Gate Research Institute: Arbitrage and Investment Prospects Amid the Rise of Stock Tokenization

Key Takeaways:

• Tokenized stocks refer to the representation of traditional equities as digital tokens on a blockchain.
• There are three mainstream tokenization models: custodian-backed + exchange integration, licensed broker + proprietary chain, and CFD-style synthetic tokens.
• Three primary arbitrage opportunities exist: hedging arbitrage, cross-exchange arbitrage, and time-lag arbitrage.
• Key risks in tokenized stock trading include technological failures, price depegging, and regulatory uncertainties.

Introduction

Multiple exchanges have launched stock tokens, and market attention toward stock tokenization remains high. An increasing number of investors have developed a strong interest in stock tokenization.

This article will systematically review the implementation principles of stock tokenization, deeply explore the arbitrage and investment opportunities currently present in the market, and detail different types of arbitrage logic, operational procedures, and potential limitations—helping professional investors identify market opportunities more efficiently. At the same time, we will also focus on the opportunities for individual investors within this trend, such as fragmented trading and global asset allocation as new pathways.

Although stock tokenization offers numerous opportunities, it still faces multiple challenges including technical implementation and price anchoring, so investors need to maintain rational judgment.

Mechanisms of Stock Tokenization

2.1 Definition

Stock tokenization refers to the process of converting traditional company stocks into tokens on the blockchain through smart contracts and custody mechanisms, enabling on-chain holding, trading, and portfolio assembly. Essentially, these tokens are derivatives of traditional stocks and do not represent direct ownership of the underlying shares. Therefore, the value and risks of stock tokens are closely tied to the underlying stocks.

2.2 Implementation Models

Currently, there are three mainstream structures for stock tokenization:

• Third-Party Custody + Exchange Integration: For example, Gate xStocks allows users to trade tokens issued by Backed Finance. A regulated entity certifies that Backed Finance holds the underlying stocks, and Chainlink oracles provide a second layer of verification. Only after these checks can tokens be issued on a 1:1 basis. The Gate exchange is responsible for the frontend interface, user trading, and order matching. This structure offers high transparency and strong price anchoring through the collateralization of real stocks.
• Licensed Broker + Proprietary Infrastructure: Robinhood, leveraging specific regulatory licenses, plans to offer a fully integrated issuance, settlement, and self-custody process on its own blockchain (Robinhood Chain). This structure maximizes regulatory compliance but also entails significant technical and legal complexity.
• Contract for Difference (CFD) Model: For example, the now-defunct Mirror Protocol allowed users to trade contract-based products pegged to stock prices rather than actual tokenized shares. Users did not obtain any ownership rights or dividend entitlements. These products were typically priced and market-made by the platform itself, lacked backing by real assets, and conferred no shareholder rights. As such, they were subject to strict regulatory scrutiny and faced significant de-pegging risks.

Arbitrage Opportunities in Tokenized Stocks

Robinhood’s tokenized stocks are primarily focused on the European market, while most CFD-based stock token projects have faded out. As a result, this report will primarily focus on stock tokens issued via third-party custody. These tokens are backed by real underlying equities, offering stronger price anchoring and generally lower investment risk.

According to RWA.XYZ, as of July 9, 2025, the total market capitalization of stock tokens stood at approximately $422 million. In contrast, Nvidia alone had a market capitalization of $3.9 trillion. This stark difference highlights the severe liquidity gap between stock tokens and traditional equity markets.

This lack of liquidity—combined with differences in trading hours—often lead to price deviations between stock tokens and their underlying assets across different platforms and timeframes. These price discrepancies create arbitrage opportunities.

This article will focus on the application of three classic arbitrage strategies in the context of stock token markets.

3.1 Spot vs. Token Hedging Arbitrage

Principle
When both the token exchange and the traditional stock market are open simultaneously, and the token price is significantly higher than the spot stock price, arbitrageurs can go long on the spot stock (Long Spot) while shorting the corresponding tokenized stock (Short Token) on the crypto exchange. If the prices converge later, the arbitrageur can sell the spot stock and buy back the token to close the position, capturing the price spread as profit. The reverse logic applies if the token price is lower than the spot.

As shown in the chart below, during a six-hour window, the price of traditional NVDA stock (in purple) and its tokenized counterpart NVDAX (candlestick chart) diverged multiple times. In several instances, the token price exceeded the spot price, creating clear arbitrage opportunities.

Example

• At one point on July 9, 2025:
• NVDA (spot) = $160.00
  NVDAX (token) on Gate xStocks = $160.40
  → Arbitrage opportunity: short NVDAX, long NVDA
  When both converge to $158.00, positions are closed with a net profit (after fees) of ~$0.22 per share.

Requirements
This strategy requires ultra-low latency, minimal slippage, and low transaction fees—best suited for high-frequency trading firms.

3.2 Cross-Exchange Arbitrage

Principle
Cross-exchange arbitrage is one of the most classic forms of arbitrage in crypto space. The principle involves buying a token on the exchange where the price is lower, transferring it to another exchange where the price is higher, and selling it there. If the price spread between the two exchanges is large enough to cover transaction fees and still yield a profit, the arbitrage is executable.

The chart below compares trading data for the NVDAX token (a tokenized version of Nvidia stock) across Gate and three other exchanges over the course of a single day. It clearly illustrates multiple instances of significant price discrepancies across platforms at different time intervals. At the snapshot moment alone, there was a 0.56% price spread. Moreover, token prices across different exchanges tend to demonstrate a strong mean-reversion trend over time.

Example
If Token A is $100 on Exchange A and $103 on Exchange B:

• Buy on A → Withdraw → Sell on B
  Even after fees, a profit margin remains if spreads are wide enough.

Requirements
Success depends on:

• Fast withdrawal and deposit processing
• Adequate order book depth
• Network reliability
  Often, arbitrageurs pre-position assets and use automation and multi-account systems to execute efficiently.

3.3 Time-Lag Arbitrage

Principle
Traditional stock settlements typically follow a T+2 cycle or longer delays, whereas tokenized stock transactions and settlements are conducted on the blockchain, enabling settlement within minutes or even seconds in theory. Arbitrageurs can exploit this time-lag by leveraging real-time price adjustments in the token market before the traditional settlement is finalized.

For instance, traditional stock markets operate from Monday to Friday, 09:30 to 16:00, while crypto markets function 24/7 without interruption. This discrepancy creates short-lived arbitrage windows during non-trading hours—such as weekends, pre-market, or after-hours sessions when tokenized stock prices may respond sharply to news events, while the underlying stock prices remain unchanged. One common form of time-lag arbitrage is pre-market news-based trading. Examples include earnings reports, geopolitical developments, or favorable macroeconomic policies that drive token prices to move ahead of the spot market.

Although tokenized stocks are relatively new and there have not yet been widely observed pre-market arbitrage cases, price simulations near the market open suggest that tokenized stocks often respond in advance to market information. The prices formed by pre-market speculation tend to align closely with opening prices, allowing traders to capitalize on this brief arbitrage window.

Example
Arbitrageurs deploy monitoring systems or rely on news feeds to capture major events during off-market hours—such as Nvidia releasing strong quarterly earnings, central bank rate hikes, or escalations in geopolitical conflicts.

They then analyze the likely direction and magnitude of the news impact on the relevant stock, often using historical case studies to estimate price movements. If the news is deemed positive, the trader buys the corresponding tokenized stock on the crypto platform; if negative, they may short the tokenized asset instead.

Once the traditional market opens, the arbitrageur closes the position based on price movement confirmation. If the spot market moves in the anticipated direction, the position is closed there. Alternatively, they may wait for the token price to converge back toward the spot price and unwind the trade on the token market to capture the spread.

Requirements
These arbitrage windows typically last only a few minutes, even just seconds—requiring high-performance news alert systems (such as Bloomberg API, Twitter/X feeds, or premium news subscriptions) and automated trading responses.

The reliability of news sources is also critical; inaccurate or fake news can lead to misjudged trades and financial loss.

In addition to time-lag arbitrage, tokenized stocks can also be applied to classic arbitrage strategies such as triangular arbitrage and funding rate arbitrage, offering further opportunities for sophisticated investors.

Retail Investor Opportunities

While most arbitrage requires capital, speed, and expertise, tokenized stocks also benefit retail participants:

• Fractional Investing
  In traditional securities markets, minimum purchase requirements vary—some markets require at least one share, while others require 100 shares per order. This creates a high entry barrier for investors looking to buy leading stocks such as Google, Amazon, or Tesla, as their share prices are often quite expensive. For beginners, this upfront cost can be significant.

With stock tokenization, however, each stock can be fractionalized into much smaller units—for example, 0.1 or even 0.001 shares.

Take Nvidia (NVDA) as an example: its current stock price is $162.88, and traditional markets require purchasing at least one full share. On Gate’s xStocks section, however, the minimum purchase is just 0.001 shares—meaning an investor can gain exposure to Nvidia stock tokens for as little as 0.16 USDT.

• Diversified Asset Allocation
  Gate’s around-the-clock trading system allows users to trade without being constrained by traditional market hours. This enables seamless access to diversified asset allocation, helping investors manage portfolios across different asset classes and mitigate region-specific financial risks.

Retail users can access international stocks without relying on local brokers, thanks to platforms like Gate xStocks. Around-the-clock trading makes global investing more flexible.

• Lower Transaction Costs
  In traditional stock markets, intermediaries often charge various fees. However, trading tokenized stocks on decentralized exchanges (DEXs) can significantly reduce transaction costs and minimize slippage for investors. For instance, brokerages typically charge trading fees ranging from 0.1% to 0.5%, whereas on Gate, the fees are as low as 0.025% to 0.1%.

Risks & Challenges

Beyond typical arbitrage risks (e.g., slippage, fees, latency), tokenized stocks present systemic concerns:

• Oracle Failure & Price Depegging: Token prices depend on oracles or centralized price feeds. Malfunctions or attacks (e.g., Band oracle failures on BSC) can lead to price distortion or permanent depegging.
• Legal Uncertainty: In many jurisdictions, tokenized stocks lack clear legal definitions. Arbitrageurs risk breaching securities or capital control regulations unknowingly.

Conclusion

Stock tokenization is not only a technical innovation but a representative route for crypto’s expansion into real-world assets (RWA). It creates opportunities for both institutional and retail investors.

However, price depegging, oracle dependence, and regulatory uncertainty remain critical concerns. Investors should remain vigilant about the safety and integrity of the underlying assets.


Reference

• Osl, https://www.osl.com/en/academy/article/what-is-stock-tokenization
• Daily Forex, https://www.dailyforex.com/forex-articles/tokenization-of-stocks/229295
• Backed Finance, https://docs.backed.fi/#backed-docs
• Gate, https://www.gate.com/zh/trade
• Backked Finance, https://backed.fi/news-updates/xstocks-are-going-live-tokenized-stocks-for-the-defi-era
• Robinhood, https://robinhood.com/eu/en/support/articles/about-stock-tokens/

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Disclaimer
Investing in cryptocurrency markets involves high risk. Users are advised to conduct their own research and fully understand the nature of the assets and products before making any investment decisions. Gate is not responsible for any losses or damages arising from such decisions.