Tokenized Stocks in DeFi AMMs A Risky Bet Without Proper Strategy

The tokenization of real-world assets on the Ethereum blockchain has seen significant growth, with nearly $15 billion worth of tokenized U.S. Treasury funds, yet adoption remains limited to a small group of holders. Tokenized stocks, however, have faced the opposite challenge, high numbers of holders but low trading volumes. This dynamic shifted dramatically with the launch of Robinhood’s layer-2 (L2) chain, which saw decentralized exchange volume surge to nearly $5 billion a day, making it the top chain for real-world asset (RWA) DEX volume.

The frenzy around Robinhood’s L2 has subsided, but liquidity providers (LPs) in automated market makers (AMMs) still earn high APYs. The SEC’s proposed innovation exemption in mid-September opened a path for fully tokenized stocks to trade legally on AMMs, raising questions about the suitability of AMMs for stock trading. Galaxy’s analysis found that tokenizing every asset in an index, like the S&P 500, and depositing it into an AMM is likely a bad idea due to high impermanent loss and turnover requirements.

The key factor in AMM performance is dispersion, the degree to which assets in a pool move apart. High dispersion leads to significant impermanent loss, making AMMs better suited for structurally linked, low-dispersion assets. The analysis suggests that broad exposure is better achieved through an index token or a tokenized portfolio, while single stocks are generally better lent or held. AMMs should be reserved for assets with a durable reason to stay close, such as dual share classes or mature-industry pairs.

For example, a Curve liquidity pool holding three semiconductor stocks, NVDA, AMD, and SNDK, without a fiat leg was set up to explore the future of finance. The analysis found that such pools could either represent the future of decentralized trading or an elaborate way to donate money to arbitrageurs, depending on the asset mix and market dynamics.