Let capital flow at the speed of the internet

null Article author: Prathik Desai

Article compilation: Block unicorn

Tokenization stitches together two worlds that are utterly different: one is a permissionless DeFi protocol that’s always online, with its price moving every few seconds; the other is traditional funds, whose settlement follows a schedule of time windows administered by permissioned holders.

Bringing them together requires exceptional coordination skills, but for those who can successfully pull it off, there’s enormous value hidden in that goal. In today’s article, I’ll explore who is manipulating the bridge connecting these two worlds behind the scenes—and who is extracting value from it.

The scale of real-world asset (RWA) tokenization pools exceeds $33 billion, with tokenized U.S. Treasuries accounting for roughly $15 billion. But it’s worth noting that its share has fallen from 55% to under 45% in just one year. Meanwhile, other tokenized fund categories have grown as well, including institutional credit funds (e.g., Apollo’s ACRED) and private credit funds (e.g., Jurney Henderson’s JAAA).

Maturity in tokenization gives treasurers or chief financial officers who manage corporate cash a menu of choices with different risk appetites. Investors seeking low risk, low yield, and high liquidity can choose Treasury funds, while those pursuing higher returns and stronger programmability can choose riskier options. The safety of yield is no longer as concerning as it used to be. These instruments supported by Treasury funds are audited by the same audit firms that audit traditional bonds.

This is the strongest argument that tokenized real-world assets are about to spark a surge of interest among institutional investors.

If someone asked me what the difference is between off-chain money and on-chain money, I’d say it’s composability. It’s composability that allows a single dollar to work harder across multiple channels, enabling higher compound growth. The ability to redeem instantly and put your funds to work more efficiently makes them look like funds that have been given a shot of adrenaline.

Traditional finance forces us to choose between yield, liquidity, and transferability. But tokenized funds—if managed properly—can let us have all three at once.

However, “managed properly” isn’t easy. A fund’s composability is an engineering problem.

Suturing two different worlds

Blockchain brings speed, cost efficiency, and rapid settlement to tokenized risk-weighted assets (RWA). But a tokenized money market fund is still a fund, not a stablecoin. It still needs to update its net asset value (NAV) once every business day according to the fund manager’s timetable. It still needs to maintain a KYC-certified holder base. For example, BlackRock’s BUIDL has a minimum investment threshold of $5 million, while Circle’s USYC is restricted to non-U.S. persons. It still needs to observe redemption cutoffs, because the settlement of its underlying Treasuries relies on off-chain infrastructure—whose settlement deadline is 5:00 PM Eastern Time.

These are essential legal substance requirements for the product. If you remove daily NAV settlement, it stops being a money market fund. If you remove the whitelist mechanism, the U.S. Securities and Exchange Commission (SEC) will come knocking.

So how can a fund keep its defined time nodes, holder settings, and redemption windows—while still letting the token representing its shares flow at internet speed?

The fund needs specially built infrastructure to maintain NAV at period end, support epoch-based settlement, and comply with strict legal boundaries when transferring assets across chains. This is a tricky coexistence problem.

A recent report jointly released by LayerZero and Centrifuge describes how they solved it.

Solving the points of conflict

Three points of conflict determine whether this coexistence model can succeed. If the coordination layer handles these conflicts correctly, the fund can run at internet speed while still not breaking legal boundaries.

First is price.

Between two NAV settlement cycles, what is the token’s value? Some issuers freeze the token price at yesterday’s level and accept that kind of stasis. When interest rates fluctuate mid-day, a frozen price is easy to manipulate. Continuous price movement is harder to manipulate, but it’s also harder to keep aligned with the fund’s actual books.

Second are compliance factors.

Where does the whitelist verification layer run? If it runs on every transfer, the token can’t reach open DeFi and can only move between already-approved wallets. If that layer is wrapped inside a vault, the vault holds regulated shares and issues a freely transferable receipt token to holders who have completed a KYC verification. That receipt can be composed in DeFi, with compliance embedded in the vault rather than checked on every transfer. Centrifuge’s deRWA framework is a good example.

The third conflict happens when transferring assets cross-chain.

When a tokenized fund is deployed across nine chains, you need a single unified data source to determine ownership and value. Even though on-chain infrastructure can update in real time, once there’s a discrepancy, you still need to update and reconcile across those nine chains. The more potential failure points, the greater the chance of mistakes.

LayerZero and Centrifuge solve this by building a hub-and-spoke model. In this model, an authoritative hub chain manages NAV, accounting, and compliance. The messaging layer (in this case coordinated by LayerZero) pushes these updates to the spoke chains where the tokens are actually used.

Centrifuge’s V3 architecture is built on this model: each fund pool chooses one hub chain as its data source, a spoke chain as the distribution endpoint for deposits, and enables DeFi composability. LayerZero is responsible for transmitting operational data among chains to ensure synchronization of NAV updates, compliance instructions, and cross-chain balance states.

This is exactly the coordination mechanism I mentioned earlier—the coveted yet critical piece that brings value to those capable of executing it. Whoever can maintain consistency of the fund’s authoritative state across chains will be hard to replace. While the fund manager still controls the schedule and the blockchain still provides composability, a participant in the middle must be able to achieve both at the same time.

The most fragile part during asset transfers is inventorying transfer-to positions.

When assets move between chains, they may temporarily disappear from the fund’s visible assets and liabilities statement. Centrifuge V3 issues tokenized confirmations for assets in transit, so even if the underlying tokens are still transferring, the fund’s assets-and-liabilities statement can remain continuous. This is like on-chain trade-date accounting. It’s dry and boring, but crucial.

So despite these conflicts, why should institutional investors still consider tokenized funds?

One of the best ways to optimize idle capital via tokenization is loop trading. A treasurer can deposit tokenized treasury funds, use them as collateral to borrow stablecoins. If the borrowing rate is lower than the fund’s yield, holding the fund earns returns. Afterwards, the treasurer can redeploy the stablecoin capital into other yield sources and repeat the loop.

Only after resolving the conflicts above can the full loop trading work effectively. This is the next challenge faced by the people building tokenized infrastructure. These conflicts have been exploited in the past. For instance, if the on-chain NAV price of a smaller tokenized product stays unchanged for two to four hours and lags behind the underlying asset price, arbitrage opportunities can arise before the next NAV price surges.

When the off-chain NAV triggers liquidity constraints, if an independent on-chain smart contract tries to process token redemptions immediately, redemption queue conflicts may occur. This can leave the smart contract holding “orphaned” or unexecuted token trades—transactions that keep attempting to execute simultaneously in an effort to fight the off-chain caps.

This is happening to large private credit funds and business development companies (BDCs) right now. Three weeks ago, Apollo Global’s $26 billion private credit fund—Apollo Debt Solutions Fund (ADS)—had to set its redemption cap to 5% after investors tried to redeem about 16.8% of the shares. If similar situations occur with tokenized versions of funds that are trading simultaneously, it’s hard to rule out the possibility of redemption-channel conflicts. In Q2, investors redeemed $15.6 billion from widely held private credit funds, up from roughly $13.9 billion in the prior quarter.

Failures can occur during cross-chain message transmission, leaving positions not fully settled. Only by monitoring every kind of failure mode and having qualified personnel responsible for them can you earn institutional investors’ trust.

If tokenization is going to realize its demonstrated potential, it must address the challenges below. This isn’t just about putting U.S. Treasuries on-chain or creating a new asset category. The people building the infrastructure must break the outdated rules that force investors to choose between yield, liquidity, and transferability. If tokenization lets dollars play multiple roles without damaging the credibility provided by existing safeguards, then institutions holding tens of billions in cash will definitely take notice.

I wrote earlier that SWIFT, as today’s coordination layer, has value and influence that exceed either side of the network it serves. The value of Visa also exceeds all the global banks it serves, except JPMorgan.

That’s what drives the role of coordination layer in a continuously evolving financial world. It enables participants to secure a place in the capital markets of the next decade. Centrifuge is defining the role of funds, while LayerZero builds the bridges connecting every link.

That’s it for today—we’ll see you in our next article.