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

When we talk about RWA, we focus more on underlying assets such as U.S. Treasury bonds, fixed income, and securities. In fact, currently, besides stablecoins, the RWA project with the largest asset scale is the money market fund. The top three projects by asset scale are: Franklin Templeton: $312 million ( government bonds ); followed by Centrifuge: $247 million ( asset-backed ); Ondo Finance: $183 million ( government bonds ).

Franklin Templeton is entirely a tokenized fund, Ondo Finance also has two tokenized funds, and Centrifuge is also establishing a tokenized fund in the RWA project in collaboration with Aave. It can be seen that the importance of tokenized funds in connecting TradFi and DeFi, we believe that this asset form of funds, due to (1) its own regulation; (2) relatively standardized digital expression method, 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), after the funds are tokenized through blockchain and distributed ledger technology, they can release even greater value.

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 practice of market participants.

1. Fund Tokenization

Tokenization is usually the expression 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 like real estate, as well as intangible assets such as music streaming copyrights. The tokens generated after asset tokenization serve as the carriers of asset value and are certificates of asset rights.

This innovation and disruption also apply to funds. After tokenization, the fund forms a tokenized fund, which means that the fund shares are recorded in a digital format of tokens on the blockchain distributed ledger, and the tokens can be traded on the secondary market. This tokenized fund is different from a cryptocurrency fund that only invests in the 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 compressed due to peer competition and the industry's shift towards passive investment strategies. In addition to investment pressures, the market demands 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 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 currently faced by the global asset management industry. Advocates of tokenized funds firmly believe that future funds based on blockchain and distributed ledger technology will not only be able to increase the scale of asset management but also invest in a wider range of asset classes; they will attract new categories of investors, improve the user investment experience; and help funds succeed in the competition of industrial digital upgrades while significantly reducing their operational and marketing costs.

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 intermediary institutions. The fund distribution side includes: financial advisors, fund platforms, and order routing networks; the fund service side includes: payment agents, custodians, and fund accountants.

The transfer agent assists the fund by coordinating both ends, responsible for understanding the client, anti-money laundering, countering terrorist financing, and screening verification of economic sanctions, settlement of fund subscriptions and redemptions, reporting to management, and maintaining investor registration records.

The operational 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; ( Transfer agents price based on net asset value by receiving and integrating orders, and settle orders in the centralized register through booking, then reconcile 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 face market volatility and counterparty risk; ( The liquidity of the fund also forces fund managers to retain cash positions to bear the costs of rebalancing the fund's net value.

In contrast, tokenization can significantly 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 investors' accounts, making transactions final and eliminating market and counterparty risks; ( Since all transactions are recorded on the distributed ledger of the blockchain, any changes in ownership will be automatically recorded, thus eliminating the need for centralized registration; ) Because 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 help fund managers and investors achieve digital interaction: (. Due to the integration of KYC, AML, CFT, and economic sanctions screening verification, the speed of investor account opening will be enhanced; ). With more efficient atomic settlement based on blockchain, real-time pricing and settlement will be achieved around the clock; (. Access to a unified multi-party ledger 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.

( 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 $6 million financing round. 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 saw on the official website that Solv Protocol has achieved the issuance and fundraising of 74 tokenized funds, including open-end funds and closed-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 by depositing the raised capital, such as stablecoins, BTC, ETH, etc., into the smart contracts of the Solv protocol with the amount of ). It also generates corresponding NFT/SFT certificates that represent fund share certificates for investors, enabling fund managers to allocate investments according to their own investment strategies using the raised funds.

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

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

The fully on-chain tokenization fund issued by Solv Protocol raises funds from BTC/ETH/stablecoins, and the assets invested are also native crypto assets or tokenized assets. This fully on-chain tokenization fund structure can maximize the value brought by tokenization. For example, the tokenization fund of Solv Protocol, (, allows fund managers to face investors directly and gain more investor data and transaction information; ) eliminates the friction of many fund service intermediaries, reducing costs; ( fundraising, issuance, trading, and settlement of the tokenization fund are realized through the blockchain and recorded in a distributed ledger, which is efficient and transparent; ) the fund's net asset value (NAV) is updated in real time, and fund shares can be subscribed/redempted 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."

3. Settlement of Tokenization Funds

Tokenization funds can replace some intermediaries to a certain extent and enhance the digital level of the fund market, but the market is not built overnight. From the most realistic point of view for fund managers and investors, what tokenization will inevitably change is the settlement method 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 three days later according to the issuance or cancellation of fund shares. However, tokenized funds calculate their prices more than once a day, and since subscriptions and redemptions will be "automatically" settled on the blockchain, the settlement method based on the banking system 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.

This settlement method, which utilizes blockchain and distributed ledger technology, is referred to as atomic settlement, meaning that the transaction of cash equivalents and fund shares is directly linked. That is, when one asset transfer occurs, the transfer of another asset happens simultaneously. In other words, the prerequisite for settlement is that the buyer's and seller's electronic wallets have cash and fund shares available for exchange, and the settlement ultimately depends on the simultaneous exchange. If cash or shares are not delivered, the transaction will not occur. This settlement method eliminates counterparty risk while allowing real-time settlement, significantly enhancing the efficiency of transactions.

Bitcoin was designed from the outset to create a decentralized peer-to-peer electronic cash payment system. Bitcoin payments allow for direct transfers between users without the need for third-party institutions such as banks, clearinghouses, and electronic payment platforms, thus avoiding high fees and cumbersome transfer processes. This atomic settlement method applied in the cross-border payment field can solve problems such as high costs, low efficiency in cross-border transfers, and high expenses in traditional cross-border payments.

Another interesting use case is that tokenization can facilitate more efficient settlement of exchange-traded funds. Since ETFs are subscribed and redeemed through physical assets, tokenizing the underlying securities can greatly simplify ETFs.