Why we’re building a general-purpose split protocol for Stock Tokens

When 0xbeans shared Isolated Exposure Tokens, it honestly stopped us in our tracks. We were excited, because once a Stock Token is fully programmable, just like software, an idea we worked on seriously years ago, and later set aside, is suddenly worth building again.

01An idea we set aside

Years ago, before perps took off, we tried splitting ETH. The idea was simple: split one ETH into two positions, longETH and shortETH, each carrying a different risk. What we thought about most back then was leverage, and whether tokens could express more trading strategies.

Then perps matured, and anyone who wanted to go long, go short or add leverage had a direct tool for it. It got harder and harder for us to say what another splitting structure would add for users, and the idea slowly went on the shelf.

It stayed there until Stock Tokens arrived. Then we began to think seriously about one question: how should the many rights inside a Stock Token be split apart and launched as a financial primitive?

Behind every share there is a business, its cash dividends and its governance, along with the open, the close, earnings and every kind of corporate action. People who buy the same stock can want very different things. Some care about long-term growth, others more about dividends. Some only want to trade one session or one kind of event, and some want to avoid the price moves that happen while the market is closed.

These needs have always been there, and Robinhood’s Stock Tokens give us the chance to build DeFi infrastructure for them on a new financial primitive. Putting stocks in a wallet, where they can move and trade onchain, is already a big step. Next, holders will want finer control over what they own: which risks to take, which returns to give up, which parts are worth holding for the long run, and which hours to sit out.

02One deposit, a full set of rights

The general-purpose split protocol we’re building is meant to give holders this kind of control, and it starts from one clear idea: deposit one asset and mint a full set of rights. The rights can trade separately, or merge back into the original asset.

$$1\ \text{unit of collateral}\;\longleftrightarrow\;1T_1+1T_2+\cdots+1T_n$$

A good example is the split in Isolated Exposure Tokens itself, with one leg for the night and one for the day. Take the simple case with no corporate actions. Let $C_0$ be the closing price at the start, $O_t$ and $C_t$ the open and close on trading day $t$, and $T$ the expiry day. Each leg starts with half of the initial ledger value. From then on, the night leg records the overnight price changes and the day leg the intraday ones:

$$\begin{aligned} L_N&=\frac{C_0}{2}+\sum_{t=1}^{T}(O_t-C_{t-1}),\\ L_D&=\frac{C_0}{2}+\sum_{t=1}^{T}(C_t-O_t). \end{aligned}$$

Step back from this example and you get a general form. Let $X$ stand for the inputs, such as prices, their path over time or data on the rights themselves, and let $f$ be a rule that is fixed when the product is created. The protocol computes each leg’s share:

$$(q_1,\ldots,q_n)=f(X),\qquad q_i\geq0,\qquad\sum_iq_i=1.$$

If one Stock Token is worth $V$ at settlement, each Isolated Exposure Token pays out $q_iV$, and together they still add up to $V$. Hold one of each and you can always redeem one Stock Token; hold just one, and you take on the gains and losses of its rule.

That’s what we mean by general-purpose. Nyxstock builds the infrastructure to split different rights apart from one another, on one shared system for minting, merging and settlement. Oracles provide verifiable inputs, markets decide what the rights are worth before expiry, and rules decide how that value is realized at expiry.

For users, all of this should come down to a simple flow: choose a supported asset, a split template, a term and parameters, see what each leg pays in different scenarios, then create the product. Products meant for long-term holding can also plug into an automatic roll layer, which redeems at expiry and buys the next term’s rights.

03What we mean to build

For everyday users, what this changes can be very concrete. Someone who follows overnight news can choose a product tied to how a stock does overnight, while someone who mostly trades during the day can stay clear of the price moves overnight. The same asset can find holders who want different things from it.

For developers, we want to provide complete infrastructure. If every new idea needs its own system for issuance, collateral and settlement, many experiments stop before they start. We want to do that repeated work well, so more people can put their energy into the product itself.

We’re not the first to split an asset into parts. Pendle inspired us a great deal: once principal and yield were split apart, rights that could only be held together could trade on their own, with their own holders and their own prices. That opened the way for many who came after. Isolated Exposure Tokens brings the same thinking to a stock’s trading hours. For us, the next step is to find which other parts of a stock deserve to be expressed on their own, and to bring those experiments into one general-purpose protocol.

We also know that more tokens mean little on their own. A right that has been split out needs people who understand it, people who want to hold it, and a sensible way to trade and exit. Liquidity, data and settlement all have to hold up in real use. So we’ll start with products where the need and the limits are clear, test as we build, and open up more ways to split over time. Our hope is that whenever a stock comes onchain, more useful products can grow around it, and more teams get the chance to build them.

Thank you to 0xbeans for bringing this paper to us, and to The Standard Reserve for writing it. Our respect to Pendle, and to every developer who shares ideas openly, publishes their code and takes DeFi innovation seriously.

The idea we set aside years ago has a new beginning. This time, we mean to build it.