Undeniable Sub-sectors in RWA: The Value, Exploration, and Practice of Fund Tokenization

When discussing RWA, we usually focus more on underlying assets such as US Treasury bonds, fixed income, and securities. However, in reality, aside from stablecoins, the largest RWA projects by asset size are money market funds. The top three projects by asset size are: Franklin Templeton: $312 million ( government bonds ); followed by Centrifuge: $247 million ( asset collateral ); Ondo Finance: $183 million ( government bonds ).

Franklin Templeton is entirely a tokenized fund, Ondo Finance also has two tokenized funds, and Centrifuge has established a tokenized fund in its RWA project in collaboration with Aave. It is evident that tokenized funds play an important role in connecting TradFi and DeFi. We believe that this asset form, due to (1) its regulated nature; (2) relatively standardized digital representation, is the best vehicle for RWA assets.

Currently, the RWAs we are discussing focus more on the one-sided value capture demand of Crypto( or DeFi) for the real world. From the perspective of traditional finance (TradFi), funds can release even greater value after being tokenized through blockchain and distributed ledger technology.

Therefore, this article will gradually analyze the value of funds after tokenization through observed cases in the current market, as well as the active exploration and practices of market participants.

1. Fund Tokenization

Tokenization ( Tokenization ) is usually the representation of assets on the blockchain after digitalization, utilizing the advantages of distributed ledger technology for accounting and settlement. Assets that can be tokenized include not only financial instruments such as stocks, bonds, and funds, but also tangible assets such as real estate, as well as intangible assets like music streaming copyrights. The tokens generated after the tokenization of assets serve as carriers of asset value and are proofs of asset rights.

This innovation and disruption also applies to funds. After the tokenization of funds, it forms the Tokenized Fund (, which refers to the fund shares recorded in a digital form of tokens on the blockchain distributed ledger, and the tokens are available for trading in the secondary market. This tokenized fund is different from just investing in primary and secondary market crypto funds ).

The global asset management industry is facing numerous challenges. Although the overall asset management scale of the industry has grown with the market rise, fund management fees are being compressed due to peer competition and a shift in the industry towards passive investment strategies. In addition to investment pressures, the market is also demanding higher digital capabilities from funds to meet investors' increasing needs for online distribution, asset reporting, regulatory compliance, and personalization. The growth rate of fund management costs is outpacing revenue, and fund profit margins are being squeezed.

For private equity funds, due to their poor liquidity and high investment thresholds, their investors have long been limited to a small number of institutional investors. The private equity fund market urgently needs to lower investment thresholds and launch alternative products through appropriate product design that can meet the investment needs of non-institutional clients such as small and medium-sized institutions, family offices, and high-net-worth individuals.

The tokenization of funds can solve many problems currently facing the global asset management industry. Advocates of tokenized funds firmly believe that future funds based on blockchain and distributed ledger technology will not only increase the scale of fund assets under management (Asset Under Management, AuM), allowing investments in a wider range of asset classes (RWA tokenized asset diversity); but also attract new categories of investors (Unbanked investors from Asia, Africa, and Latin America to invest through crypto assets ), improving the user investment experience (with KYC embedded in smart contracts ); and can help funds succeed in the competition of industrial digital upgrades (digital upgrades), while significantly reducing their operational and marketing costs (advantages of blockchain and distributed ledger).

2. Tokenization will have a profound impact on the fund market

( 2.1 Tokenization helps advance the digitalization of the fund market

Currently, funds and investors are separated by a large number of intermediaries. The fund distribution side ) Fund Distributors ### includes: financial advisors, fund platforms ( Fund Platform ), and order routing networks ( Order-Routing Networks ); the fund service side includes: paying agents ( Paying Agents ), custodians ( Custodian Banks ), and fund accountants ( Fund Accountants ).

Transfer Agents ( assist funds by coordinating both ends, responsible for understanding clients ) KYC (, Anti-Money Laundering ) AML (, Counter Financing of Terrorism ) CFT ( and the screening and verification of economic sanctions, the settlement of fund subscriptions and redemptions, reporting to management, and maintaining investor registration records.

The operation process of traditional funds is essentially inefficient: ) Fund shares are established to meet subscriptions and are canceled to meet redemptions; ( Fund pricing is not based on buying and selling, but on the net asset value set by the fund accountant; ) The transfer agent prices based on the net asset value by receiving and consolidating orders, and settles orders in the centralized register through bookkeeping, then reconciles orders with the cash positions of investors and the fund; ( Three days before the settlement of fund shares and cash release, both the fund and investors will face market volatility and counterparty risk; ) The liquidity of the fund also forces fund managers to keep cash positions to bear the cost of rebalancing the fund's net value.

In contrast, tokenization can greatly simplify the complex processes mentioned above: ( When tokenized funds are issued and traded on the blockchain, the subscription and redemption processes will be directly settled through fund tokens and payment tokens, entering the investors' accounts ) electronic wallets (. Transactions have finality in settlement, thus eliminating market and counterparty risks; ) Because all transactions are recorded on the distributed ledger of the blockchain, any changes in ownership will be automatically recorded, eliminating the need for centralized registration; ( Since all intermediaries can access and view data on the blockchain, there is also no need for multi-party reporting and reconciliation.

At the same time, tokenization will help fund managers and investors achieve digital interaction: ) The speed of investor account opening will be enhanced due to the integration of KYC, AML, CFT, and economic sanctions screening verification; ( Based on blockchain's more efficient atomic settlement, achieving 24/7 real-time pricing and settlement; ) Access to a unified ledger for multiple parties will enable real-time data sharing, allowing investors to directly access fund data and trade; ( Fund managers will obtain richer investor information as well as trading information.

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) 2.2 Solv Protocol's on-chain fund issuance and fundraising platform

Founded in 2020, Solv Protocol is dedicated to providing blockchain-based financial tools and diversified asset management infrastructure for the crypto industry, recently completing a financing round of $6 million. The latest product from Solv Protocol, Solv V3, sets a new standard for on-chain fund issuance. The tokenized funds created through Solv Protocol enable on-chain fundraising, issuance, subscription, redemption, trading, and settlement, achieving efficient capital flow for tokenized funds.

We have seen on the official website that Solv Protocol has achieved the issuance and fundraising of 74 tokenized funds, including Open-end Funds and Close-end Funds, serving over 25,000 investors and managing over 160 million USD in assets.

The core mechanism of the Solv Protocol allows fund managers to create on-chain funds, depositing the raised funds in stablecoins, BTC, ETH, etc. into the smart contracts of the Solv protocol, and generating corresponding NFT/SFT certificates representing fund share certificates for investors, enabling fund managers to invest based on their investment strategies with the raised funds.

For example, we see that Blockin GMX Delta Neutral Pool is an open-end fund managing approximately 2.6 million USD in assets, laid out according to the investment strategy of the fund manager Blockin; in addition, another open-end fund RWA: Generate Yield On Your Stable Coins, initiated by the fund manager Solv RWA, raises USDT stablecoins to invest in US debt RWA assets, providing interest income from US debt to stablecoin holders.

Open-ended funds refer to funds where the total scale of fund units or shares is not fixed at the time of establishment by the fund manager. The fund can issue shares at any time and allows investors to redeem regularly, with a high liquidity investment portfolio as the investment strategy. Fund managers typically establish these funds using an open-ended corporate structure.

The fully on-chain tokenized fund issued through the Solv Protocol raises funds from BTC/ETH/stablecoins, and the assets invested also belong to native crypto assets or tokenized assets like US Treasuries RWA(. This structure of a fully on-chain tokenized fund can maximize the value brought by tokenization. For example, the tokenized fund of Solv Protocol, )1( allows fund managers to interact directly with investors, obtaining more investor data and transaction information; )2( eliminates many frictions from fund service intermediaries, reducing costs; )3( the fundraising, issuance, trading, and settlement of tokenized funds are all realized through blockchain and recorded in a distributed ledger, ensuring efficiency and transparency; )4( the net asset value (NAV) of the fund is updated in real-time, and fund share subscriptions/redemptions can be done anytime, anywhere, 24/7, among many other advantages.

Solv Protocol states: Currently, most crypto asset management services come from CeFi institutions, whose asset creation and fund management processes are opaque, leading to trust issues. Better decentralized solutions provide a transparent and secure investment experience while helping asset management companies gain trust and liquidity. Solv is building the infrastructure and ecosystem to offer comprehensive services, including creation, issuance, marketing, and risk management. This lowers the barriers to participating in Web3 while promoting the maturity of the crypto market.

Olivier Deng from Nomura Securities, an investor in Solv Protocol, stated: "Solv has built a trustless, institutional-grade DeFi platform that integrates brokers, underwriters, market makers, and custodians, creating the first liquidity financial infrastructure that bridges DeFi, CeFi, and TradFi on the blockchain."

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3. Settlement of Tokenization Fund

Tokenized funds can partially replace certain intermediary institutions ) such as fund distributors ###, and enhance the digital level of the fund market, but the market does not change overnight. For fund managers and investors, the most realistic point is that tokenization will inevitably change the settlement methods for fund subscriptions and redemptions.

( 3.1 Tokenization fund settlement

Currently, funds are generally priced based on net asset value, and fund managers settle by collecting or paying cash through the banking system, with settlement of fund shares issued or redeemed three days later using ) T+3(. However, the pricing of tokenized funds is calculated multiple times a day, and since subscriptions and redemptions will be "automatically" settled on the blockchain, the settlement method based on the banking system ) T+3( will be replaced. We can see in the case of Solv Protocol how a fully blockchain-based tokenized fund can achieve real-time pricing and real-time settlement for a 24/7 market )7/24(.

This settlement method utilizing blockchain and distributed ledger technology is referred to as: Atomic Settlement)Atomic Settlement(, which means that the transactions of cash equivalents and fund shares are directly related; that is, when the transfer of one asset occurs, the transfer of another asset occurs simultaneously. In other words, the prerequisite for settlement is that both the buyer and seller have cash and fund shares available for exchange in their electronic wallets, and the settlement ultimately depends on the simultaneous exchange. If cash or shares are not exchanged.