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

When discussing RWA, we focus more on underlying assets such as US Treasuries, fixed income, and securities. In fact, currently, 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 ); followed by 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 also established a tokenized fund in the RWA project in cooperation with Aave. 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) being regulated itself; (2) a relatively standardized digital representation, is the best carrier 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), when 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 cases observed 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 digitization, utilizing the advantages of distributed ledger technology for accounting and settlement. Assets subject to tokenization can include financial instruments such as stocks, bonds, and funds, as well as tangible assets like real estate, and intangible assets such as music streaming copyrights. The tokens generated after the asset is tokenized serve as the carriers of asset value and certificates of asset rights.

This innovation and disruption also applies to funds. After tokenization, the fund forms the Tokenized Fund (, which means that the fund shares are recorded in a digital form of tokens on a blockchain distributed ledger, and the tokens are available for trading in the secondary market. This tokenized fund is different from a crypto fund that merely 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 a shift in the industry towards passive investment strategies. In addition to investment pressures, the market has also 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 outpacing revenue, putting pressure on fund profit margins.

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 introduce 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. Proponents of tokenized funds firmly believe that in the future, funds based on blockchain and distributed ledger technology will not only increase the scale of fund asset management ( Asset Under Management, AuM ), and invest in a broader range of asset classes ( RWA tokenized asset diversity ); but also attract new categories of investors ( investors from Unbanked regions in Asia, Africa, and Latin America to invest through crypto assets ), improving the investment experience for users ( with KYC embedded in smart contracts ); and will 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 promote the digitalization of the fund market

Currently, funds and investors are separated by numerous intermediary institutions. 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 customer ) KYC (, Anti-Money Laundering ) AML (, Counter Financing of Terrorism ) CFT ( and economic sanctions screening and verification, fund subscription and redemption settlement, 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 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 the net asset value by receiving and integrating orders, and settle orders in the centralized register through bookkeeping methods, then reconcile the orders with the cash positions of investors and the fund; ( Three days before the settlement of fund shares and cash, the fund and investors face market volatility and counterparty risk; ) The liquidity of the fund also forces fund managers to maintain cash positions to bear the costs of rebalancing the fund's net asset 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, thereby 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, thus eliminating the need for centralized registration; ( Since all intermediaries can access and view data on the blockchain, there is no need for multiple parties to report and reconcile.

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 and verification, the speed of investor account opening will be improved; ( Based on blockchain's more efficient atomic settlement, achieving real-time pricing and settlement 24/7; ) 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 gain richer information about investors as well as transaction 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 $6 million financing round. Solv Protocol's latest product, 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 of funds, achieving efficient capital circulation for tokenized funds.

We have seen on the official website that Solv Protocol has already 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 allows 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 NFT/SFT certificates that represent fund share vouchers for investors, enabling fund managers to invest based on their investment strategies using the raised funds.

For example, we see that the Blockin GMX Delta Neutral Pool is an open-ended fund that manages approximately $2.6 million in assets, arranged according to the investment strategy of the fund manager Blockin; in addition, another open-ended 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, providing interest income from US Treasuries for stablecoin holders.

An open-end fund refers to a fund 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 allow investors to redeem periodically. Fund managers who typically use a high liquidity investment portfolio as an investment strategy usually establish the fund using an open-end corporate structure.

The fully on-chain tokenized fund issued by Solv Protocol raises funds from BTC/ETH/stablecoins, and the investment assets also belong to 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, Solv Protocol's tokenized fund, )1( allows fund managers to face investors directly, obtaining more investor data and trading 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 occur anytime and anywhere 24/7, among many other advantages.

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Solv Protocol states: Currently, most crypto asset management services come from CeFi institutions, which have opaque asset creation and fund management processes, 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 reduces 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 to some extent replace certain intermediary institutions ( such as fund distributors ), and improve the digital level of the fund market, but the market does not develop overnight. For fund managers and investors, the most practical point is that tokenization will inevitably change the settlement method of fund subscriptions and redemptions.

( 3.1 Tokenization Fund Settlement

Currently, funds are generally priced based on net asset value. Fund managers settle by collecting or paying cash through the banking system, with settlement occurring three days later, ) T+30 1928374656574839201, corresponding to the issuance or redemption of fund shares. In contrast, the pricing of tokenized funds is calculated 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 ( T+30 1928374656574839201 will be replaced. We can see in the case of Solv Protocol that fully blockchain-based tokenized funds can achieve real-time pricing and real-time settlement in a 24/7 market )7/24(.

This settlement method utilizing blockchain and distributed ledger technology is known as: Atomic Settlement ), which means that the transaction of cash equivalents and fund shares is directly linked, that is,