This House rejects any derivative-based models that tokenize equities

At Breakpoint 2025, four industry heavyweights squared off in a structured debate over one of crypto's most consequential questions: as the world's largest asset class moves on-chain, should tokenized equities be backed by real shares or synthetic derivatives? The answer could shape how billions of dollars flow through decentralized finance.

Summary

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The debate pitted Tarun Chitra of Gauntlet and Mary Gooneratne of Loopscale arguing for spot tokenization against Arush Sehgal of Alpaca and Shrey Rastogi of KAIO defending derivative-based models. Both teams acknowledged that equities coming on-chain is inevitable—the disagreement centered on which mechanism will ultimately dominate and serve users best.

The pro-spot side argued that empirical evidence from stablecoins and tokenized treasuries demonstrates that collateralized, spot-tokenized assets simply perform better on-chain. They emphasized that derivatives markets require spot assets for basis traders to function efficiently, and that the oracle complexities inherent in derivative products introduce unacceptable risks—pointing to recent incidents on platforms like Hyperliquid where parameter choices caused significant problems.

The opposition countered that rejecting derivatives entirely would limit crypto's potential to build true "internet capital markets." They highlighted that in markets like India and Korea, derivative trading volumes exceed spot volumes by 15-20 times, suggesting that derivatives are essential for global retail access. They also argued that derivatives circumvent the platform risk inherent in tokenized wrapper models and allow for capital-efficient exposure to equities.

The debate ultimately centered on a philosophical question: Is crypto building for buy-and-hold investors who want governance rights and dividends, or for traders seeking leverage and capital efficiency? The audience, voting via real-time poll, appeared to side with the spot tokenization team.

Key Points:

The Case for Spot Tokenization: Empirical Evidence and Market Microstructure

Tarun Chitra opened by pointing to the massive success of spot-tokenized assets already on-chain. Stablecoins backed by real dollars (like USDC) command orders of magnitude more market share than synthetic alternatives. The same pattern holds for tokenized treasuries. If this roadmap applies to equities, spot tokenization should dominate.

More critically, Chitra argued that derivatives markets fundamentally depend on spot assets. Basis traders—who arbitrage between spot and derivative prices—provide the stickiest liquidity on exchanges. Without a real underlying asset to trade against, these traders can't function, and the derivative market loses its anchor. He pointed to Hyperliquid perpetuals already deviating from underlying prices as evidence of this structural weakness.

The Case for Derivatives: Access and Capital Efficiency

Shrey Rastogi rejected what he called a "false choice," arguing that the goal is building internet capital markets—not an internet brokerage. He emphasized that derivatives can reference traditional equity prices during weekdays while enabling on-chain price discovery on weekends, getting the best of both worlds.

The capital efficiency argument proved central to the opposition's case. With spot tokenized equities, every dollar of capital gets you one dollar of exposure. Derivatives allow for leveraged positions, which is what most on-chain traders actually want. Rastogi noted that in emerging markets, derivative trading dwarfs spot trading by enormous margins, suggesting that excluding derivatives would shut out a massive potential user base.

Oracle Risk vs. Counterparty Risk: The Technical Tradeoffs

Mary Gooneratne raised pointed concerns about derivative pricing mechanisms. When derivatives aim to track underlying assets, the market operators must correctly handle corporate actions like stock splits, mergers, and reverse splits—something even established players like the NIC have recently botched, resulting in billions in lawsuits. Weekend pricing, where Redstone has implemented EMA-based predictions, potentially exposes market makers to being exploited if prices can be predicted algorithmically.

The opposition countered that spot tokenization introduces its own platform risk. Most tokenized equity models involve an issuer creating a wrapper around shares held by an SPV or custodian. Even direct DTCC integration, Arush Sehgal revealed from his work with Canton Network, essentially creates a collateralized wrapper—another form of derivative. The risk profiles may be different but neither approach is risk-free.

Governance Rights, Dividends, and the Purpose of Ownership

A key distinction emerged around what tokenized equity holders actually receive. Spot tokenized assets, in theory, can confer governance rights—the ability to vote in shareholder meetings. They also receive dividends and participate in stock splits directly. Derivative holders get economic exposure only.

The opposition pushed back hard: "No one who is buying Nvidia on chain is looking to vote in shareholder meetings." Current crypto users are traders seeking leverage and speculation, not long-term investors interested in corporate governance. Chitra countered that in crypto, vote markets exist—people can be paid for their votes—and tokenized equity creates that possibility.

The 24/7 Market Advantage

One of the strongest arguments for spot tokenization centered on market hours. Traditional equity markets operate during limited hours in specific time zones. For derivatives to attract sufficient liquidity from basis traders, they need 24/7 trading capability and price guarantees at market open. Without spot tokenized assets providing continuous price discovery, derivative markets are forced back into the nine-to-five regime—defeating the purpose of building internet capital markets.

Facts + Figures

• The ratio of derivative to cash equity trading volume in the US is approximately 4:1 (derivatives higher)
• In markets like India and Korea, derivative equity trading exceeds spot trading by 15-20x
• The opposition argued that most derivative volume concentrates in indexes rather than long-tail individual equities
• Spot tokenized stablecoins (like USDC) command approximately two orders of magnitude more supply than derivative-based alternatives
• Hyperliquid perpetuals were cited as deviating from underlying spot prices, demonstrating oracle challenges
• The NIC (National Index Committee) recently made errors on corporate actions resulting in billions of dollars in lawsuits
• Redstone has implemented EMA-based price predictions for weekend trading when traditional markets are closed
• DTCC integration, even for "direct" tokenization, involves locking shares and issuing collateralized tokens—effectively a wrapper model
• New yield-bearing stablecoins are increasingly passing through treasury yields to holders as rewards
• The audience voted in real-time, with green (supporting spot tokenization) appearing to win

Top quotes

"Our goal is to build internet capital markets. Our goal is not to build an internet cash equities brokerage."

"No one who is buying Nvidia on chain is looking to vote in shareholder meetings."

"The oracles in for tokenized stock equities have a lot of parameters. They change a lot. They're not super interpretable."

"If you're really talking about access, let's talk about access more generally, more broadly. With just cash equities, we're not going to get any institutional adoption."

"Every dollar of capital gets you $1 of exposure. The only way to get capital-efficient exposure to equities is via derivative markets."

"Derivative models expand access only to basically zero-day options. Everything is truly about pure gambling, more than real stocks."

"Basis traders also need the derivative leg to actually run a basis trade."

"Our colleagues here have really redefined the notion of accessibility. It sort of reminds me of a US president redefining the notion of affordability recently."

"Without the spot tokenized assets, you're effectively forcing people into the nine-to-five regime or whatever the hours are in that jurisdiction."

"The best solution here really isn't a—it's a cash versus derivatives battle. The best solution here is, let's bring all of the tools to market."

Questions Answered

What's the difference between spot and derivative tokenized equities?

Spot tokenization involves taking an actual share of stock, holding it in custody (whether through DTCC, an SPV, or another custodian), and minting a token that represents direct ownership of that share. The token is collateralized by the real underlying asset. Derivative tokenization creates synthetic exposure to an equity's price movement through mechanisms like perpetual contracts, without requiring the underlying share to be held. Think of it like the difference between owning a house versus owning a futures contract on housing prices—one gives you the actual asset, the other gives you exposure to price movements.

Why does the derivatives market need spot assets to function properly?

The most important liquidity providers in derivative markets are basis traders, who maintain positions in both spot and derivative markets to capture the price difference between them. These delta-neutral traders provide the stickiest, most reliable liquidity on exchanges. Without a spot asset to trade against, these arbitrage opportunities don't exist, and the derivative market loses a crucial source of depth and price stability. This is why perpetual contracts on Hyperliquid have been observed deviating from their underlying prices when spot liquidity is thin.

What are the main risks of derivative-based tokenized equities?

Oracle risk represents the primary concern with derivative models. Someone must provide the price feed that determines whether positions are liquidated and at what rate funding payments occur. These oracles have many parameters, change frequently, and aren't always transparent. Beyond that, derivative contracts must correctly handle corporate actions like stock splits, mergers, and dividends—errors that even established traditional finance institutions have made, resulting in massive lawsuits. Weekend pricing presents another challenge, as underlying equity markets are closed but crypto trades 24/7.

Why might derivatives be better for global retail adoption?

In many emerging markets, derivative trading volumes vastly exceed spot trading. In India and Korea, for example, derivative equity trading runs 15-20 times higher than cash equity trading. This suggests that retail investors globally prefer capital-efficient, leveraged exposure over simple buy-and-hold strategies. Requiring users to put up full capital for spot positions may price out many potential participants who could access markets through derivatives with smaller capital requirements. The opposition argued this accessibility concern outweighs the theoretical benefits of direct ownership.

Can you get governance rights with tokenized equities?

With spot tokenized equities, governance rights are theoretically possible—the token represents actual share ownership, which includes voting rights. However, the opposition noted that most current tokenized equity products don't actually pass through voting rights to holders, making this advantage more theoretical than practical. The pro-spot team countered that crypto enables vote markets where governance rights can be monetized even if the holder doesn't want to participate directly, creating value that derivatives simply cannot offer.

How does DTCC tokenization actually work?

According to insights shared during the debate from Alpaca's direct integration work with DTCC and Canton Network, the tokenization process involves DTCC locking the actual underlying share and issuing a token collateralized by it. This is effectively a wrapper model—similar in structure to other tokenization approaches. The distinction between "direct DTCC integration" and third-party wrappers may be less significant than it appears, as both involve an intermediary holding shares and issuing representative tokens.

What role do tokenized treasuries play in this debate?

Tokenized treasuries were cited as evidence that spot tokenization models work well on-chain. However, the discussion revealed nuance: successful tokenized treasury platforms are actively building repo markets and derivative products on top of the spot assets. This suggests the spot asset provides the foundation, but derivatives built on top unlock additional utility. Both sides seemed to agree that the end state involves both spot and derivative products—the debate centered on which should be primary.