Important Track in RWA: The Value and Practice of Fund Tokenization

When discussing RWA, we focus more on underlying assets such as US Treasury bonds, fixed income, and securities. However, besides stablecoins, the largest RWA project by asset size is money market funds. The top three projects by asset size are: Franklin Templeton ( with $1.312 billion, government bonds ), Centrifuge ( with $1.247 billion, asset collateral ), and Ondo Finance ( with $1.183 billion, 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 collaboration with Aave. It is evident that tokenized funds play an important role in connecting traditional finance with DeFi. We believe that the fund as an asset form, due to its regulated nature and relatively standardized digital representation, is the best vehicle for RWA assets.

Currently, the discussion of RWA is more about the unilateral demand for value capture from the real world by the crypto world. From the perspective of traditional finance, funds can release greater value after being tokenized through blockchain and distributed ledger technology. This article will analyze the value of fund tokenization and the exploration and practice of market participants through market cases.

1. Fund Tokenization

Tokenization ( Tokenization ) is usually the expression of assets in digital form on the blockchain after digitization, and utilizes the advantages of distributed ledger technology for accounting and settlement. Assets applicable to tokenization 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 copyrights. The tokens generated after asset tokenization serve as carriers of asset value and are proofs of asset rights.

This innovation also applies to funds. After the tokenization of the fund, it forms the Tokenized Fund (, which means that the fund shares are 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 is different from the Token Fund ), which 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 competition among peers and the industry's shift towards passive investment strategies. In addition to investment pressures, the market has raised higher demands for the digital capabilities of funds to meet the increasing online distribution, asset reporting, regulatory compliance, and personalization needs of investors. The growth rate of fund management costs is outpacing revenue, putting pressure on fund profit margins.

For private equity funds, due to 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 launch alternative products that meet the investment needs of non-institutional clients such as small and medium-sized institutions, family offices, and even high-net-worth individuals.

The tokenization of funds can solve many problems currently faced by the global asset management industry. Advocates of tokenized funds believe that in the future, funds based on blockchain and distributed ledger technology will not only 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 investment experience for users; and help funds succeed in the competitive landscape of industrial digital upgrades while significantly reducing operational and marketing costs.

2. Tokenization will bring profound impacts to the fund market

( 2.1 Tokenization helps promote the digitization of the fund market

Currently, funds and investors are separated by numerous intermediaries. The fund distribution side includes financial advisors, fund platforms, and order routing networks; the fund service side includes payment agents, custodians, and fund accountants. Transfer agents assist funds by coordinating both sides, responsible for KYC, AML, CFT, and sanctions screening, settlement of fund subscriptions and redemptions, reporting to managers, 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 rather 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 through accounting in a centralized register, 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 hold cash positions to bear the cost of rebalancing the fund's net asset value.

In contrast, tokenization can greatly simplify the complex processes mentioned above: )1( When tokenized funds are issued and traded on the blockchain, the subscription and redemption processes will be directly settled through the fund tokens and payment tokens, entering the investors' accounts, resulting in definitive settlement of transactions and thus eliminating market and counterparty risks; )2( Since all transactions are recorded on the distributed ledger of the blockchain, any changes in ownership will be automatically recorded, eliminating the need for centralized registration; )3( 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: ) With the integration of KYC, AML, CFT, and sanctions screening, the speed of investor account opening will increase; ( More efficient atomic settlements based on blockchain will enable real-time pricing and real-time settlement around the clock; ) Access to a unified ledger by multiple parties allows for real-time data sharing, enabling investors to directly access fund data and trade; ( Fund managers will gain richer investor information as well as 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 cryptocurrency industry, and has recently completed 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.

The official website shows 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 dollars in assets.

The core mechanism of the Solv Protocol allows fund managers to create on-chain funds, deposit the raised funds such as ( stablecoins, BTC, ETH, etc. into the smart contracts of the Solv protocol, and generate corresponding NFT/SFT certificates representing fund shares for investors, enabling fund managers to invest based on the raised funds according to their investment strategies.

For example, the Blockin GMX Delta Neutral Pool is an open-end fund that manages approximately 2.6 million USD in assets, deploying investments based on the strategy of the fund manager, Blockin; 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 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. Shares can be issued at any time, and investors are allowed to redeem regularly. Fund managers typically establish these funds using an open-ended corporate structure with a high liquidity investment portfolio as their investment strategy.

The fully on-chain tokenization 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 tokenization fund structure can maximize the value derived from tokenization. For example, the tokenization fund of Solv Protocol, )1( allows fund managers to directly face investors, obtaining more investor data and trading information; )2( eliminates many friction points from fund service intermediaries, reducing costs; )3### fundraising, issuance, trading, and settlement of tokenized funds are all achieved through blockchain and recorded on a distributed ledger, which is 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.

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 lowers the barriers to participating in Web3 while promoting 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 bridging DeFi, CeFi, and TradFi on the blockchain."

3. Settlement of Tokenization Funds

Tokenization funds can partially replace some intermediary institutions (, such as fund distributors ), and enhance the digital level of the fund market, but the market is not achieved overnight. From the most realistic perspective 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 via the method of issuing or redeeming fund shares corresponding to )T+3(. The pricing calculation method for tokenized funds occurs 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+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 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, i.e., when a transfer of one asset occurs, a transfer of another asset happens simultaneously. In other words, the prerequisite for settlement is that both the buyer and seller have cash and fund shares available for exchange in their electronic wallets, 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 enabling real-time settlement, greatly enhancing transaction efficiency.

Bitcoin was designed from the beginning to achieve 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 to 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 through tokenization, it can settle exchange-traded funds ( ETF ) more efficiently. Because ETFs are subscribed and redeemed through physical assets.