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

When discussing RWA, we focus more on underlying assets such as US Treasury bonds, fixed income, and securities. In fact, currently, aside from stablecoins, the largest RWA project by asset size is money market funds. The top three projects by asset size are: Franklin Templeton: $312 million ( government bonds ); followed by Centrifuge: $247 million ( asset-backed ); and Ondo Finance: $183 million ( government bonds ).

Franklin Templeton is completely a tokenized fund, Ondo Finance also has two tokenized funds, and Centrifuge is also setting up a tokenized fund in collaboration with a lending platform on an RWA project. It can be seen that the importance of tokenized funds in connecting TradFi and DeFi. We believe that this asset form of funds, due to (1) being regulated itself; (2) and its relatively standardized digital representation, is the best carrier for RWA assets.

Currently, the RWA we are discussing is more about the one-sided value capture demand of crypto against the real world. From the perspective of traditional finance (TradFi), once the funds are tokenized through blockchain and distributed ledger technology, they can release even 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.

1. Fund Tokenization

Tokenization ( Tokenization ) is usually the expression of assets in digital form on the blockchain after digitalization, utilizing the advantages of distributed ledger technology for accounting and settlement. Assets applied in tokenization can not only include 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 serve as carriers of asset value and proof of asset rights.

This innovation and disruption also apply to funds. After tokenization, a tokenized fund (Tokenized Fund) is formed, which refers to fund shares recorded in a digital format as 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 many challenges. Although the overall asset management scale of the industry has grown with the market rise, fund management fees are being compressed due to competition among peers and the industry's shift towards passive investment strategies. In addition to investment pressures, the market also demands higher digital capabilities from funds to meet the growing online distribution, asset reporting, regulatory compliance, and personalized needs of investors. The growth rate of fund management costs is faster than that of income, and fund profit margins are being squeezed.

For private equity funds, due to their poor liquidity and high investment thresholds, their investors are long limited to a few institutional investors. The private equity fund market urgently needs to lower the 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 even 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 increase the fund's assets under management (Asset Under Management, AuM), but also invest in a wider range of asset classes (RWA tokenized asset diversity); they can also attract new categories of investors (investors from Unbanked regions in Asia, Africa, and Latin America to invest through crypto assets ), improve users' investment experience (smart contracts embedded with KYC); and they can 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 are separated from investors by a large number of 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 customers ) KYC (, Anti-Money Laundering ) AML (, Combating the Financing of Terrorism ) CFT ( and economic sanctions screening verification, fund subscription and redemption settlement, 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 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, settling orders through accounting entries in a centralized register, and then reconciling the orders with the cash positions of investors and the fund; ( Three days before the settlement of fund shares and cash release, 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 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 settled directly through fund tokens and payment tokens, entering the investors' accounts ) electronic wallets (, and the transactions have finality in settlement, thus 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 and verification, the speed of investor account opening will be enhanced; ( Based on blockchain's more efficient atomic settlement, achieving round-the-clock real-time pricing and settlement; ) Access to a unified ledger by multiple parties allows for real-time data sharing, enabling investors to directly obtain fund data and trade; ( Fund managers will gain richer investor information and trading information.

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) 2.2 On-chain fund issuance and fundraising platform of a certain protocol

Founded in 2020, a certain 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. The protocol's latest product V3 sets a new standard for on-chain fund issuance. The tokenization funds created through this 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 the protocol has already achieved 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.

The core mechanism of the protocol allows fund managers to create on-chain funds, depositing the raised funds such as ( stablecoins, BTC, ETH, etc. into the protocol's smart contracts, and generating corresponding NFT/SFT certificates that represent fund shares 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, and is 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 to provide interest income from US Treasuries for stablecoin holders.

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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 regularly. Fund managers who typically use a high liquidity investment portfolio as an investment strategy often establish funds using an open-ended corporate structure.

The fully on-chain tokenized fund issued through this protocol has its funding sources from BTC/ETH/stablecoins, and the invested assets also belong to native crypto assets or tokenized assets ) such as US Treasuries RWA (. This structure of a fully on-chain tokenized fund can maximize the value brought by tokenization. For example, the tokenized fund of this protocol, )1( allows fund managers to face investors directly, gaining more investor data and transaction information; )2( eliminates many frictions from fund service intermediaries, reducing costs; )3### the fundraising, issuance, trading, and settlement of tokenized funds are all realized through blockchain and recorded in a distributed ledger, ensuring efficiency and transparency; (4) the net asset value NAV of the fund is updated in real-time, and fund share subscriptions/redemptions can be done anytime and anywhere 7/24, among many other advantages.

The 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. This protocol is building infrastructure and ecosystems 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.

A certain securities investor of the agreement stated: "This agreement builds a trustless institutional-grade DeFi platform, integrating brokers, underwriters, market makers, and custodians, creating the first liquidity financial infrastructure that bridges DeFi, CeFi, and TradFi on the blockchain."

3. Settlement of Tokenization Funds

Tokenization funds can partially replace certain intermediaries such as fund distributors ( to some extent and enhance the digital level of the fund market, but the market is not built overnight. The most realistic aspect for fund managers and investors 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) by issuing or canceling fund shares. However, the pricing method for tokenized funds is calculated multiple times daily, and since 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 a certain protocol that fully blockchain-based tokenized funds can achieve real-time pricing and real-time settlement in a 24/7 market (/24).

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, i.e., when one asset transfer occurs, the transfer of another asset occurs simultaneously. In other words,