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 Treasuries, fixed income, and securities. However, in reality, apart from stablecoins, the largest RWA project by asset size is money market funds. The top three projects by asset size are: Franklin Templeton: $312 million ( government bonds ); Centrifuge: $247 million ( asset-backed ); Ondo Finance: $183 million ( government bonds ).

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

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

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

1. Fund Tokenization

Tokenization ( Tokenization ) is usually the representation of assets on the blockchain after digitization, utilizing the advantages of distributed ledger technology for accounting and settlement. Assets applied to tokenization can include financial instruments such as stocks, bonds, and funds, as well as tangible assets like real estate, and intangible assets like music streaming copyrights. The tokens generated after asset tokenization serve as carriers of asset value and are proof of asset rights.

This innovation and disruption also applies to funds. After tokenization, the fund forms a Tokenized Fund (, which refers to the fund shares being recorded in a digital form as tokens on the blockchain distributed ledger, and the tokens are available for trading in the secondary market. This tokenized fund differs from crypto funds ) that only invest in primary and secondary markets.

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 squeezed by peer competition and a shift towards passive investment strategies. In addition to investment pressures, the market has raised higher demands for the digital capabilities of funds to meet investors' increasing needs for online distribution, asset reporting, regulatory compliance, and personalization. The growth rate of fund management costs is faster than that of income, 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 the investment threshold 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 in 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 asset management ( Asset Under Management, AuM ), invest in a wider range of asset classes ( RWA tokenized assets diversity ); but also attract new categories of investors ( Unbanked investors in Asia, Africa, and Latin America to invest through crypto assets ), improve users' investment experience ( smart contracts embedded KYC ); and help funds win 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 promote the digitalization of the fund market

Currently, funds and investors are separated by a large number of intermediary institutions. The fund distribution side ) Fund Distributors ### includes: financial advisors, fund platform ( 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 customer ) KYC (, Anti-Money Laundering ) AML (, Countering the Financing of Terrorism ) CFT ( and economic sanctions screening validation, 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 through bookkeeping in a centralized register, then reconciles the orders with the cash positions of investors and the fund; ( Three days before the release of fund shares and cash settlement, 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 costs of rebalancing the fund's net value.

In contrast, tokenization can significantly simplify the aforementioned complex processes: ( When the tokenized fund is issued and traded on the blockchain, the subscription and redemption phases will be directly settled through the fund token and payment tokens, entering the investors' accounts ) electronic wallets (, with transactions having settlement finality, thus eliminating market and counterparty risks; ) because all transactions are recorded on the distributed ledger of the blockchain, any change in ownership will be automatically recorded, thereby eliminating the need for centralized registration; ( since all intermediaries can access and view data on the blockchain, there is also no need for multiple reporting and reconciliation.

At the same time, tokenization will facilitate the digital interaction between fund managers and investors: ) Due to the integration of KYC, AML, CFT, and economic sanctions screening verification, the speed of investor account opening will be improved; ( Based on blockchain's more efficient atomic settlement, achieving around-the-clock real-time pricing and settlement; ) Unified access to multi-party ledgers enables real-time data sharing, allowing investors to directly access fund data and trade; ( Fund managers will gain richer investor information and 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, it completed a financing of 6 million USD. The latest product from Solv Protocol, Solv V3, sets a new standard for on-chain fund issuance. The tokenized funds created through Solv Protocol can achieve on-chain fundraising, issuance, subscription, redemption, trading, and settlement, enabling efficient capital flow for tokenized funds.

We saw 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 more than 160 million USD in assets.

The core mechanism of Solv Protocol is to allow fund managers to create on-chain funds, depositing the raised funds such as ( stablecoins, BTC, ETH, etc. into the smart contracts of the Solv protocol, and generating corresponding NFTs/SFTs as certificates representing fund shares for investors, enabling fund managers to make investment arrangements according to their own investment strategies using the funds raised.

For example, we see that the Blockin GMX Delta Neutral Pool is an open-end fund managing approximately $2.6 million in assets, allocated 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 and invests in US Treasury RWA assets to provide interest income from US Treasuries for stablecoin holders.

Open-end funds refer to funds where the total size 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. Fund managers typically use an open-end corporate structure to establish funds with a high liquidity investment strategy.

The fully on-chain tokenized fund issued through the Solv Protocol raises funds from BTC/ETH/stablecoins, and the assets invested are also native crypto assets or tokenized assets ) such as US Treasury RWA (. This fully on-chain tokenized fund structure can maximize the value brought by tokenization. For example, the tokenized fund of Solv Protocol, )1( allows fund managers to face investors directly, obtaining more investor data and trading information; )2( eliminates the friction of numerous fund service intermediaries, reducing costs; )3( the fundraising, issuance, trading, and settlement of the tokenized fund are all realized through blockchain and recorded in a distributed ledger, making it efficient and transparent; )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.

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Solv Protocol said: Currently, the majority of crypto asset management services come from CeFi institutions, which have opaque asset creation and fund management processes, creating trust issues. Better decentralized solutions provide a transparent and secure investment experience while helping asset managers gain trust and liquidity. Solv is building the infrastructure and ecosystem to provide a full range of services, including creation, distribution, marketing, and risk management. This lowers the barriers to participation in Web3 while facilitating the maturation of the crypto market.

Olivier Deng from Nomura Securities, an investor in Solv Protocol, said: "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."

3. Settlement of Tokenized Funds

Tokenization funds can to some extent replace some intermediary institutions ( such as fund distributors ), and enhance the digital level of the fund market, but the market does not develop overnight. For fund managers and investors, the most realistic aspect 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 receiving or paying cash through the banking system, with settlement occurring three days later using the method of issuing or redeeming fund shares at ) T+3(. In contrast, the pricing of tokenized funds is calculated multiple times a day, and due to subscriptions and redemptions being "automatically" settled on the blockchain, the settlement method based on the banking system at ) T+3( will be replaced. We can see in the case of the Solv Protocol that fully blockchain-based tokenized funds can achieve real-time pricing and real-time settlement in a round-the-clock market at )7/24(.

This settlement method that leverages blockchain and distributed ledger technology is known as: atomic settlement)Atomic Settlement(, which means that the transaction of cash equivalents and fund shares is directly linked, that is, when one asset transfer occurs, another asset...