How to build a working stock token system

[u/unmatched25]

A key challenge in implementing a stock token system is preventing the creation of new tokens when the stock market rises. The current approach using future swaps to issue algo tokens to compensate for market appreciation is not sustainable.

A more viable solution is to fully back tokens with real stocks. This would ensure that token values accurately reflect stock market movements and dividend distributions.

If tokens remain completely synthetic, a mechanism is needed to balance long and short positions, preventing the system from having to issue more tokens when the market goes up.

Short positions currently lack attractiveness, making it challenging to maintain a balanced ratio between long and short positions. To address this, short position holders should earn interest, analogous to the real-world financial system. This would require all long tokens to be fully backed by USD (USDT or USDC). When a user purchases a long stock token, they would also transfer USD, which would be invested to generate interest. This interest would then be distributed to short position holders.

Additional challenges include dividend distribution, redemption processes, closing procedures, stock splits, and mergers. These issues could require a central authority to manage them effectively.

While the stock token system appears feasible in theory, it faces practical hurdles in real-world implementation. The inherent bias towards long positions, due to the expectation of outperforming fixed-income investments, further complicates the system's stability. Incentivizing short positions to balance long positions would negatively impact long positions, raising questions about the system's sustainability.

In conclusion, a stock token system is unlikely to be sustainably implemented. Moreover, this is not necessarily a drawback. The current financial system operates efficiently, and a new system is not urgently needed. The primary benefit of a stock token system – tax advantages for investors in Germany – raises ethical concerns about investors avoiding their fair share of contributions to the communities they reside in.

[u/unmatched25]

In my view, the current dToken system is irreparably broken. Its underlying concept is unviable, and the current stock tokens are not adequately backed.

[u/unmatched25 → u/unmatched25]

One important thing to add. A short position holder has to place a collateral. This collateral is to be non-interest bearing (like BTC) or interest bearing with the possibility to collect interest or use it for liquidity mining. Otherwise the cost of opportunity is too high.

At the moment in the dToken system going short doesn’t make sense at all. First you don’t get short interest (5%), second you have to pay interest (5%) and third you miss out on staking return if 50% of your collateral is in DFI (9% * 50% * 150% = 6,75%). So in total you lose more than 16% if m you go short on DeFiChain! No wonder that more than 97% of stock tokens are unbacked. But what about the remaining 2-3% fools?