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

When discussing RWA, we often focus on underlying assets such as U.S. Treasury bonds, fixed income, and securities, but in fact, apart from stablecoins, the largest RWA projects by asset size are money market funds. The top three projects are: Franklin Templeton ( $1.312 billion, government bonds ), Centrifuge ( $2.47 billion, asset-backed ), 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 collaboration with Aave on the RWA project. This demonstrates the importance of tokenized funds in connecting traditional finance with DeFi. Currently, the RWAs we are discussing are 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 greater value once they are tokenized through blockchain and distributed ledger technology.

This article will analyze the value of fund tokenization through observed cases in the market, as well as the explorations and practices of market participants.

I. Fund Tokenization

Tokenization usually refers to the representation of assets in digital form on the blockchain, utilizing distributed ledger technology for accounting and settlement. Assets that can be tokenized include financial instruments such as stocks, bonds, and funds, as well as tangible assets like real estate and intangible assets such as music copyrights. The tokens generated after asset tokenization serve as carriers of asset value and as certificates of asset rights.

This innovation also applies to funds. Tokenized funds refer to fund shares recorded in digital token form on the blockchain distributed ledger, and the tokens can be traded on the secondary market. This tokenized fund is different from crypto funds that only invest in 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 placing higher demands on the digital capabilities of 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, resulting in squeezed 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 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 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 be able to increase the scale of asset management but also invest in a wider range of asset classes; they can attract new categories of investors, improve the investment experience for users; 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 digitization of the fund market.

Currently, funds and investors are separated by numerous intermediary institutions. The fund distribution end includes: financial advisors, fund platforms, and order routing networks; the fund service end includes: payment agents, custodians, and fund accountants.

The transfer agent assists the fund by coordinating both ends, responsible for understanding the clients, conducting anti-money laundering, counter-terrorism financing, and economic sanctions screening and verification, settling 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 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 integrating orders, settling orders in the centralized register through entry methods, and then reconciling 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 retain cash positions to bear the cost of rebalancing the fund's net asset 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 directly settled through fund tokens and payment tokens, entering the investor's account, with transactions having a final settlement nature, 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: ( 1) Due to the integration of KYC, AML, CFT, and economic sanctions screening verification, the speed of investor account opening will be improved; ( 2) Based on the more efficient atomic settlement of blockchain, achieving real-time pricing and settlement around the clock; ( 3) Access to a unified ledger by multiple parties enables real-time data sharing, allowing investors to directly access fund data and trade; ( 4) Fund managers will gain richer investor information and 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 cryptocurrency industry, recently completing a $6 million financing. The latest product of 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, achieving efficient capital flow for tokenized funds.

We saw on the official website that Solv Protocol has issued and raised 74 tokenized funds, including open-end funds and closed-end funds, serving over 25,000 investors and managing more than 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, etc. into Solv's smart contracts, and generating corresponding NFT/SFT certificates that represent fund share certificates for investors, enabling fund managers to invest based on 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, 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 yield returns on 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 allows investors to redeem regularly, with a high liquidity investment portfolio as the investment strategy. Fund managers usually establish these funds using an open-ended corporate structure.

The fully on-chain tokenized fund issued through the Solv Protocol raises funds from BTC/ETH/stablecoins, with the invested assets also belonging to 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 the Solv Protocol allows fund managers to face investors directly, obtaining more investor data and transaction information; it eliminates many frictions from various fund service intermediaries, reducing costs; the fundraising, issuance, trading, and settlement of the tokenized fund are realized through blockchain, and recorded in a distributed ledger, ensuring efficiency and transparency; the fund's net asset value (NAV) is updated in real-time, and fund share subscriptions/redemptions can be made anytime and 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 offer comprehensive services, including creation, issuance, marketing, and risk management. This lowers the barriers to participating in Web3 while promoting 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 intermediary institutions to a certain extent, 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 collecting or paying cash through the banking system, three days later ) T+3### in accordance with the issuance or cancellation of fund shares. However, the pricing of tokenized funds is calculated multiple times a day, and as 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 called: Atomic Settlement(. It means that the transactions of cash equivalents and fund shares are 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'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 occur. This settlement method eliminates counterparty risk while enabling real-time settlements, greatly enhancing the efficiency of transactions.

Bitcoin was designed from the beginning to create 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 cross-border payments can solve issues such as high costs, low efficiency in cross-border transfers, and high expenses in traditional cross-border payments.

Another interesting use case is that tokenization can enable more efficient settlement of exchange-traded funds ) ETF (. Since ETFs are subscribed and redeemed through physical assets, if the underlying securities in the basket of securities ) in the ( ETF are tokenized, it can greatly simplify the settlement process of the underlying securities of the ETF, achieving real-time settlement.

) 3.2 Tokenization fund settlement use case

This atomic settlement trading method has been approved by the U.S. SEC and is being applied in the Franklin OnChain U.S. Government Money Fund with an asset scale of $310 million. At the same time, we see that the Monetary Authority of Singapore also has UBS.