Essentially, in the latent / embedding / semantic space, "seahorse emoji" is something that is highly probable. Actually, more accurately, since LLMs aren't actually statistical or probabilistic in any serious sense, "seahorse emoji", after tokenization and embedding, is very close to the learned manifold, and other semantic embeddings involving related emoji are very close to this "seahorse emoji" tokenization embedding.
An LLM has to work from this "seahorse emoji" tokenization embedding position, but can only make outputs through the tokenizer, which can't accurately encode "seahorse emoji" in the first place. So, you get a bunch of outputs that are semantically closest to (but still far from) a (theoretical) seahorse emoji. Then, on recursive application, since these outputs are now far enough from the the sort of root / foundational position on the manifold, the algorithm probably is doing something like an equivalent of a random walk on the manifold, staying close to wherever "seahorse emoji" landed, but never really converging, because the tokenization ensures that you can never really land back "close enough" to the base position.
I.e. IMO this is not as much a problem with (fixed) tokenization of the inputs, but moreso that tokenization of the outputs is fixed.