How Tokenized Stocks Could Undercut Interactive Brokers' 77% Profit Margin

Transcript

I like to think about this as like the internet allowed anybody, you know, to do what Stephen Spielberg did, you know, create content, movies, films. I don't know if you've seen Obsession, but, you know, this is a guy who came out of uh creating content on the internet, has now created one of the highest grossing films uh to ever exist. And what these markets are going to allow people to do is anyone can now be Ken Griffin, right? they can come on chain and they can participate in the very act of market making um in a really incredible way. >> Hi everyone, welcome to Unchained, your no hype resource for all things crypto.

I'm your host Laura Shin. Thanks for joining this live stream. First, we'll take a quick word from the sponsors who make the show possible. This episode is brought to you by 1 in Aqua, the shared liquidity layer from 1 in. Back multiple liquidity positions with one wallet balance and keep your tokens in your wallet until a swap fills. See how it works at 1in.com/aqua. Today's guest is Alex Cutler, CEO and co-founder of Dramos Labs. Welcome, Alex. >> Thanks for having me. Good morning. >> Yeah, excited to chat. So, Coinbase jumped into the tokenized stocks race this week by launching tokenized Apple, Nvidia, Meta, and Google on base and there's already been, you know, a number

of tokenized stocks that are out in the market, but you know, as people are learning on the back end, they can be quite different. So, kind of maybe explain some of the different types in broad strokes and explain what type the Coinbase tokenized stocks are. >> Yeah. Um, yeah, thanks for for having me in. is like an incredibly exciting time for us. Um, so I can't wait to jump in. Um, uh, before I answer that, I'll say, you know, what's the overall vision here? I think in the words of my friend, uh, Jesse Pollock, the founder of Bass, you know, onchain, what we're trying to build is the most vibrant, deepest, richest capital market, um, in history, right? And we can do that because traditional markets, they are only open,

right, for about a third of any given week. They work banker's hours and onchain our markets can be faster, cheaper, globally accessible, 247, 365 and the assets that power them are fully programmable. So this is like bringing the network effects of the internet to financial markets for the first time. So you're correct. Um this is a very big moment for tokenized stocks uh because uh these represent something very different than the versions we've seen before. Prior versions um which I like to think of as kind of betas uh for uh tokenizing a real world asset like uh a stock they were largely synthetic

representations uh debt claims uh a derivative wrapper or something like that. And that of course just adds friction, right? It adds risk um and it adds cost to the usage and uh any friction, cost or risk will hold back uh their ability to be adopted freely. What Coinbase uh launched um is a paradigm shift moment. You know, I think this is leaping far ahead of the solutions we've seen because it is fundamentally a representation of the actual underlying uh asset in the stock. Um, every token that you see today issued on base, you

know, it's backed one by one by an actual share and it's uh trusted and issued by a regulated custodian, right? It's held in trust. And the mint and redeem model here is the exact same one that we see in traditional ETFs. Um, and so it's basically the the gold standard for this type of thing. And this is really critical because um if you look at some of the existing solutions out there right now, they will be very clear in their terms and conditions that you do not actually have any right to the underlying thing, right? That this is just a token. Um if something goes wrong, you know, you definitely can't sue us. You can't come claim it. And

what Coinbase has said from day one is this is actual beneficial ownership. This is the real thing. And uh for us to have true adoption par with traditional markets to have true price par um you need to have functional parity and this is the first true version of it we've seen yet on chain. >> Yeah it's super interesting like once I started digging into the details I was like wow it it gets kind of complicated but um I do agree that you know what you have built um seems kind of like a superior product in multiple different ways. What kind of volume have you seen out of the gate?

>> Yeah, I mean this is really incredible. Um, and you know, we've been working as a close partner to Coinbase for some time since the launch of Bass and we've helped them to uh stand up uh what is the highest volume markets around the top traded digital asset in Bitcoin today. though on base on aerrrome we uh many weeks do more volume than every other chain every other exchange combined on the world's top digital asset and same thing for global FX markets right which is another trillion dollar market um aerrone and base today uh do more FX volume than uh pretty much every other chain and exchange combined most so we had high expectations going into the launch of uh tokenized stocks

and I think we've blown and past them. So as you mentioned uh the opening set were four stocks you know tokenized Apple, Nvidia, um Meta etc. and the in just I guess the first few days here right we have captured about 25% of the AMM volumes on these tokenized assets across all exchanges and chains and issuers right and this is like kind of a soft launch uh for us I I think we weren't anticipating it to go quite this fast um but you know even over the last weekend before we were even able to announce a drone was the top AMM on three or four of the these assets and uh

we've seen volumes scaling up um basically exponentially uh ever since then. So I think within the last uh 24 hours if we're saying it was about 25% of total share I think that was about 25 million in volume I think we've done about 80 million since launch that's creating an extraordinary amount of of course fees for uh users of of Aerome which is pretty incredible. I think there's already 5,000 wallets, you know, holding these assets and that is growing very very quickly. And I think one of the most exciting things about this is that we are already beginning to see signs of um these onchain spot markets uh engaging in price discovery

because as I mentioned, you know, uh traditional markets, they close, right? They close at the end of the day, they close over the weekend. And there was a big moment yesterday in uh the markets closed and Nvidia came out and announced their earnings, right? And uh well the stock market closed at a particular price uh onchain markets continued to operate and what we saw was millions of volume pouring in to the the Nvidia pool right on base and on aerroneum and uh the price rising higher than the close.

So much like an aftermarket is going to sort of price in those earnings. Um, and that's what we expect the future to be here, right? We've just started with four of these and we've captured a significant portion of the overarching market. We expect them to grow and scale significantly and we expect a lot more assets and that increasingly onchain markets will be the venue for um price discovery for permissionless market making and basically this future of onchain finance that I think we've all been dreaming of you know for some time.

>> Yeah. And I want to dig into more of the details about how it works on the back end because um this part, you know, is quite fascinating. Um there's I I think a sense already that there's many different flavors of these. You know, we saw a few years ago when Robin Hood initially did the tokenized versions of um I forget which I think it was like SpaceX and um for was it OpenAI I think was the other one. And clearly you know there was some uh you know uh drama uh that broke out into the public about sort of what those shares actually were. And so like you kind of have to dig into these details

in the back end to sort of understand. So explain like how the tokenized um stocks on Coinbase have been set up on the back end. >> Yeah, I mean I think the critical thing here is like if you've been on chain for a while, you know to do your due diligence on what a token actually represents and of course what it doesn't represent. Um and uh of course there's been a lot of discussion and evolution over the years on understanding what it means to have a token that represents some sort of immutable onchain utility uh that has some sort of actual claim on value. And you're even beginning to see right the synthesis between tokens and equity and implying some kind of of

legal ownership. And I think that this um analogy is helpful for onchain audiences because if you go look at the terms and conditions, right, when you are engaging with many of these other um uh derivatives or uh debt instruments or rappers, they're going to be very clear that you do not own when using these things or you do not get the beneficial ownership uh claims of of them, right? And we know what it means to own something that might be a version of something. But when things get hairy, you know, that's when it's going to going to burn you. And that has held back adoption. And that's why I think like we've seen such consolidation in stable coins amongst the stable coins

that do fundamentally represent the underlying thing. And the ease of transacting between the real thing and the digital thing is very very easy. So the key thing is here is that it is held in a beneficial trust. um and that the uh benefits of it are conveyed to the users of it like Coinbase says this is the real thing and that is a big difference between other digital assets where they're going to be very clear that it's not necessarily the real thing and that means that they can bring on chain right things like uh token uh or sorry stock splits um they can bring on the chain things like uh dividends and they can increasingly I think close that

gap between what it means to hold a stock in a traditional brokerage and to hold a digital representation of it. And I think honestly we're in early days here. I think Coinbase is going to be very very excited to um ensure that more and more of the beneficial ownership uh translates through to users of these assets and and of these tokens uh over time. But the the net net is this is the real thing and nobody else will tell you, you know, in their terms and conditions, it's the real thing. Um, in the same way that Coinbase is here as well.

>> Yeah. Yeah. I found the way that it does the dividends thing pretty interesting because, you know, these are actually also freely tradable. So, you know, not every customer is KYC. So, could you just explain like that mechanism like how that works? I I found it really interesting. Yeah, you can think about it as there is um obviously the the version of the underlying uh tokenized stock that exists on chain, right? So the the number of shares or the number of tokens will not necessarily change um as you see dividends uh flow through to them or something like a split. Uh but what they have is an off-chain multiplier, right? So you're basically uh translating the delta between one

apple plus dividends andor stock split or things like that. So that allows the onchain users of that to understand that when an authorized party goes and mints and redeems, it is going to reflect not just that one apple but that one apple plus that multiplier um or something like that. So it allows you onchain to participate use that token um and that token because authorized participants will be able to realize the value of that multiplier could then reflect you know the underlying.

>> All right so in a moment we're going to talk now about how these tokenized stocks will be used in DeFi. But first we're going to take a quick word from the sponsors who make the show possible. $540 million. That's how much concentrated liquidity sat idle in a given week in the first half of this year. About 30% of the DeFi TVL if you're wondering. That's according to Dune Research commissioned by 1 in. But there's a solution. 1in Aqua is the new shared liquidity platform. It lets LPS back multiple positions with the same token balance and keep their tokens in their wallet till a swap comes. Why does that help? Because the LPS don't have to split their tokens across positions, they can cover more market conditions and pairs with their full balance. That

means more activity across deeper liquidity. See how it works at 1in.com/ aqua. Remember that providing liquidity carries risk and fees aren't guaranteed. Back to my conversation with Alex. So, I'm sure that the feature that most crypton natives will be excited about is composability. And at launch you have integration with nine D5 protocols or well I mean you're one of them so Erdro is one a Morpho Oiler uh Zerox 1 in Kyber swap cow swap wasabi and these are you know all different um kind of sectors of DeFi. So explain what it is that users

can do with tokenized stocks in DeFi. Yeah. So, this is a great question because this is um where I think we get really excited because this is not just a um you know better version of a tokenized stock at this point. This is a better version of a stock period because of the programmability and the composability that comes with it. So, we think about this from a few dimensions. I mean one is first just to talk about the basic portion of this which is um you know these stocks now exist on an exchange. Um and most users of uh stocks internationally they have to go through brokerages right and things like

interactive brokers and interactive brokers is an institution right it's got uh thousands of employees it has you know billions under management and it extracts you know a staggering like 77% profit margin on that type of activity. So the first and most critical thing is that we are giving access right to people um to engage with these assets who otherwise would have had to have gone through a very expensive a very clumsy if very slow um intermediary. And the most exciting thing is that even in these first few days, we have seen moments where you can get better execution

um on these assets than you can even through this you know billion dollar um traditional uh incumbent. So access right in just trading or in the act of uh participating in market making is like the the base level here. But what makes it even more exciting is the programmable portions of this and the composable portions of it. And this is critical because of course we've had tokenized stocks on chain uh for a minute um in like perpetual markets right as derivatives and those are fine uh if you just want to sort of bet on what the price is going to be um and you can use things like RFQS today if you want to maybe trade these things in

certain environments but that is just a market um or that is not a market that's just a dealer connecting um trader traders and uh market makers. A spot pool is the actual market for these assets. It's where they actually sit. It's where people can provide liquidity and anyone can trade uh 247 365. And I like to think about this as like the internet allowed anybody, you know, to do what Stephen Spiel Spielberg did, you know, create content, movies, films. I don't know if you've seen Obsession, but you know, this is a guy who came out of uh creating content on the internet, has now created one of the highest grossing films uh to ever exist. And what these markets are going to allow people to do

is anyone can now beat Ken Griffin, right? They can come on chain and they can participate in the very act of market making um in a really incredible way. And so we are seeing already all of these protocols line up to build these really interesting things, these programmable building blocks. We've seen like Arcadia, right, launching their leveraged uh LP positions. We've seen folks like Bitwise build uh the first automated token portfolio, right, which allows there to be no fund wrapper. All these tokens stay in your wallet and things like that. And gives people access to these types of uh products and and services and tokenized equities. And so we think over time these spot markets

because of all the composability that comes with it these will become some of the deepest richest uh markets for these types of assets that everything else you know quotes against that everything else hedges against and will really be the foundation of uh the trade of of tokenized stocks tokenized FX um and all these other you know trillion dollar markets that are quickly coming on chain. Yeah. So, um you know, I could imagine this this would be very exciting for people to put these assets into DeFi. Um like for instance, as collateral. Um but I do have some questions about that because um obviously the underlying does

not trade 247 and so I know chain link is providing a price oracle but that's obviously to the underlying which again um is going to trade it's it's a 245 oracle as far as I understand. >> So what does that mean for um people who want to trade these over the weekend? You know, you could imagine situations where the price could start to dislocate somewhat significantly from the underlying. >> Yeah. >> And potentially you might even see also thinner liquidity on the weekends which you know uh those those elements combined can cause problems come Monday morning. So what are some of the risks that users should be aware of and how um

are Aerog or or any of the other entities here you know trying to mitigate these risks? Yeah, I mean that's a great question and that that goes right to the um importance of these deeply liquid uh spot markets because in our opinion price dislocations when markets are closed is the feature not the bug of these um tokenized onchain markets. Uh because like we talked about um with the Nvidia earnings that we saw uh yesterday, that price dislocation onchain was not a slippage thing between the close price and the actual that was onchain markets participating in the act

of discovering what they believe the opening price would be. And that only works right to the the point we were discussing earlier if the asset you are trading is an actual claim one to one on the underlying thing. So when uh after markets right we see um a lot of speculation on Nvidia because of a earnings beat. Um that is basically the market saying well hey we think we're able to get some Nvidia today and by the time the markets open we think the price is going to be somewhere else and that is why we think like over time these markets will increasingly be the venue for that onchain price discovery.

Uh things like the chain link oracle I think that will become 247 uh very soon I know that they're uh working on it. Uh but lending markets, this is why we are the bedrock of things like um the Morphos onchain uh Bitcoin lending product, right? that's available to uh Coinbase customers today because that market if it needs to liquidate it's finding a price and it's finding deep liquidity on Aerum and uh and the the the AMM pools there and for the lending to scale up right on these new tokenized equities they need deep liquid um uh AMM pools on each of these

tokenized stocks and their oracle won't necessarily be the price that was uh the market price at close. It will be the price that the onchain markets are are pricing it at. And this is truly what we think is so exciting about this because of the open composable nature of this because everyone can participate in the act of market making because these markets exist 247 365 and because they're fully transparent. We believe increasingly these will be the markets whereby price discovery happens. And it was actually very interesting with the Nvidia um uh earnings. We actually saw uh liquidity providers positioning on

either side in various weights uh ahead of the earnings, right? Either if they were a bit more bullish maybe on the buy side, if they were a bit more um bearish on those earnings on the sell side. So there was deep liquidity on either side. And then you saw the market contract, right? And the liquidity sort of come tighter around the range on the day of. As lending markets scale up, you know, that is the type of liquidity that they will be able to tap into. And the oracle will not be some off-chain connection between the NASDAQ and uh you know, these onchain markets, but will increasingly be the liquidity on those tokens uh in AMMs like a drone.

And um out of curiosity when you said that Chainlink is working on having the oracle work um on the weekends like since I think they're supposed to reflect the stock price, I'm I'm confused how that would work. >> Yeah. I mean I'm I'm not super deep in the weeds and you know that's just something I was uh was told that they're working on the the 247. You know, you could imagine a scenario where, you know, chain link of course aggregates a bunch of different price feeds, right? And and a bunch of different sources of truth to ensure that those oracles are extremely resilient. And my expectation would be over time different types of products and services, they certainly look at uh closing prices and redemption values,

but they also look at liquidation values and prices within AMMs and things like that. >> Okay. Okay. So, I'm sure our uh mostly US audience is going to be interested in knowing because so currently these are not available in the US. Surprise, surprise. Um but as far as I understand, Coinbase has applied for an SEC innovation exemption. Um however, I I think that even if that were granted, US users would still not be able to use the tokens as they're currently designed.

So, I think it would need to be some kind of separate token for US users. Um, like it almost seems to me like it might have to be an inferior product to the one that was launched. Um, so could you kind of explain, you know, what this innovation exemption was is that you applied for like what it would allow? Um, and you know, obviously I know it has been granted. So, you know, it like the details would need to be worked out, but just at this point in time, what do you think the product would end up looking like in the US? Yeah, >> I mean I think uh Coinbase has been very very clear and they've been some of the uh biggest advocates in Washington uh for uh not just our industry but for um

bringing all of these assets on chain in the most robust and uh permissionless way they possibly can. And uh you know I guess I'll I'll just be careful in in what I say, but I think when you've looked at some of the the leaks that have come out of the SEC, I think we've done this a few times now, right? Something very big guidance is coming on how uh the SEC will treat tokenizing things like uh US equities um in a in a very global way. And you know, I'm just going to take what I've been hearing, you know, through public channels, which is, uh, they've had a lot of this ready to go. Um, they're very interested in getting it out. And of course, there are

a lot of interested parties like us, like Coinbase in, um, seeing that come out, but they've been waiting for Clarity. And perhaps there's some gamemanship even here. and you know the SEC is only going to come out with that once it's clear clarity is either passing or not passing or things like that but from what we've heard um I think it is a version of things um that is very much aligned with the direction that uh Coinbase has been taking and I think where the separation will exist is between what you can do with these assets onchain and what you can do with these assets if you are willing to KYC

and take them and use them on Coinbase. And so in some ways it's the best of both worlds, right? The tokens themselves are still permissionless and accessible and composable across DeFi. But uh for the full experience, say I wanted to um take my Apple shares and I wanted to vote in a uh issue um that was uh being brought up for Apple shareholders to vote on. I might need to go do that on Cobase.com, you know, with my KYC. And so, uh, you know, if I had to bet, I would I would bet that when we do eventually get the guidance from, um, the SEC on how they plan to, uh, treat tokenized equities, it will be very

synergistic with the product, um, that Coinbase has brought to market while also unlocking, um, some of these benefits for US users um, of these products today. >> Okay. Okay. Well, um yeah, I you know, looking at that kind of thought it seems like it might be more limited in DeFi, but it feels like um you know, you you guys have thoughts on how to uh still allow um usage there. Um so let's end on another question that I'm pretty sure the users will want to know about which is um which other you know assets are you considering adding um or what are the criteria for deciding and when do

you think you will be adding new ones? Yeah, I mean I think uh both us and Coinbase are very very excited to bring as many of these um to market as quickly as as we can, especially seeing the impact of these assets so far. You know, uh on Aerome um we redistribute 100% of the protocol's revenue right back to users of the token. The Arrow token represents 100% claim on that revenue. And you can see even in a few days of these they generated tens of thousands of fees, right? Um and those fees go right back to us users of our protocol.

So we're deeply incentivized um and all the users of our protocol are deeply incentivized to see uh massive growth on these um tokens uh and and real world assets on our platform. So, uh, I'd expect to see a whole bunch more over the next, uh, week or so, um, scaling up, uh, significantly. We've also seen new products like, um, uh, Reserve launched on our platform, a tokenized, uh, Meg 7, uh, token. Um, we're very excited. I believe the news will come out today that Centrifuge is bringing some of their products over from another DEX and we'll be hosting that liquidity on Aerodrome. And uh so it won't just even be the tokenized stocks and things

you're seeing coming out of Coinbase. We will be the hub of these new onchain uh financial products and primitives because we want to dominate them just the same way we dominate the top digital asset in Bitcoin and onchain FX because we think these are the most important growth verticals of the onchain economy. Um, and like Brian Armstrong said, uh, Coinbase's belief is that in the next five years, we will bring 10% of global GDP onchain. And I think that seemed a little crazy to folks when he said that on an earnings call I think uh late last year kind of in the the midst of a bare market. But seeing the rate at which these are being adopted, seeing the rate at which we are already competing with

uh folks like Interactive Brokers, some of the most uh you know complex uh longlasting billion-dollar incumbents. I think we're all very very anxious to see more. So um by this time next week there will be a lot more I guess is what I can say. Um and uh we'll be bringing a number of these things uh to market and we're also very excited to be launching soon on ARC uh which is circles chain and where we're going to see I think significant growth in the FX category as well. >> Oh wow. Okay great. Well I look forward to seeing those announcements. Thank you so much Alex for sharing your news and um giving us a taste of what's to come.

Thank you so much for having me >> and thanks to everyone for joining this live stream. We will catch you next week. Nothing you hear on Unchained is investment advice. This show is forformational and entertainment purposes only and my guest and I may hold assets discussed on the show. For more disclosures, visit unchainedcrypto.com.