Why Tokenize a Stock?

Every marketplace wants to make transactions more efficient (think “cheaper” “faster” “easier”). For many online exchanges, these 3 metrics are maxed out, so it’s hard to offer a differentiated product that grows revenue at a sustained rate, especially with competitive downward pressure on trading fees. That’s why “simple” exchanges like Robinhood and Coinbase keep launching whacky new products like stocks, crypto, derivatives, sports gambling prediction markets, debit cards, high-yield cash-equivalent accounts, agentic-trading connectors, and a growing suite of fintech offerings. They need new markets for their existing users, or new users for their existing markets.

Tokenized stocks provide the latter. As an international poor person retail investor, it’s hard to directly participate in the US equities market. Supposedly, for many of these people, funding a crypto wallet to interact with a decentralized, blockchain-powered exchange for synthetic stocks is easier than onboarding to a traditional brokerage. This is the explicit thesis, as stated by the CEO of Coinbase. Personally, I think the implicit thesis has more to do with AI agents preferring blockchain transactions, but this doesn’t play as well with the regulators… they need some indication that this is good for Americans.

So, because they lack a single strong argument on why US investors need this, Coinbase and Robinhood have made a lot of weak arguments. 24/7 trading has been available to retail investors, without a blockchain, for a while now. But today, SEC Commissioner Mark Uyeda released an Innovation Exemption for tokenized stocks, citing:

…the potential to modernize core market infrastructure functions, such as issuance, trading, transfer, settlement, and recording ownership, with the potential to reduce costs, enhance transparency, and expand liquidity.

In my brief assessment, nobody in the United States should care about tokenized stocks. The only impact most Americans should see is a small bump in demand as it becomes easier for very small international buyers to bid up the price of US equities, and even this will be slow and insignificant. It’s unlikely that anyone will develop better financial products by combining these tokenized stocks with novel smart contracts to create synthetic shorts or longs or perps or some derivative monstrosity with a bonding curve. I don’t think anything will happen, and that’s why I was surprised to see Adam Aron, the CEO of AMC theaters, absolutely livid about Robinhood’s launch of this incremental fintech product:

“I find this practice to be contemptible, outrageous, disgusting, detestable, inexcusable, vile. How can it possibly be legal?”

Looking into this, I found 3 interesting angles to consider:

1. AMC’s stock price is down 99% (unrelated to blockchain, but strongly related to Robinhood).

2. Tokenized stocks have weak-points, but shareholder privilege transfer isn’t one of them.

3. The future of agentic trading.

$AMC is down 99%

In my opinion, Adam’s feedback has more to do with attention-seeking than it does with any actual concern about the legality of tokenized stocks. He wants attention because AMC stock is currently down 99% from its all-time-high 5 years ago, back when it was a meme-stock thanks to Reddit and Robinhood (similar to GameStop). So, starting any conversation with the Robinhood audience is a reasonable last-ditch effort. I actually think he is considering the hail-mary chance that the same Redditors turn the former meme-stock into a meme-coin. I mean, it’s not going to work… but I don’t have any better ideas to pump the price of AMC stock.

The other cynical angle is that AMC is a failing company that recently dumped billions of dollars of inflated stock on retail traders. Adam is likely to be out of a job soon (as CEOs of failing companies often are) and is looking to reposition himself on the way out, both to blame-shift AMC’s performance to Robinhood and also to align his personal brand as somehow fighting for the rights of those retail traders… good luck!

Whatever his motivations are, let’s take a look at these tokenized stocks he’s ranting about.

Flaws of Tokenized Stocks

Shareholder Voting Privileges

To understand how these tokenized stocks work, let’s first examine normal stock ownership. For large stakeholders, features like shareholder rights and voting privileges actually matter. Most people never think about this because it would be a waste of time to vote with 0.000001% of the shares.

HOWEVER, if a single platform collectively holds the shares on behalf of its retail users, without explicitly transferring all the voting rights to those users, it could do the maximally-evil thing and vote all of those shares itself, as the platform. That’s obviously not going to happen, but this interview does not inspire confidence (seriously, who is letting this guy pick his outfits and speak in interviews?):

In short, even though we have no legal precedent for which shareholder privileges transfer to the custodial institution vs the synthetic asset holder, the obvious competitive market forces will cause the platforms to provide the best customer experience in this regard. I’m sure there will be challenges because they don’t necessarily have the info on the identity of the shareholders, which creates small issues… but until an anonymous crypto trader buys 51% of AMC on a decentralized exchange, this really won’t matter (that would be hilarious, though).

Price-pegging

This is what I would actually worry about, but I wouldn’t lose sleep over the idea. It’s already common for the price of certain stocks to differ slightly across multiple exchanges, so there will certainly be some drift between the price of the token and the price of the stock. Historically, the “solution” is that massive hedge funds will build high-frequency trading operations to find and exploit these tiny arbitrage opportunities. In one sense, these tokenized securities venues (TSVs, like Robinhood and Coinbase) are simply another exchange / brokerage / order-book / whatever you call the players in this space.

But still, if there is any potential for disaster, it’s in this price-pegging. I’m not sure exactly how it will happen, but if it’s anything like the stablecoin failure at Coinbase, it will come from somewhere unexpected.

A long time ago, in 2022, I was the Manager of Assets and Balances at Coinbase. To make a long story short, we got really excited about stablecoins. The business model was to custody dollars and issue tokens. While people blasted those tokens around their favorite blockchains, Coinbase would invest some of the dollars in short-dated US treasuries to earn yield (and, to be fair, share most of it back to the user). Everyone was worried about some obvious failure modes, and we put a lot of work into preparing for them:

• Lack of 1-1 backing: Many other stablecoins (Terra Luna) literally failed because they were backed by something more complicated than a dollar or a UST bond. Other stablecoins (Tether) caused a loss of confidence in the industry because they were obviously allegedly, at some point, issuing more coins than they had dollars backing.

  • Coinbase partnered with Circle to promote the USDC stablecoin, and the 2 regulated US companies provided a lot of transparency here through efforts like a new foundation (Center) and lots of auditing.

• Run on the Bank: If some of the funds are tied up in treasury bonds (even short-dated ones), and 100% of users decided to withdraw, that wouldn’t work out well. But, the lower % held in bonds, the lower the revenue.

  • Coinbase and Circle partnered with a too-big-to-fail financial institution to solve this problem. BlackRock managed the bond-buying-and-selling process. This was a disgustingly pragmatic solution, because it’s exactly the opposite of what Satoshi Nakamoto ever wanted. The creators of cryptocurrency hate central banks and literally invented money-on-the-blockchain to disinter-mediate them, but now every time someone mints USDC, Blackrock buys more US treasuries… and Satoshi rolls over in his grave).

Anyways, it turns out that none of these things mattered, and the problem came from the actual cash we held in a normal bank account. We used 3 banks, and 1 of them was Silicon Valley bank, which collapsed in early 2023. This caused the price of USDC to briefly de-peg to $0.88, on literally my last day at Coinbase (before I left to start Truemed). It was a great last day, as I had personally fought for kill-switches that my team (and other heroes) built into the cash-equivalent products. This meant that Coinbase didn’t even halt trading, just some USDC-specific features… anyways… it was an interesting day in fintech (and everything was fine the next week).

I’m sure the Tokenized Stocks will give us interesting days as well, but I’m not sure exactly how. Maybe when the price volatility of a stock triggers trading halts on normal exchanges but not blockchains, this will put untested stress on the 1-1 redemption mechanisms… or maybe the next president will issue an executive order making all tokenized stocks immediately worthless… or, probably, something I’m not even thinking about will explode. But, unironically, I’m sure it will be fine for all of us (humans and otherwise).

Agentic Trading

Unlike humans, AI agents seem to prefer blockchain transactions for the tiny sliver of purchasing decisions they get to execute. In my estimate, this is because logging-into-things (especially financial things) is terrifically annoying, and blockchains side-step that particular friction with a different set of trade-offs that really work for ephemeral AI agents. In short, it boils down to “onboarding friction.”

This friction is relevant for the growing horde of retail investors who now want Claude to trade on their behalf, but irrelevant to the majority of the trading volume in the market. The HFT firms, which account for over half the trading volume, already eat an astronomical amount of “onboarding friction” to co-locate their servers in the same rack as the exchanges and shorten the length of the fiber-optic cables in those rooms. From their perspective, using 2FA to manually rotate API keys isn’t really a big deal. So maybe this bottoms-up disruption will start with the retail investors, but I don’t think the actual early-adopters of AI trading (who care about nano-second latency) will switch to blockchain execution anytime soon.

Even if the retail-agentic-commerce wave does crash soon, I think customers are more likely to connect their agent to a centralized exchange (like Robinhood or Coinbase) than to use the blockchains to trade tokenized stocks (also on Robinhood or Coinbase).

Conclusion

Tokenized stocks are obviously a great business move for Robinhood and Coinbase, as they have a small immediate value and potential asymmetric upside. The small immediate value is:

• More international trading volume

• Custody over A LOT of equities in a novel way

The future asymmetric bet is to capture the potential agentic trading volume. It’s one of many efforts (by both companies) to position themselves in front of the agentic commerce wave. In this particular case, I agree with the conclusions of the SEC more than the movie theater executives, although none of them make the obvious argument:

Tokenized stocks will increase trading volume, which makes them inevitable given the market forces at play. The spice must flow!

Random Thoughts

Personal musings, feel free to skip:

Does price-pegging really even matter?

When trading “normal” stocks, we correctly assume that many smart people out there are making sure the price of each stock remains somewhat tethered to the commercial prospects of the underlying business. However, stock ownership is mediated heavily for most investors, who know the business more as a number in their online dashboard and less as a group of people operating a company.

In recent past, armies of Redditors have run socio-economic experiments with meme-stocks by simply bidding up the stock-price of a basically worthless company. This is objectively hilarious, and it creates all sorts of problems for major financial institutions who maintain the collective delusion that stock prices are more mathematical than they are memetic. Robinhood lost a lot of credibility during the Gamestop frenzy because their actual relationship with the brokerages didn’t handle edge-cases like this well, and the outcome for users was disastrous (Robinhood literally disabled the “buy” button but left the “sell” button live for the most popular options).

So, specifically in these highly volatile edge-cases, there is no guarantee that the price of the stock is pegged to the reality of the company… but, it’s the best quantification we have, so we might as well aim there.

I’m not sure what would happen if tokenized stock volume eclipses that of traditional exchanges (in some weight of AUM and trading volume that ignores wash-trading). Would the other markets start trying to track their synthetic tokens? It would be strange if the map became the territory in that sense, but I’m not holding my breath.

The majority of stock-market trades are already executed by non-humans.

Large firms have used some form of AI (or “machine learning” or “applied statistics”) to trade stocks for years without a blockchain. These tools are technically different but spiritually similar to the LLMs that consumers are now using as their omniscient pocket-consultant. And even if many of the strategies that high-frequency trading firms run can’t tolerate the latency of LLM inference in the signal-processing hot path, the fast algorithms on the optimized substrates will increasingly be written by an AI and comprehended by fewer humans.

Large firms obviously use some form of AI ( digital tools to trade stocks. Without a blockchain, they’ve used a wide range of machine-learning models and deterministic algorithms to exchange a staggering amount of wealth per nano-second. The amount of optimization here is overwhelming the first time you learn about it, but at scale, it is completely rational for massive hedge funds to tolerate this complexity for a fractional edge in the market.

I was the founding CTO of Truemed and a manager at Coinbase, so I have deep brain damage from “knowledge of” fintech, but also a life outside of it, so let’s cut to the chase.

What are all of these AI routing services, and why are fintech companies suddenly clamoring for them? Just this week, Stripe acquired OpenRouter for $7B, and Ramp launched router.com for free.

I’ll briefly explain:

• What these tools do.

• Why OpenRouter is worth billions of dollars to Stripe.

• Why Ramp is launching Router for free.

• Why these routers are bad for frontier labs but good for humanity.

What do AI routers do?

What they actually do

These routers make it easy for finance teams to forcibly switch their entire company to the cheapest possible Chinese models.

Less cynically, they provide companies with real-time cost metrics of their AI token spend and give them knobs to easily redirect that traffic. The danger, of course, is that the cost-savings are quantitative (immediately tangible) while the performance-degradation is qualitative (fuzzy, harder to measure).

The problem they solve

It’s a classic hub / integrator model. Multiple teams and people within each company are now using a mix of AI services, each with different cost / performance / compliance characteristics. Given that AI token spend is the fastest-growing expense category, every finance team under the sun wants to throw a router into this mess:

Why OpenRouter is worth billions of dollars

Obviously, OpenRouter has a lot of users and is growing exponentially, and that distribution is way more valuable than the software IP. More interestingly, OpenRouter has one of the greatest flywheels in the history of capitalism: volume discounts with the model providers.

These volume-discounts allow OpenRouter to offer lower prices, and given the cost-sensitive nature of the token-optimization market, this leads to more customers, more token traffic, and more volume discounts, and this basically guarantees that the largest routing company will always have the lowest prices. It also means that OpenRouter can charge a healthy margin on all AI token spend and still provide customers with the lowest inference prices. Given that the potential TAM of token spend is ~infinity… that’s a valuable company.

What Ramp is doing

Stripe and Ramp aren’t direct competitors yet, but as infinitely-ambitious fintech companies, they’re bound to battle on some fronts. Launching router.com is a reactive, defensive move for Ramp.

Ramp is, first and foremost, a set of tools for corporate finance teams. It makes perfect sense for them to launch their own point-solution for managing AI spend, but acquiring OpenRouter would be silly, because they can’t afford it they really wouldn’t know what to do with most of OpenRouter’s users. However, they’re probably worried about their customers using a Stripe product to manage their fastest-growing expense category.

Also, Ramp has supposedly been building this tool internally for 3 years, so it’s not like their investment was literally $0. The real price was the opportunity-cost of their product team’s focus, with the budget in dollars for “router.com” being essentially a rounding error compared to the OpenRouter acquisition.

But still, it’s hilarious and petty that Ramp shelled out for the shorter “router.com” days after Stripe’s “openrouter.com” announcement. We’ll see if the free-for-one-year price tag lets them get enough users → negotiate enough volume discounts with the model providers → provide inference at low enough prices → prevent their customers from using Stripe to manage token-spend… I’m skeptical they’ll win the whole market this way, but maybe they can get whatever critical-mass keeps them alive here.

What Else is Stripe Thinking

From Stripe’s side, this acquisition also complements a lot of their unique strategies:

Agentic Payments

Agentic payments represent less than 0.1% of e-commerce volume, but that could change fast given that more than 50% of web traffic is already non-human. Nobody is certain how this will play out, but there will likely be HUGE network effects for the most popular payment system for AI agents. With this acquisition, Stripe has the ability to tilt the odds in its favor by building first-class support for Stripe’s payment rails (Tempo or similar). They don’t even need to exclude other payment rails; just by grafting in a very slight advantage for themselves, Stripe can become the path-of-least-resistance to accept payments for all of OpenRouter’s users (human and otherwise). Given that OpenRouter’s users span all major model providers, this is a really smart play.

Orchestration

For years, Stripe has been trying to reposition itself as an orchestration company.

This is somewhat reactive to churn, as their business model (great bottoms-up developer experience, high price tag) means that their largest, most valuable customers eventually graduate off Stripe to competing platforms with lower rates (Adyen or similar). These customers end up with a lot of pain related to routing & reconciling payments across different processors. Stripe wants to become an orchestration layer for these partners, so that even if they lose (or partially lose) the processing relationship, they’ll still be an indispensable part of their payment stack.

This reposition is also forward-looking, in the sense that payment processing margins will likely trend to 0 over the long-term. In that world, Stripe needs to find other value-add services adjacent to payment processing to charge for.

It’s unclear how effective Stripe’s internal efforts to build orchestration have been. I’m not sure what adoption looks like for their largest partners, and the features are mostly useless to the overwhelming majority of customers who are single-processor. In other words, if you only use Stripe, you don’t really need payment orchestration.

Whether the issue was Stripe’s orchestration product or simply the problem-space it was built around, the acquisition of OpenRouter solves it. Everyone has (or will soon have) an AI orchestration problem, and OpenRouter has solved it better than anyone else (as evidenced by all the users).

Metered Billing

I’m not sure if this is good or bad; it might actually be an inefficient redundancy in the acquisition. Stripe’s usage-based billing product (Metronome, which they acquired only a few years ago) is apparently quite good and is seeing healthy traction, but this metered-billing is also a core feature of OpenRouter’s platform. There is obviously some sort of spiritual alignment between the teams, but redundancy in M&A is typically a negative thing. But, I dunno, maybe they’re more different than I realize, or maybe they’ll find a way to integrate the teams and trojan-horse some deeper orchestration features into their metered-billing customers.

Why This is Bad for Frontier Labs

tl;dr

This disintermediates Anthropic / OpenAI / etc… from the end-users and commoditizes the inference market.

Commoditization

Widespread adoption of this router pattern makes it easier for companies to switch model providers and harder for model providers to compete on anything besides token cost & quality. By forcing all inference through a single interface, the margin opportunity of proprietary integrations or differentiated context-management is categorically eliminated.

Switching Costs

When some team integrates an AI service (think Claude Fable) into their workflow, the switching cost can be tedious for the company. If leadership wants to migrate to cheaper models, they have to ask this team to perform the switch. This team then gets a chance to explain why the higher-quality inference is valuable for their special use-case, and there is ultimately a lot of hand-to-hand combat involved in the transition. However, if companies use a model router… leadership can just push a button in a dashboard.

Differentiated Integrations

There is a lot of nuance in the proprietary context-management tooling that gets lost when you shove all the models behind 1 blunt API. As one trivial example of this, many users love the terminal-based Claude Code product because it “wraps” Anthropic’s models more effectively than Cursor and other IDEs.

This moat around harnesses (and tooling generally) feels temporary; OpenRouter and Cursor and everyone else will eventually get better at intelligently managing context for different models. It’s also worth noting that a lot of the traffic OpenRouter absorbs was already happening behind blunt inference APIs anyways (think string-concatenation, like “Please reply correctly and politely to this customer who said: “ + customer_text), so in practice there’s usually not much quality-loss when using the exact same model via OpenRouter vs directly… but these tools categorically prevent the labs from deploying deeper integrations.

Obviously, this creates a more efficient marketplace for inference that the customers (and scrappy, cheap model providers) love, while the incumbent model providers would prefer all of their customers to build stickier direct integrations… but I think we’re past the point of no return. Given the token volume through these hubs, it seems impossible for any frontier lab to categorically stop cooperating with the routing services.

This is somewhat bleak for new model development because the frontier labs essentially finance the billions-of-dollars it takes to create next-gen models against the future inference revenue of that model. If more of the inference traffic shifts to the cheaper distilled models, the AI labs will need some other way to finance the training of large new models.

Conclusion (Why This is Good for Humanity)

On the surface, there is some irony that the frontier labs are promising “intelligence too cheap to meter” while the hottest category in fintech is simply managing the token spend. However, it’s exactly this kind of commoditization that creates more efficient free-market dynamics that will drive the price of tokens down faster. It also shifts the balance-of-power slightly away from the model providers and toward the consumers in the best way possible: using free-market incentives (and not via regulation).

Random Thoughts

Personal musings, feel free to skip, these go on forever:

I think it’s incredible how fast some of these decisions are happening; Stripe’s acquisition announcement was largely unexpected, and Ramp responded in days by commercializing their internal tool and launching it as router.com. The pace of software-product-development is picking up!

I feel like a new inflection-point in B2B SaaS is imminent, where the cost to build & maintain a tool internally drops below the cost of the procurement / RFP process of an enterprise sales cycle.

I also second-guessed myself every time I wrote an example using “teams” at companies, because I know a lot of individuals who are now effectively managing multiple functions, and continuing the trend further I’ve read stories of agents doing the same (although I haven’t personally seen it).

In their recent investor update, Stripe mentioned “deft helmsmanship” in the age of the singularity being a reason for delaying an IPO, which feels like the opposite of Elon Musk’s strategy, given that he batched Starlink / xAI / SpaceX and rushed to go public ahead of the singularity. Maybe he just has more ambitious cap-ex and needs some cash.

If I was an employee at a typical big tech company and the CEO started talking about “deft helmsmanship” I would assume lots of teams are about to get fired… but this is Stripe, and they really believe in the singularity, so maybe they just mean boldly re-inventing the company overnight (or shooting more $7B shots from the hip).

I personally like how the Collison brothers sprinkle these ten-dollar-words strategically into their writing and speeches (words like “recalcitrant” etc…).

In my opinion, the quantity-vs-quality problems with these router tools ultimately won’t matter. It’s not a new category of problem; anyone who has defended a large expense on creative work to company leadership knows this pain already (replacing in-house developers with cheap overseas ones, or negotiating salary with a principal designer or marketing leader). These tools are just levers that can more efficiently and quickly magnify the cultural impact of the real decision-makers within a company.

So, while the narrow token-marketplace might not price in some of the attributes like quality, the broader markets in which the token consumers themselves compete should measure something like quality in a global sense. Sure, there are lots of blog posts and best-practices for running A/B tests to tune prompts & model-providers, but these ultimately need some scoring function, and you lose something… anyways, I’m less interested in the category of products that quantify the quality of tokens… it’s obviously the right thing to do at scale, but good taste & judgement are just way more fun.

Of course, there are other externalities not priced into any markets (like proxying a lot of our AI traffic through foreign nations)… but most of the Chinese models are actually served via hosting-providers in the US. So, similar to my fears with TikTok, I’m not as worried about China getting our data as I am about China’s AI models having a formative impact on the daily decisions & worldview of the American people… but honestly, I don’t worry about this too much either.

Over time, the balance of power could shift too far away from the model companies to these routing companies. You could imagine a world where most of a model provider’s revenue comes via OpenRouter, and how OpenRouter might be incentivized to actively discourage any direct-to-consumer integration with the model providers, sort-of like an exclusive retailer / wholesaler relationship (or worse, like a TurboTax perverse incentive). This feels unlikely, but it’s fun to think about.

There are a lot of other ways this could shake out… I’ve seen arguments like this that Stripe and OpenRouter are essentially similar companies in that they provide a clean abstraction over multiple providers (the providers just happen to be processing money in 1 case and tokens in another case). To me, this sounds like someone worked on this particular thing at Stripe, so now they view everything through that lens. There is some merit to the idea that both companies are providing a single abstraction layer over multiple underlying providers, but that could apply to a lot of online businesses, not just Stripe & OpenRouter.

The analogy breaks down for me because the whole point of OpenRouter is that their customers can selectively route traffic to their preferred providers, which creates immense competition among the underlying providers. With payments, you have to honor whatever payment method the end-consumer shows up with, which creates a much different (and far less competitive) relationship with the underlying card networks and payment methods.

There is also the pseudo-religious angle, which is this vague idea that scarce compute will become the fundamental economic unit… but didn’t we already try that with Bitcoin? Let’s not revisit that one, please.