out that there are significant differences in the rights granted to investors by different tokenization structures. Therefore, investors need to deconstruct the two core questions: What assets are the tokens supported by? As a holder, what rights can I claim? Even if the token name includes well-known companies such as “Apple,” if the issuer goes out of business, holders' claims may face huge uncertainty, which highlights the importance of underlying asset isolation and legal structure.

How to convert stocks into on-chain tokens involves a strict set of minting, distribution, and exit mechanisms. Take a simplified equity-backed product as an example. Assuming Apple (AAPL.US) stock price is $100 (example only), the issuer must place the actual stock in a designated brokerage or escrow account, and then create or 'mint' the token according to the product terms. Assuming that one token corresponds to one share, this did not increase Apple's share capital; it only created a representation of rights linked to existing assets. Company actions such as dividends and stock splits will change the exchange ratio over time. Some systems allow authorized institutions to convert between shares and tokens, or allow qualified customers to directly issue and redeem them after completing registration. Alpaca's Authorized Participant Guide is a specific example. In the distribution process, exchanges or investment applications open products to qualified users, and market makers use their own inventory and funds to take risks and make quotations.

It is worth noting that holding tokens on your own does not mean that the underlying custodian disappears, and the token balance shown on the chain cannot independently prove that the stock is actually stored in the brokerage account. Ultimately, the exit path is divided into two completely different mechanisms: one is' sale ', where another buyer takes the existing token, which is a secondary market transfer; the other is' redemption ', that is, going through the issuer process, the token is withdrawn from circulation, and the holder obtains cash, stablecoins, or securities according to the terms. Being able to buy tokens does not automatically mean being eligible for direct redemption; thresholds, fees, timing, and eligibility restrictions all constitute key variables.

Furthermore, changing tokens ten times is not equal to adding ten new shares. The trading volume and the number of underlying assets supporting the product are two completely independent indicators. This difference is essential for understanding market liquidity.

According to data compiled by Woofun AI, price anchoring and arbitrage mechanisms are the core of maintaining the stability of on-chain stock values, and are also accompanied by unique risks during non-trading periods. Assuming the price of the underlying stock is $100 and the token transaction price is $105, an eligible institution can execute arbitrage by buying the underlying stock, minting the token, and selling it. If the price difference is sufficient to cover the cost and risk, the transaction is established. As the supply of tokens increases, the price is crushed back to the equilibrium level; conversely, if the token is too cheap, buying and redeeming can be reversed.

The key to this arbitrage mechanism is whether the transaction can actually be executed, rather than relying only on the price source on the screen. A more complicated scenario occurs during non-trading periods such as Sunday: the underlying stock market is closed, but tokens are still being traded, making hedging more difficult for market makers, and it is questionable whether the redemption process is open and at what price. Therefore, “7×24 hour trading” is by no means the same as “being able to trade at a good price around the clock”; widening spreads and price deviations are the norm. xStocks's detailed explanation of the primary and secondary markets is worth referring to. It reveals the vulnerability of derivatives pricing in the absence of immediate liquidity of the underlying assets.

The risk caused by this misalignment of time requires investors to thoroughly understand the inventory management and hedging strategies of market makers rather than blindly trusting real-time prices displayed on the chain.

The industrial chain panorama reveals the infrastructure role of each link, forming a complete closed loop from upstream assets to downstream applications. The simple chain can be summarized as follows: stocks go through brokerage and trusteeship, enter the legal structure and token issuance layer, then flow to transactions and distribution, and are eventually applied to scenarios such as portfolios and loans. The upstream relates to the establishment of assets and rights. The middle layer transforms these rights into accessible and tradable digital forms, while the downstream builds the product experience that users need. The underlying technologies that support the entire chain include: blockchain and smart contracts record balances and implement pre-set rules; stablecoins and payment channels move funds, but they also face issuance and redemption risks; wallets and security systems manage keys, authorizations, and permissions; quotes and oracles feed prices and external information into the application, but price oracles are not proof of reserves; compliance systems determine who can buy, hold, transfer, and redeem according to relevant rules; the service processes corporate actions such as dividends, stock splits, and mergers and acquisitions; the reconciliation system checks the consistency of token balances, escrow accounts with customers.

The final confirmation of an on-chain transfer does not mean that every underlying security or bank step is completed at the same time; institutions, operating procedures, and legal obligations still exist. All participants need to establish a business model: brokerage firms and custodians charge service fees; issuers may charge product fees or issue/redemption fees; exchanges charge transaction fees; market makers earn price spreads and manage risk; infrastructure companies sell software; and applications rely on users or distribution to monetize. From an investor's perspective, the key is who earns revenue by solving problems. A large number of transactions through a certain network does not equal a large amount of revenue, nor does good business performance mean that token holders can share the profits.

Although traditional brokerage firms already provide fractional shares, portfolios, and securities collateral loans, the stock chain still has five core values, profoundly changing the way financial interaction is carried out. First, assets are easier to access, and stablecoins are a funding channel. For users who already own stablecoins, tokenized stocks provide a direct path from stablecoins to stock exposure, simplifying the funding and distribution experience, and are particularly conducive to cross-market distribution, even though geographical restrictions still exist. Second, developers can reduce repetitive construction and move to product development.

Under compatible tokens and agreements, developers can reuse existing wallets, trading sites, lending facilities, and smart contracts to build combinations around arguments such as 'artificial intelligence boosts electricity consumption'. Trial and error startup costs are lower, and small teams can focus on differentiated experiences. Third, investors can move their positions, not just their funds. On-chain opportunities are to move positions between compatible wallets, apps, and protocols. For example, xStocks are designed to be used between wallets, exchanges, and DeFi protocols, changing the relationship between investors and apps, and forcing applications to continue to optimize. Fourth, positions don't just lie in accounts.

Eligible stock tokens can be used to collateralize loans or security deposits, such as Kamino to support borrowing USDC with selected xStocks; holders can also lend to earn interest or provide liquidity to automated market makers to earn transaction fees, such as Uniswap's fee mechanism, but this comes with the risk of liquidation. Fifth, transactions and settlements can operate according to the Internet schedule. The supported token market can be traded at night and on weekends, and stock tokens and stablecoins can be exchanged in a single atomic chain transaction, reducing the risk of handing over one side but not receiving the other side. But that doesn't mean that the underlying stock market or Tier 1 issuance and redemption is also open around the clock, and there is no guarantee that the price spread is narrow enough while the market is open.

One of the opportunities to start a business is to build portfoliable products and turn abstract ideas into actionable strategies. Taking 'artificial intelligence will greatly boost electricity demand' as an example, users face extensive work to select assets, understand risks, place orders, and maintain portfolio updates. Startups can take these steps and let others follow the strategy to the extent permitted to occupy this experience for specific groups. Code listings generated by artificial intelligence are easy to copy, but products that are distributed, have a credible track record, and users are willing to continue to fund are difficult to replicate. The point is that the chain must improve how combinations are held, transferred, or used elsewhere, rather than just providing a static list. For example, the electricity usage scenario involves many companies such as power generation, power grids, and equipment manufacturing. Combined products need to dynamically adjust weights and achieve one-click tracking or automated rebalance through an on-chain mechanism, thereby reducing user cognitive burden and operational friction.

The core competitiveness of this product form lies not in the complexity of the algorithm, but in the consistency of the user experience and the transparency of strategy execution, which enables ordinary investors to participate in complex macro-hedging or trend tracking strategies with a very low threshold.

Entrepreneurial opportunities 2 and 3 focus on operating large-scale software and loan collateral infrastructure. Issuers, brokerage firms, custodians, and applications need to ensure that records are correct, even in the face of complex situations such as transaction failures, redemption delays, or stock dividends or stock splits. Startups can sell software, do reconciliation, coordinate updates, and help operators handle exceptions. A pragmatic entry is a high-cost workflow that is clear to buyers. Supporting multiple service providers allows independent products to exceed the internal systems of a certain issuer. A history of reliable docking and handling difficult cases can lead to switching costs, and endless customization for each customer cannot become a large-scale software business.

On the other hand, making eligible stock tokens useful collateral requires lenders to be able to set prices, understand legal rights, and recover value when borrowers default. Market closures, redemption restrictions, and issuer differences make this matter more complicated than connecting to stock price sources. Startups can use lending platforms as collateral assessment, risk management, and clearing tools without becoming lenders themselves. The value is to help the platform decide what to accept, how much to borrow, and how to exit under pressure. This relies on reliable data and real liquidity, not just a smart contract. These are three different businesses: investment products for users, operating software for financial institutions, and infrastructure for loans. Each requires specific customers and a reason for existence beyond 'putting tokens on the chain'.