In the 1990s, exchange traded funds (ETFs) were a new idea. Many saw them simply as a new wrapper for traditional assets – a convenient repackaging of mutual funds. In effect, ETFs sparked a market structure revolution. By introducing creation/redemption mechanisms and arbitrage-driven liquidity, ETFs fundamentally changed how markets worked and how investors accessed assets. ETFs blurred the line between primary and secondary markets and made arbitrage the mechanism to hold the system together.
How does tokenization reflect the ETF market structure revolution? In almost every key aspect.
A robust tokenized asset is not simply “issued” once like a stock or bond – it can typically be minted or burned on demand against a pool of underlying assets or rights. For example, when a token represents shares of a fund or stock, authorized participants (or smart contracts acting as such) should be able to deposit the underlying and mint new tokens or redeem tokens for the underlying assets.
If the token trades above the value of its underlying holdings, arbitrageurs will mint new tokens (injection of supply) until prices adjust; if it trades below, they will redeem the tokens (reduce the supply) until the discount closes. The economic principle is identical to ETFs. The token is a wrapper on the same assets and arbitrage keeps its price honest.
In terms of both ETFs and tokenization, the wrapper is simply a liquid representation of a basket of financial exposures. An ETF share is not the underlying securities themselves, but a standardized claim to a basket that trades efficiently because creation and redemption keep it in line with the underlying assets. Tokenization follows the same logic. The token becomes the liquid instrument, while the underlying assets remain the financial anchor. What matters is not the shape of the cover, but the strength of the arbitrage connection between the cover and the curve.
ETFs already represented a great leap in transparency by allowing baskets of assets to trade continuously on the exchange with visible prices, intraday liquidity and adjustment to underlying value through arbitrage. Tokenization builds on this foundation. Where blockchains can go further is in making issuance, transfers and outstanding supply observable in near real-time, potentially expanding visibility into how the wrapper is evolving relative to the underlying basket.
One of the most important features of tokenized markets is their ability to trade continuously even when the underlying markets are closed. For anyone who has traded ETFs globally, this is not new, but a familiar and very valuable market structuring capability. Continuous trading outside of local market hours allows prices to incorporate new information as it emerges, rather than waiting for the next open, and allows investors across time zones to transfer risk when they actually need it. These prices reflect informed expectations – built using correlated instruments, futures, currency and broader market signals – in the same way international and cross-time zone ETFs have operated for decades.
US-listed ETFs that own European or Asian stocks are already showing how credible pricing can exist when the underlying cash market is closed. These ETFs continue to trade during the US session even after Europe or Asia close, and their market price naturally reflects updated expectations – based on futures, currency, ADRs, macro news and other correlated signals – rather than stale closing statements. In practice, authorized participants and market makers continuously estimate an “intrinsic fair value” for the ETF, including an expected next open price for holdings in closed markets, and quote around this to keep the ETF’s market price anchored to this fair value.
The same concept can be applied to tokenized Apple shares, for example, which can be traded on Saturday based on the evaluation of Apple’s likely next trading price on Monday. If big news broke on Saturday, you would see the token react immediately. Liquidity providers will quote a price that takes this news into account, likely hedging with related instruments such as Nasdaq futures if available. At Monday’s open, Apple’s real share price would likely catch up to wherever the token traded over the weekend. In effect, the token becomes a leading indicator of the underlying stock.
Market participants (especially across different time zones) do not all operate on US Eastern Time. A European investor holding a tokenized US bond fund might love the ability to adjust positions at 20:00 CET on a Friday instead of waiting until Monday. While providing liquidity 24/7 increases the “cost of carry” or the risk of holding a position when the underlying markets are closed. In practice, this simply means that the spreads can be a bit wider during purely off-hours trading, which they e.g. are in currency markets on a holiday – but the key difference is that the digital asset market remains open. And as more participants join and risk management tools improve, these costs will decrease. In the long run, a 24/7 market should become as natural as the 24/5 forex market is today.
The current tokenization dialogue is very reminiscent of the early days of ETFs: initial skepticism, early traction in niche segments, and increasing institutional involvement. The same pattern ultimately transformed ETFs into a $10+ trillion market.
I strongly believe that tokenization is on the same path because the structural forces pushing it forward are the same ones that made ETFs successful. The relevant test is not technological novelty, but whether it improves efficiency, access and robustness at the system level. When these conditions are met, tokenization is not only comparable to the ETF evolution – it represents its logical continuation.
