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

Recently, in discussions about RWA, people are more focused on underlying assets such as US Treasury bonds, fixed income, and securities. However, apart from stablecoins, the largest RWA project by asset size is actually the money market fund. The top three projects by asset size are: Franklin Templeton ( $1.312 billion, government bonds ), Centrifuge ( $2.47 billion, asset collateral ), and Ondo Finance ( $1.83 billion, government bonds ).

Franklin Templeton is entirely a tokenized fund, Ondo Finance also has two tokenized funds, and Centrifuge has established a tokenized fund in its RWA project in collaboration with Aave. This demonstrates the importance of tokenized funds in connecting TradFi and DeFi. Currently, the RWA we discuss more often concerns the unilateral value capture demands of Crypto( or DeFi) on the real world. From the perspective of traditional finance (TradFi), once funds are tokenized through blockchain and distributed ledger technology, they can unlock even greater value.

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 on the blockchain after digitalization, and utilizes 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 such as music streaming copyrights. The tokens generated after the tokenization of assets are carriers of the asset's value and serve as certificates of asset rights.

This innovation and disruption also applies to funds. After the tokenization of funds, it forms the Tokenized Fund (, which refers to the fund shares being recorded in a digital form of tokens on the blockchain distributed ledger, with tokens 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 investors' increasing needs for online distribution, asset reporting, regulatory compliance, and personalization. The growth rate of fund management costs is outpacing that of revenues, 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 the investment threshold and launch alternative products that can meet the investment needs of non-institutional clients such as small and medium-sized institutions, family offices, and high-net-worth individuals through appropriate product design.

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 increase the scale of fund asset management (Asset Under Management, AuM), and invest in a wider range of asset classes (RWA tokenized assets 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 investment experience for users ( embedding KYC in smart contracts ); and 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 digitization 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 client ) KYC (, Anti-Money Laundering ) AML (, Countering the 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 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 through bookkeeping in a centralized register, then reconcile 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 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 phases will be settled directly through fund tokens and payment tokens and entered into the investors' accounts ) electronic wallets (, with transactions having settlement finality, 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, eliminating the need for centralized registration; ( Since 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: ) Due to the integration of KYC, AML, CFT, and economic sanction screening verification, the speed of investor account opening will be improved; ( Based on blockchain's more efficient atomic settlement, achieving real-time pricing and settlement around the clock; ) Access to a unified ledger among multiple parties, allowing for real-time data sharing, enabling 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 cryptocurrency industry, and recently completed a $6 million funding 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 flow for tokenized funds.

We saw on the official website that Solv Protocol has already issued and raised 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, 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 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 in assets, laid out according to the investment strategy of the fund manager Blockin; additionally, 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 allows investors to redeem regularly. Fund managers who typically use an open company structure to establish funds adopt a high liquidity investment portfolio as their investment strategy.

The fully on-chain tokenized funds issued through the Solv Protocol raise funds from BTC/ETH/stablecoins, and the assets invested are also native crypto assets or tokenized assets such as US Treasury RWA). This structure of fully on-chain tokenized funds maximizes the value brought by tokenization. For example, Solv Protocol's tokenized funds, (1) allow fund managers to face investors directly, obtaining more investor data and transaction information; (2) eliminates various frictions of intermediary services in fund management, reducing costs; (3) the fundraising, issuance, trading, and settlement of tokenized funds are all realized through blockchain and recorded in a distributed ledger, making it efficient and transparent; (4) the net asset value (NAV) of the funds 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, 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 fostering 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 to create the first liquidity financial infrastructure that bridges DeFi, CeFi, and TradFi on the blockchain."

3. Settlement of Tokenization Fund

Tokenized funds can partially replace some intermediaries ###, such as fund distributors (, and enhance the digital level of the fund market, but the market will not change overnight. For fund managers and investors, the most realistic point is that tokenization will inevitably change the settlement methods 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 receiving or paying cash through the banking system three days later (T+3), corresponding to the issuance or cancellation of fund shares. In contrast, the pricing of tokenized funds is calculated 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 the Solv Protocol that a fully blockchain-based tokenized fund can achieve real-time pricing and real-time settlement in a round-the-clock market (7/24).

This settlement method, utilizing blockchain and distributed ledger technology, is referred to as: Atomic Settlement (, which means that the transactions of cash equivalents and fund shares are directly linked; that is, when the transfer of one asset occurs, the 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, bringing significant improvements to transaction efficiency.

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