Tokenized Stocks

Short Exposure with Tokenized Stocks on GM Markets: A DeFi Guide

Explore how to achieve short exposure to tokenized US stocks from GM Markets using DeFi lending protocols, perpetual futures, and synthetic assets, understanding the benefits and risks.

In traditional financial markets, short selling allows investors to profit from an asset's price decline. This strategy involves borrowing shares, selling them, and then buying them back later at a lower price to return to the lender. However, the world of tokenized stocks, particularly those offered on GM Markets, introduces new avenues for achieving similar short exposure through the decentralized finance (DeFi) ecosystem.

While we do not offer direct short selling on our platform, the ERC-20 tokenized US stocks we issue are designed for composability. This means they can be leveraged across various DeFi protocols to enable advanced strategies, including those that mimic short positions. We do not offer services to users in the United States or other restricted jurisdictions. This guide explores how you can achieve short exposure to tokenized stocks using DeFi lending protocols, perpetual futures, and synthetic assets.

What 'Short Selling' Means in Traditional Markets

Short selling is a trading strategy where an investor anticipates a decrease in an asset's price. The process typically involves borrowing shares from a broker, selling them at the current market price, and then repurchasing the same number of shares at a lower price in the future. The profit is the difference between the initial selling price and the repurchase price, minus any borrowing fees or other costs.

Key mechanics of traditional short selling include borrowing fees, which are paid to the lender for the use of their shares, and margin requirements, which serve as collateral to cover potential losses. Short positions carry the risk of unlimited losses, as an asset's price can theoretically rise indefinitely. Additionally, the short seller is obligated to pay any dividends declared on the borrowed shares to the lender. Traditional brokers play a crucial role in facilitating these transactions, managing the borrowing and lending of shares, and enforcing margin rules.

Hands exchanging blocks, illustrating the traditional short selling process.

Tokenized Stocks and the DeFi Advantage

GM Markets offers tokenized US stocks and exchange-traded funds (ETFs) as standard ERC-20 assets. Each token is fully backed 1:1 by a real share held in a segregated customer account at regulated broker-dealers such as Interactive Brokers or Alpaca Markets. Our Proof of Reserves page, attested by Accountable, provides real-time verification of this backing. These tokens provide economic exposure to the underlying asset, tracking its price movements and corporate actions through a total-return Net Asset Value (NAV) model.

The fundamental advantage of these tokenized assets is their composability within the broader DeFi ecosystem. Unlike traditional brokerage accounts, our tokens live in your embedded wallet, allowing you to move, trade, lend, borrow, or supply them as liquidity across various DeFi protocols. This means that while GM Markets provides a secure, permissionless on-ramp to tokenized equities, the mechanisms for achieving short exposure occur on external DeFi platforms, not directly within the GM Markets application. Learn more about our mission to make global equities accessible on-chain.

A stock certificate transforming into a digital token connected to various DeFi protocols.

Achieving Short Exposure with Tokenized Stocks in DeFi

The composable nature of tokenized stocks opens several avenues for sophisticated trading strategies in DeFi, including those that enable short exposure:

Lending Protocols

Decentralized lending protocols such as Aave and Morpho are increasingly integrating tokenized real-world assets (RWAs), including tokenized stocks. These platforms allow users to borrow tokenized stocks by providing other cryptocurrencies or stablecoins as collateral. Once borrowed, these tokens can be sold on a decentralized exchange (DEX).

To close the short position, the user later buys back the same tokenized stocks, ideally at a lower price, and repays the loan. Protocols like Aave V4 are expanding to support tokenized shares of major companies like Apple (AAPL) and Tesla (TSLA) as collateral, though specific issuers are not yet disclosed. Morpho, however, directly supports GM Markets' tokenized stocks (referred to as "GM" or "Ondo Stocks" in Ondo Finance documentation) as collateral, with markets managed by Gauntlet. Similarly, Venus Protocol has integrated "bStocks" tied to Tesla, Nvidia, and SpaceX exposure as DeFi collateral, while Kamino on Solana allows "xStocks" from Backed Finance to be used as collateral. It is important to verify which specific tokenized stock issuers are supported by each protocol before engaging.

Perpetual Futures Protocols

Decentralized perpetual futures exchanges allow traders to open leveraged short positions on tokenized stock derivatives without directly owning or borrowing the underlying asset. These platforms offer continuous trading with no expiration date, using a funding rate mechanism to keep contract prices aligned with the spot market.

Prominent platforms in this space include Kraken's Tokenized Equity Perpetual Futures (built on the xStocks framework), which offers up to 20x leverage on major US equities and indices for eligible non-US clients. Hyperliquid also introduced tokenized equity perpetuals, allowing permissionless deployment of new markets with up to 50x leverage. Ondo Perps, for eligible non-US users, offers 24/7 perpetual futures trading on tokenized US stocks, ETFs, and commodities with up to 20x leverage, using tokenized securities as collateral.

Synthetic Assets or Inverse Tokens

Some DeFi protocols create synthetic assets designed to track the inverse price movement of an underlying asset. These inverse tokens automatically gain value when the underlying asset declines. While earlier models like Synthetix's sStocks and Mirror Protocol's mAssets showed promise, they faced challenges, and many have pivoted or ceased operations.

Today, the most prominent method for gaining inverse exposure to tokenized US stocks in DeFi is through the aforementioned perpetual futures contracts. Platforms like gTrade (Gains Network) offer synthetic stock trading where positions are derivative contracts backed by stablecoin collateral pools. However, dedicated inverse tokens for GM Markets' tokenized stocks are not a primary mechanism; instead, perpetuals offer a more liquid and widely adopted solution for short exposure.

Benefits of Shorting Tokenized Stocks Through DeFi

Leveraging DeFi protocols to achieve short exposure to tokenized stocks offers several distinct advantages over traditional methods:

Accessibility: DeFi platforms are globally accessible, often with lower barriers to entry compared to opening traditional margin accounts, which can have stringent requirements.
Transparency: All transactions and positions are recorded on-chain, providing verifiable and auditable proof of holdings, collateral, and trading activity.
Flexibility: The composable nature of ERC-20 tokenized stocks allows for innovative and complex trading strategies, enabling integration with other DeFi primitives like yield farming or liquidity provision.
24/7 Market Access: While the underlying traditional stock markets have specific trading hours, DeFi protocols operate continuously. This allows for the management of positions and execution of trades outside conventional market hours, although liquidity for specific tokenized assets may vary.

Funding Rates and Fees

Shorting tokenized stocks, especially through perpetual futures (PERPs) or margin accounts, involves various costs. Understanding these is crucial for managing profitability. Our pricing page details fees for trading tokenized stocks on GM Markets.

Funding Rates

Funding rates are periodic payments exchanged between long and short position holders in perpetual futures contracts. Their primary purpose is to keep the perpetual futures price closely aligned with the spot price of the underlying asset, preventing significant discrepancies.

Mechanism: When the perpetual future trades at a premium to the spot price (positive funding rate), long position holders pay short position holders. Conversely, when the perpetual future trades at a discount to the spot price (negative funding rate), short position holders pay long position holders.
Calculation: Funding rates are typically determined by an interest rate set by the exchange and a premium index, which reflects the difference between the futures and spot prices.
Frequency: Funding payments are usually settled periodically, often every eight hours. Some platforms may implement four or twelve-hour schedules, or even hourly during periods of high market volatility.
Impact: Funding rates are applied to the notional value of a position, not just the deposited margin, which is crucial for calculating the true cost of holding a position. Consistent positive funding rates can erode profits for long positions over time, while short positions might benefit from receiving these payments.

Other Fees

Trading Fees: Tokenized stock trading typically involves percentage-based maker/taker fees on each trade. GM Markets charges a trading fee of 10 to 20 basis points, included in the quoted price.
Spread: The difference between the buy and sell price can fluctuate, potentially widening during off-hours or periods of low liquidity.
Conversion Fees: Costs may be incurred when converting between different currencies or asset types, such as fiat to stablecoin, to fund trades.
Withdrawal Fees: Fees may apply when moving assets off a trading platform. GM Markets offers free deposits and withdrawals.
Borrowing Fees: For short selling through margin accounts, stock borrow fees are applicable. Historically, these fees for "hard-to-borrow" stocks could range from 5% to 20% annually, sometimes reaching as high as 50%. Perpetual futures can often eliminate the need for traditional stock borrowing fees.
Custodial Fees: Storing tokenized equities in personal blockchain wallets can eliminate traditional custodial fees. GM Markets offers self-custodial embedded wallets via Privy MPC.

Risks and Important Considerations

While shorting tokenized stocks through DeFi offers unique opportunities, it is crucial to understand and manage the inherent risks:

Market Volatility and Unlimited Loss Potential: Short positions are inherently risky. If the price of the tokenized stock rises instead of falls, losses can theoretically be unlimited, potentially exceeding your initial capital.
Liquidation Risk: DeFi lending protocols require over-collateralization. If the value of your collateral drops significantly, or the value of the borrowed tokenized stock rises, your position's health factor may fall below the liquidation threshold. This can lead to automatic liquidation of your collateral to repay the loan, often incurring additional fees. For example, Morpho uses a Liquidation Loan-to-Value (LLTV) threshold, and Venus Protocol sets collateral factors for tokenized assets.
Smart Contract Risk: Interacting with any DeFi protocol involves smart contract risk. Potential bugs, exploits, or unforeseen vulnerabilities in the smart contract code could lead to loss of funds. GM Markets' smart contracts are audited by Sherlock, Halborn, Cantina, and Cyfrin, but external protocols carry their own risks. Learn more on our security page.
Counterparty Risk: While GM Markets tokens are 1:1 backed by real shares held in segregated accounts at regulated brokers, the specific DeFi protocols you use for shorting introduce their own counterparty risks, including the solvency of the protocol or its market makers.
Funding Rates and Fees: Maintaining short positions on lending or perpetuals protocols incurs costs, as detailed in the previous section. These can significantly impact profitability.
Regulatory Uncertainty: The regulatory landscape for tokenized securities and DeFi derivatives is still evolving globally. Changes in regulations could impact the availability, legality, or operational aspects of shorting tokenized stocks. A 2023 report from the Bank for International Settlements (BIS) highlights the need for robust regulatory frameworks for tokenized financial products.
Tax Implications: The tax treatment of profits and losses from shorting tokenized stocks through DeFi can be complex and varies by jurisdiction. Users are responsible for their own tax obligations. We do not provide tax advice; consult a qualified tax advisor for guidance specific to your situation.

GM Markets does not give financial, investment, tax, or legal advice. Markets can move against you, and you may lose money. Tokenized stocks carry settlement, counterparty, smart-contract, and custody risk. For full details, please review our legal and risk disclosures.

A wobbly stack of blocks with a warning symbol, representing risks in DeFi shorting.

Frequently Asked Questions

What are tokenized stocks?

Tokenized stocks are digital representations of traditional company shares on blockchain networks, designed to track the price of an underlying equity. They can be structured in various ways, including equity-backed tokens (1:1 backed by real shares in custody, like those on GM Markets) or synthetic tokens (tracking prices via oracle data and smart contracts without direct share backing). While they provide economic exposure to a company's share price, they typically do not confer direct ownership or shareholder voting rights like traditional stocks.

Can you short tokenized stocks?

Yes, it is possible to achieve short exposure to tokenized stocks, often through platforms that offer perpetual futures or synthetic models. Some platforms, like Kraken, offer margin trading on equity-backed tokenized stocks. However, the mechanisms and regulatory landscape can differ significantly from traditional stock shorting.

How does shorting tokenized stocks work?

Shorting tokenized stocks can occur through a "synthetic model," where a token references a public company's stock without direct underlying exposure. Another method involves perpetual futures, which track prices via oracle feeds and do not hold an underlying share. In traditional short selling, shares are borrowed and sold, with the expectation of buying them back at a lower price. The process for tokenized stocks may involve similar borrowing mechanisms or leverage through margin trading via DeFi protocols.

What platforms allow shorting of tokenized stocks?

Platforms like Kraken offer tokenized stocks and some provide margin trading options. Hyperliquid (via trade.xyz) is mentioned for permissionless perpetuals on tokenized assets. Ondo Perps also offers perpetual futures trading on tokenized US stocks for eligible non-US users. For lending protocols, Morpho directly integrates GM Markets' tokenized stocks, while Kamino and Venus integrate tokens from other issuers.

What are the risks of shorting tokenized stocks?

Shorting tokenized stocks carries several risks, including the potential for unlimited losses if the asset price rises significantly. Due to the 24/7 trading nature of tokenized stocks, prices can experience unexpected fluctuations during periods when traditional stock markets are closed, increasing the risk of price manipulation. Other risks include smart contract risk, counterparty risk, and the possibility of higher volatility and sharper short squeezes because tokenized shares can be recalled at any time. Regulatory uncertainty also poses a risk, as rules are still evolving.

Are there any fees associated with shorting tokenized stocks?

Yes, shorting tokenized stocks typically involves various fees. These can include trading fees (often percentage-based maker/taker fees), spread costs (the gap between buy and sell prices), conversion fees (e.g., fiat to stablecoin), and withdrawal fees. For products structured as perpetual futures, periodic funding payments and overnight holding costs may also apply. Borrow fees for tokenized stocks can vary depending on liquidity and demand.

Conclusion: Navigating Short Exposure with Tokenized Stocks

The ability to achieve short exposure to tokenized stocks represents a significant evolution in financial markets, bridging traditional equity strategies with the innovative capabilities of blockchain technology. While GM Markets does not offer direct short selling, the composable nature of our 1:1 backed tokenized US stocks allows for sophisticated strategies through the decentralized finance ecosystem.

Shorting tokenized stocks is possible through various DeFi mechanisms, primarily lending protocols and perpetual futures. These approaches offer benefits such as global accessibility, transparency, and 24/7 market access, enabling investors to capitalize on negative price outlooks or hedge existing positions. However, this nascent market also presents challenges, including market volatility, liquidation risk, smart contract vulnerabilities, and evolving regulatory landscapes.

As the market for tokenized securities matures, understanding the underlying mechanisms, associated risks, and the continuously developing regulatory environment is paramount for navigating this innovative segment of the financial world responsibly. We encourage you to explore our platform to understand how tokenized stocks work and to consider the potential of DeFi to extend your trading strategies. Remember, we do not offer services to users in the United States or other restricted jurisdictions.