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

When discussing the tokenization of physical assets ( RWA ), we usually focus on underlying assets such as US Treasuries, fixed income, and securities. In fact, aside from stablecoins, the largest RWA project by asset size currently 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 completely a tokenized fund, Ondo Finance also has two tokenized funds, and Centrifuge has also established a tokenized fund in collaboration with Aave's RWA project. It can be seen that tokenized funds play an important role in connecting traditional finance and decentralized finance. 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 RWAs we are discussing are more about the one-sided value capture demand of cryptocurrencies ( or decentralized finance ) in the real world. From the perspective of traditional finance, after funds are tokenized through blockchain and distributed ledger technology, they can release much 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.

I. Fund Tokenization

Tokenization is usually the representation of assets on the blockchain after digitization, 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 serve as carriers of asset value and certificates of asset rights.

This innovation and disruption also applies to funds. After tokenization, funds form tokenized funds, which means that fund shares are recorded in a digital form as tokens on a blockchain distributed ledger, and the tokens are available for trading on the secondary market. This tokenized fund is different from cryptocurrency funds that only invest in primary and secondary markets.

The global asset management industry is facing numerous challenges. While the overall asset management scale of the industry has grown with the market rise, fund management fees have been compressed due to competition among peers and the industry's shift towards passive investment strategies. In addition to investment pressures, the market has also raised higher demands for funds' digital capabilities to meet investors' growing needs for online distribution, asset reporting, regulatory compliance, and personalization. The growth rate of fund management costs is outpacing revenue, leading to a squeeze on fund profit margins.

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 thresholds and launch 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.

Tokenization of funds can solve many problems currently facing 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 asset management and invest in a wider range of asset classes, but also attract new categories of investors, improve user investment experience, and help funds succeed 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 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.

The transfer agent assists the fund by coordinating both ends, responsible for understanding the client, anti-money laundering, combating the financing of terrorism and the screening verification of 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; ( Transfer agents price based on the net asset value by receiving and consolidating orders, and settle orders in the centralized registry through accounting entries, 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 face market fluctuations and counterparty risks; ( The liquidity of the fund also forces fund managers to maintain cash positions to cover 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, subscription and redemption processes will be settled directly through fund tokens and payment tokens, entering the investor's account. The transactions have finality in settlement, 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 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, achieving 24/7 real-time pricing and settlement; ( ) Access to a unified ledger by multiple parties, enabling real-time data sharing, allowing investors to directly access fund data and trade; ( ) Fund managers will gain richer investor information, as well as trading information.

( 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, having 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 flow for tokenized funds.

We saw on the official website that Solv Protocol has implemented the issuance and fundraising of 74 tokenized funds, including open-end funds and closed-end funds, serving over 25,000 investors and managing more than 160 million USD in assets.

The core mechanism of Solv Protocol allows fund managers to create on-chain funds, deposit raised funds such as ) stablecoins, BTC, ETH, etc. into the smart contracts of the Solv protocol, and generate corresponding NFTs/SFTs that represent fund share certificates 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 in assets, laid out 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 the type of fund where the total size of fund units or shares is not fixed when the fund manager establishes the fund. The fund can issue shares at any time and allow investors to redeem them periodically. Fund managers that typically use a high liquidity investment portfolio as their investment strategy usually establish 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 invested assets also belong to native crypto assets or tokenized assets such as US Treasury RWA(. This 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 friction points from fund service intermediaries, reducing costs; the fundraising, issuance, trading, and settlement of the tokenized fund are all achieved through 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 24/7, among many other advantages.

Solv Protocol states: Currently, most crypto asset management services come from centralized financial 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 provide 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.

Solv Protocol investors 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."

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3. Settlement of Tokenization Fund

Tokenization funds can to some extent replace some intermediary institutions and enhance the digital level of the fund market, but the market is not developed overnight. The most realistic point 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 through the bank system by collecting or paying cash, with settlement done by issuing or redeeming fund shares three days later, ### T+30 19283746565774839201. In contrast, the pricing of tokenized funds is calculated multiple times a day, and since subscriptions and redemptions will be "automatically" settled on the blockchain, the bank system's method of settlement, ( T+30 19283746565774839201, 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 all-day 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, that is, when a 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. If cash or shares are not delivered, the transaction will not take place. This settlement method eliminates counterparty risk while enabling real-time settlement, significantly enhancing the efficiency of transactions.

Bitcoin was designed from the outset 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 is applied