Creation/redemption mechanics and arbitrage-driven liquidity could transform asset markets as they did for exchange-traded funds
The current tokenization dialogue closely mirrors the early days of exchange-traded funds, according to Michael Lie, author of an analysis published by CoinDesk. ETFs, which grew into a $10+ trillion market, relied on structural mechanisms that tokenized assets are now replicating.
“The current tokenization dialogue closely resembles the early days of ETFs: initial skepticism, early traction in niche segments and increasing institutional involvement,” Lie wrote. “I firmly believe tokenization is on the same path, because the structural forces pushing it forward are the same ones that made ETFs successful.”
The parallel centers on market mechanics. ETFs introduced creation and redemption mechanisms paired with arbitrage-driven liquidity that kept prices aligned with underlying asset values. A robust tokenized asset operates identically: authorized participants or smart contracts can deposit underlying assets to mint new tokens, or redeem tokens for underlying assets on demand.
When a token trades above its underlying value, arbitrageurs mint new tokens to capture the spread. When it trades below, they redeem tokens until price realigns. This arbitrage loop, Lie argues, is the same structural innovation that transformed how investors access baskets of assets.
ETFs blurred the boundary between primary and secondary markets by making baskets of assets trade continuously on-exchange with visible prices, intraday liquidity, and alignment with underlying value. Authorized participants and market makers estimate “intrinsic fair value” for ETFs and quote around that benchmark to keep market price anchored.
Tokenized markets extend this capability further. They can trade continuously even when underlying markets are closed. U.S.-listed ETFs holding European or Asian equities already trade during U.S. sessions after those markets close, with prices reflecting updated expectations based on futures, foreign exchange, American Depositary Receipts, and macro news.
Tokenization could enable even broader access. A European investor could adjust positions in tokenized Apple stock at 8 p.m. CET on a Friday, when traditional equity markets are closed. Tokenized assets could trade 24/7, compared to the 24/5 operating schedule of foreign exchange markets or the limited hours of traditional exchanges.
Wider spreads may occur during purely off-hour trading, similar to currency markets on holidays, but the underlying mechanism remains intact: arbitrage-driven alignment between token price and intrinsic value.
The 1990s saw ETFs emerge as a novel idea facing initial skepticism. Lie’s framing suggests tokenization is entering a comparable phase, with structural forces now pushing institutional adoption forward.
