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

1. Fund Tokenization

Tokenization ( Tokenization ) is usually the representation of assets after digitalization on the blockchain, leveraging 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 asset tokenization are carriers of the asset's value and serve as proof of asset rights.

This innovation and disruption also apply to funds. After the tokenization of the fund, it forms the Tokenized Fund (, which refers to the fund shares being 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 the industry's shift towards passive investment strategies. In addition to investment pressures, the market is also demanding higher digital capabilities from funds to meet the increasing online distribution, asset reporting, regulatory compliance, and personalized needs of investors. The growth rate of fund management costs is outpacing that of revenue, and fund profit margins are being squeezed.

For private equity funds, due to their poor liquidity and high investment thresholds, their investors are long limited to a few institutional investors. The private equity fund market urgently needs to lower the investment threshold 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 faced by the global asset management industry. Advocates of tokenized funds firmly believe that future funds based on blockchain and distributed ledger technology can not only increase the scale of fund assets under management ( Asset Under Management, AuM ), invest in a wider 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 ), improve the user investment experience ( smart contracts with embedded KYC ); and help funds win in the competition of industrial digital upgrades ( digital upgrades ), while significantly reducing their operational and marketing costs ( benefits of blockchain and distributed ledgers ).

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 end )Fund Distributors### includes: financial advisors, fund platforms (Fund Platform), and order-routing networks (Order-Routing Networks); the fund service end 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 economic sanctions screening verification, fund subscription and redemption settlement, reporting to management and maintaining investor registration records.

The operating process of traditional funds is essentially inefficient:) Fund shares are established to satisfy subscriptions and are canceled to satisfy 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 orders with the cash positions of investors and the fund;( Three days before the settlement of fund shares and cash, funds and investors will face market fluctuations and counterparty risks;) The liquidity of the fund also forces fund managers to retain cash positions to bear the costs of rebalancing the fund's net asset 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 ) electronic wallets (, with transactions having settlement finality, thereby eliminating market and counterparty risks; ) Because all transactions are recorded on the blockchain's distributed ledger, any change 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 no need for multiple reports and reconciliations.

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 improved; ( Based on blockchain's more efficient atomic settlement, achieving 24/7 real-time pricing and settlement; ) 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 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 completing a $6 million funding round. The latest product of 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 of funds, achieving efficient capital flow for tokenized funds.

We saw 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 dollars in assets.

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

For example, we see that the Blockin GMX Delta Neutral Pool is an open-end fund, managing approximately 2.6 million USD in assets, deployed 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, providing interest income from US Treasuries to stablecoin holders.

Open-end 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 allow investors to redeem regularly, employing 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 fully on-chain tokenized fund structure can maximize the value derived from tokenization. For example, the tokenized fund of Solv Protocol, (1) allows fund managers to face investors directly, 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 on a distributed ledger, providing 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, and the asset creation and fund management processes of these institutions 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 facilitating the maturation 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. Tokenization Fund Settlement

Tokenization funds can replace some intermediaries to a certain extent, such as fund distributors ), and enhance the digitalization level of the fund market, but the market will not change overnight. The most realistic aspect for fund managers and investors 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, and fund managers settle transactions by collecting or paying cash through the banking system, with settlement occurring three days later at ) T+30, with the issuance or cancellation of fund shares. In contrast, tokenized funds calculate their prices multiple times a day, and because subscriptions and redemptions will be settled "automatically" on the blockchain, the settlement method based on the banking system ( T+30 will be replaced. We can see in the case of Solv Protocol that fully blockchain-based tokenized funds can achieve real-time pricing and 24/7 market real-time settlement )/24(.

This settlement method leveraging blockchain and distributed ledger technology is known as: Atomic Settlement), which means that the transaction of cash equivalents and fund shares is directly linked, i.e., when one asset transfer occurs, the transfer of another asset happens simultaneously. In other words, the prerequisite for settlement is that both the buyer's and seller's electronic wallets must have cash and fund shares available for exchange, and the settlement ultimately depends on simultaneous exchange. If cash or shares are not delivered, the transaction will not occur. This settlement method eliminates counterparty risk while enabling real-time settlement, greatly enhancing the efficiency of transactions.

Bitcoin was designed from the beginning to achieve a decentralized peer-to-peer electronic cash payment system. Bitcoin payments allow direct transfers between users without the need for third-party institutions such as banks, clearing houses, and electronic payment platforms, thereby avoiding high fees and cumbersome transfer processes. This atomic settlement method applied to the cross-border payment field can address the issues of high costs, low efficiency in cross-border transfers, and other problems in traditional cross-border payments.

Another interesting use case is that tokenization can facilitate more efficient settlement of the exchange-traded fund ( ETF ). Because ETFs are subscribed and redeemed through physical assets, if the underlying securities in the basket of securities in ( ETF are tokenized, it can greatly simplify the settlement process for the underlying securities of the ETF, achieving real-time settlement.

) 3.2 Tokenization Fund Settlement Use Case

This atomic settlement trading method has already been adopted in the United States.