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, aside from stablecoins, the largest RWA project by asset size is the money market fund. The top three projects by asset size are: Franklin Templeton: $312 million ( government bonds ); followed by Centrifuge: $247 million ( asset-backed ); and a certain trading platform: $183 million ( government bonds ).

Franklin Templeton is entirely a tokenized fund, and a certain trading platform also has two tokenized funds. Centrifuge is also establishing a tokenized fund in collaboration with a certain DEX on an RWA project. This illustrates the importance of tokenized funds in connecting TradFi and DeFi. We believe that this asset form of funds, due to (1) being regulated itself; (2) and its relatively standardized digital expression, is the best carrier for RWA assets.

Currently, the RWA we are discussing is more about the demand for one-sided value capture from the real world by Crypto( or DeFi). From the perspective of traditional finance (TradFi), after 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 ( Tokenization ) is usually the representation of assets after digitization on the blockchain, utilizing the advantages of distributed ledger technology for accounting and settlement. Assets applied 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 tokenization of assets are carriers of the asset's value and certificates of asset rights.

This innovation and disruption also applies 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 the blockchain distributed ledger, and the tokens are available for trading in the secondary market. This tokenized fund is different from the crypto funds that merely invest in the primary and secondary markets, which is the Token Fund ).

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 placing higher demands on the digital capabilities of funds to meet the growing online distribution, asset reporting, regulatory compliance, and personalization needs of investors. 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 few institutional investors. The private equity fund market urgently needs to lower investment barriers and launch alternative products through appropriate product design that 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 address 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 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 cryptocurrency assets ), improve user investment experience ( smart contracts embedded with KYC ); and help funds succeed in the competition of industrial digital upgrades ( digital upgrades ), while greatly 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 promotes the digitization of the fund market

Currently, funds and investors are separated by a large number of intermediaries. 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 clients' ) KYC (, Anti-Money Laundering ) AML (, Counter Financing of Terrorism ) CFT ( and economic sanctions screening verification, 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 cancelled to meet 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 the orders through bookkeeping in a centralized register, then reconciles the orders with the cash positions of investors and the fund; ( Three days before the settlement of fund shares and cash, both 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 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 phases will be settled directly through fund tokens and payment tokens, entering investors' accounts ) electronic wallets (. Transactions have settlement finality, thereby eliminating market and counterparty risks; ) Because all transactions are recorded on the distributed ledger of the blockchain, 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 multi-party 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 improved; (. Based on blockchain's more efficient atomic settlement, achieve real-time pricing and settlement around the clock; ). Access to a unified ledger allows for real-time data sharing, enabling investors to directly obtain 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 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 can achieve on-chain fundraising, issuance, subscription, redemption, trading, and settlement, enabling 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 in assets.

The core mechanism of the Solv Protocol allows fund managers to create on-chain funds, depositing the raised funds of ( stablecoins, BTC, ETH, and other ) into the smart contracts of the Solv protocol, and generating corresponding NFT/SFT certificates that represent fund share certificates for investors, enabling fund managers to invest according to their own 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 in assets, allocated 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 in which 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. Fund managers who typically use a high liquidity investment portfolio as an investment strategy usually establish funds using an open-ended corporate structure.

The fully on-chain tokenized fund issued by Solv Protocol has its fundraising sources from BTC/ETH/stablecoins, and the invested assets are also native crypto assets or tokenized assets like US Treasury RWA(. Such a fully on-chain tokenized fund structure can maximize the value brought by tokenization. For example, the tokenized fund of Solv Protocol allows fund managers to face investors directly, obtaining more investor data and trading information; it eliminates many frictions of intermediary fund services, reducing costs; the fundraising, issuance, trading, and settlement of the tokenized fund are all realized through the blockchain and recorded in a distributed ledger, ensuring efficiency and transparency; the net asset value (NAV) of the fund is updated in real-time, and fund share subscriptions/redemptions can be done anytime and anywhere 7/24, 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 facilitating 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."

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3. Settlement of Tokenization Funds

Tokenization funds can replace some intermediaries to a certain extent, such as fund distributors ), and improve the digitalization level of the fund market, but the market does not change overnight. For fund managers and investors, the most realistic point is that tokenization will inevitably change the settlement method of fund subscriptions and redemptions.

( 3.1 Settlement of Tokenization Funds

Current funds are generally priced based on net asset value, with fund managers settling by collecting or paying cash through the banking system, three days later )T+3( by issuing or redeeming fund shares. In contrast, tokenized funds calculate prices multiple times a day, and since subscriptions and redemptions will be settled "automatically" on the blockchain, the settlement method based on the banking system )T+3( will be replaced. We can see in the case of Solv Protocol how a fully blockchain-based tokenized fund can achieve real-time pricing and real-time settlement in an around-the-clock market )7/24###.

This settlement method utilizing blockchain and distributed ledger technology is called: Atomic Settlement(Atomic Settlement), meaning that the transaction of cash equivalents and fund shares is directly linked, that is, when the transfer of one asset occurs, the transfer of another asset occurs simultaneously. In other words, the prerequisite for settlement is that both 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. As