Fund Tokenization: Value, Exploration, and Practice

When discussing the tokenization of real-world assets ( RWA ), we usually focus on underlying assets such as U.S. Treasury bonds, fixed income, and securities. However, aside from stablecoins, the largest RWA project by asset size is actually the money market fund. Ranked by asset size, the top three projects are: Franklin Templeton ( $3.12 billion, investing in government bonds ), Centrifuge ( $2.47 billion, asset-backed ), and Ondo Finance ( $1.83 billion, investing in government bonds ).

It is worth noting that Franklin Templeton is entirely a tokenized fund, Ondo Finance also has two tokenized funds, and Centrifuge has also established a tokenized fund in collaboration with Aave on the RWA project. This indicates that tokenized funds play an important role in connecting traditional finance (TradFi) with decentralized finance (DeFi). We believe that this asset form of funds is one of the best carriers for RWA assets due to its regulatory nature and relatively standardized digital representation.

Currently, the RWAs we are discussing are more about the demand for unilateral value capture of cryptocurrencies ( or DeFi ) in the real world. However, from the perspective of traditional finance, funds can unleash much greater value after tokenization through blockchain and distributed ledger technology.

Therefore, this article will gradually analyze the value of fund tokenization through currently observed cases in the market, as well as the active exploration and practice of market participants.

1. Fund Tokenization

Tokenization(Tokenization) generally refers to the representation of assets in a digital form on the blockchain after digitization, leveraging 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 asset tokenization serve as a carrier of the asset's value and as a certificate of asset rights.

This innovation and disruption also apply to the fund sector. After the tokenization of the fund, it forms the Tokenized Fund (, which refers to fund shares recorded in a digital form of tokens on a blockchain distributed ledger, with tokens available for trading in 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. Although the overall asset management scale of the industry has grown with the market rise, fund management fees have been compressed due to peer competition and the industry's shift towards passive investment strategies. In addition to investment pressure, the market has also raised higher demands for 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, 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 thresholds 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 even high-net-worth individuals.

The tokenization of funds can solve many issues 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 assets under 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 (Unbanked investors in regions like Asia, Africa and Latin America to invest through crypto assets ), improve user investment experiences (smart contracts embedded with KYC ); and help funds win 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 digitalization of the fund market

Currently, funds and investors are separated by numerous intermediary institutions. 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 screening validation 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:)1( Fund shares are established to meet subscriptions and canceled to meet redemptions;)2( Fund pricing is not based on buying and selling, but on the net asset value set by fund accountants;)3( Transfer agents price based on net asset value by receiving and integrating orders, and settle orders through entry in a centralized register, then reconcile orders with the cash positions of investors and the fund;)4( Three days before the settlement of fund shares and cash, the fund and investors will face market volatility and counterparty risk;)5( 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 directly settled through the fund tokens and payment tokens, entering the investors' accounts ( electronic wallets ). The transactions have final settlement, thereby eliminating the risks of market and counterparties; ( Since all transactions are recorded on the distributed ledger of the blockchain, any change in ownership will be automatically recorded, thus eliminating the need for centralized registration; ) As all intermediaries can access and view the 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 more efficient atomic settlement on the blockchain, achieving around-the-clock real-time pricing and settlement; ( Access to a unified ledger for 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 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, 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 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 implemented 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 USD in assets.

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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 the smart contracts of the Solv protocol, and generating corresponding NFT/SFT certificates that represent fund shares for investors, enabling fund managers to invest according to their investment strategies using the funds raised.

For example, we see that the Blockin GMX Delta Neutral Pool is an open-end fund, managing approximately $2.6 million 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 to stablecoin holders.

Open-end funds refer to funds where the total amount 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, typically using a high-liquidity investment portfolio as the investment strategy. Fund managers usually establish such funds using an open-ended corporate structure.

The fully on-chain tokenization fund issued by Solv Protocol raises funds from BTC/ETH/stablecoins, and the invested assets are also native crypto assets or tokenized assets ( such as US Treasury RWA ). This structure of a fully on-chain tokenization fund can maximize the value brought by tokenization. For example, the tokenization fund of Solv Protocol, (1) allows fund managers to directly face investors, obtaining more investor data and trading information; (2) eliminates much friction from various fund service intermediaries, reducing costs; ###3( the fundraising, issuance, trading, and settlement of tokenized funds are realized through blockchain and recorded in distributed ledgers, making it efficient and transparent; )4( the net asset value (NAV) of the fund 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, 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 provide 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 Tokenized Funds

Tokenization funds can partially replace certain intermediary institutions such as fund distributors ), and enhance the digital level of the fund market, but the market is not built 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 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 method for tokenized funds calculates the price 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 completely blockchain-based tokenized funds can achieve real-time pricing and around-the-clock market real-time settlement )7/24(.

This settlement method utilizing blockchain and distributed ledger technology is known as: Atomic Settlement), which means that the transactions of cash equivalents and fund shares are directly linked, that is, 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.