An Undeniable Subsector in RWA: The Value, Exploration, and Practice of Fund Tokenization

When discussing RWA, we usually focus on underlying assets such as US Treasury bonds, fixed income, and securities. However, apart 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 ); Centrifuge: $247 million ( asset-backed ); Ondo Finance: $183 million ( government bonds ).

Franklin Templeton is entirely a tokenized fund, and Ondo Finance also has two tokenized funds. Centrifuge has also established a tokenized fund in collaboration with Aave in the RWA project. This demonstrates the importance of tokenized funds in connecting traditional finance and decentralized finance. We believe that this asset form, due to its regulated nature; and its relatively standardized digital representation, is the best vehicle for RWA assets.

Currently, what we are discussing about RWA is more about the cryptocurrency industry’s one-sided demand for value capture from the real world. From the perspective of traditional finance, funds can release even greater value after being tokenized through blockchain and distributed ledger technology.

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 expression of assets in digital form on the blockchain after digitization, utilizing the advantages of distributed ledger technology for accounting and settlement. Assets that can be tokenized include not only financial instruments such as stocks, bonds, and funds but also tangible assets like real estate, as well as intangible assets like music streaming copyrights. The tokens generated after the tokenization of assets serve as carriers of asset value and proof of asset rights.

This innovation and disruption also apply to funds. After tokenization of the fund, it forms a tokenized fund (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 (Token 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 demands higher digital capabilities from 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, 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 small number of institutional investors. The private equity fund market urgently needs to lower investment barriers 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 will not only be able to increase the scale of asset management but also invest in a broader range of asset classes; attract new categories of investors, improve the investment experience for users; and help funds win in the competition of industrial digital upgrades, while significantly reducing their operational and marketing costs.

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 a large number of intermediary institutions. The fund distribution side includes: financial advisors, fund platforms, and order routing networks; the fund service side includes: payment agents, custodians, and fund accountants.

The transfer agent assists the fund by coordinating both ends, responsible for understanding the client, anti-money laundering, screening and verification for countering terrorist financing and economic sanctions, 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 canceled 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 orders by 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 will face market volatility and counterparty risk;( The liquidity of the fund also forces fund managers to retain cash positions to bear the costs of rebalancing the fund's net 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 investor's account, with transactions having finality in settlement, thus 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 also no need for multi-party 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 economic sanctions screening verification, the speed of investor account opening will be improved; ( Based on more efficient atomic settlement on the blockchain, achieving 24/7 real-time pricing and settlement; ) Access to a unified ledger among multiple parties will enable real-time data sharing, allowing investors to directly access fund data and trade; ( Fund managers will gain richer investor information and transaction information.

![RWA's Underrated Sub-sector: The Value, Exploration, and Practice of Fund Tokenization])https://img-cdn.gateio.im/webp-social/moments-e1e80c288fe48155a598841403605761.webp(

) 2.2 Solv Protocol's on-chain fund issuance and fundraising platform

Founded in 2020, Solv Protocol is committed 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 from 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 see from the official website that Solv Protocol has already 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 Solv Protocol allows fund managers to create on-chain funds, depositing the raised funds such as ( stablecoins, BTC, ETH, and other ) into the smart contracts of the Solv protocol, and generating corresponding NFT/SFT certificates representing fund shares for investors, enabling fund managers to invest according to their own investment strategies using the raised funds.

For example, we see that the Blockin GMX Delta Neutral Pool is an open-end fund managing approximately 2.6 million dollars in assets, positioned 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 for 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 periodically. Fund managers who typically use high liquidity investment portfolios as their investment strategy usually establish funds using an open-ended corporate structure.

The fully on-chain tokenized fund issued through Solv Protocol raises funds from BTC/ETH/stablecoins, and the assets invested also belong to native crypto assets or tokenized assets. Such a fully on-chain tokenized fund structure can enjoy the value brought by tokenization to the greatest extent. For example, the tokenized fund of Solv Protocol, (, allows fund managers to face investors directly, obtaining more investor data and trading information; ) eliminates many frictions of fund service intermediaries, reducing costs; ( fundraising, issuance, trading, and settlement of tokenized funds are all realized through blockchain and recorded in a distributed ledger, which is efficient and transparent; ) the net asset value of the fund is updated in real-time, and fund share subscriptions/redemptions are available anytime and anywhere 7/24, among many other advantages.

Solv Protocol states: Currently, most cryptocurrency asset management services come from centralized institutions, whose asset creation and fund management processes 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 provide comprehensive services, including creation, issuance, marketing, and risk management. This lowers the barriers to participating in Web3 while promoting the maturity of the cryptocurrency market.

Olivier Deng from Nomura Securities, an investor in Solv Protocol, stated: "Solv has built a trustless, institutional-grade decentralized finance platform that integrates brokers, underwriters, market makers, and custodians, creating the first liquidity financial infrastructure that bridges decentralized finance, centralized finance, and traditional finance on the blockchain."

3. Settlement of Tokenized Funds

Tokenization funds can partially replace some intermediary institutions and enhance the digital 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 Tokenization fund settlement

Currently, funds are generally priced based on net asset value. Fund managers settle cash receipts or payments through the banking system and reconcile the issuance or redemption of fund shares three days later. However, the pricing of tokenized funds is calculated multiple times a day, and since subscriptions and redemptions will be "automatically" settled on the blockchain, the method of settlement based on the banking system 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 an around-the-clock market.

This settlement method using blockchain and distributed ledger technology is called atomic settlement, which means 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 there is cash and fund shares available for exchange in the electronic wallets of both the buyer and the seller, 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 for direct transfers between users without the need for third-party institutions such as banks, clearinghouses, and electronic payment platforms, thereby avoiding high fees and cumbersome transfer processes. This atomic settlement method applied to the field of cross-border payments can solve issues such as high fees, low efficiency in cross-border transfers, and high costs in traditional cross-border payments.

Another interesting use case is that tokenization can enable more efficient settlement of exchange-traded funds. Because ETFs are subscribed and redeemed through physical assets, if the underlying securities are tokenized, it can greatly simplify the underlying assets of the ETF.