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

1. Fund Tokenization

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 subject 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 asset tokenization serve as carriers of the asset's value and proof of asset rights.

This innovation and disruption also applies to funds. After tokenization, a Tokenized Fund( is formed, which means that fund shares are recorded in a digital format as tokens on the blockchain distributed ledger, and the tokens are available for trading on the secondary market. This tokenized fund is different from a Token Fund) that only invests 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 toward passive investment strategies. In addition to investment pressures, the market has also raised higher demands for the digital capabilities of funds to meet the increasing online distribution, asset reporting, regulatory compliance, and personalization needs of investors. The growth rate of fund management costs is outpacing revenue, squeezing 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 even high-net-worth individuals.

The tokenization of funds can address many issues currently faced by the global asset management industry. Proponents 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 ( Asset Under Management, AuM ), and invest in a wider range of asset classes ( RWA tokenized asset diversity ); but also attract new categories of investors ( such as investors from unbanked regions in Asia, Africa, and Latin America through crypto assets ), improve user investment experiences ( with embedded KYC in smart contracts ); and help funds succeed in the competitive landscape 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 aids in advancing the digitalization of the fund market

Currently, funds are separated from investors by a large number of intermediaries. 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 customer ) KYC (, Anti-Money Laundering ) AML (, Combating the Financing of Terrorism ) CFT ( and economic sanctions screening verification, fund subscription and redemption settlement, 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 rather 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 accounting entries in a centralized register, then reconcile the orders with the cash positions of investors and the fund; ( Three days before the fund shares and cash settlement releases, 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 significantly simplify the complex processes mentioned above: ( When tokenized funds are issued and traded on the blockchain, the subscription and redemption stages will be directly settled through fund tokens and payment tokens, entering the investor's account ) electronic wallet (. 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 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 24/7 real-time pricing and settlement; ) Access to a unified ledger for multiple parties, enabling real-time data sharing, allowing investors to directly obtain fund data and trade; ( Fund managers will gain richer investor information as well as transaction 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 crypto industry, recently completing a $6 million financing 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 enable on-chain fundraising, issuance, subscription, redemption, trading, and settlement, achieving efficient capital flow for tokenized funds.

We see 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 over 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 the smart contracts of the Solv protocol, and generating corresponding NFT/SFT certificates representing fund shares for investors, enabling fund managers to invest based on their investment strategies using the raised funds.

For example, we see that the Blockin GMX Delta Neutral Pool is an open-end fund managing about 2.6 million USD 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 funds where the total scale 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 regularly. Fund managers who typically use a high liquidity investment portfolio as their investment strategy usually establish funds using an open-end corporate structure.

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The fully on-chain tokenization 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 like US Treasuries RWA). This fully on-chain tokenization fund structure allows for maximum enjoyment of the value brought by tokenization. For example, the tokenization fund of Solv Protocol, (1), enables fund managers to interact directly with investors, obtaining more investor data and trading 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, recorded on 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 made anytime, anywhere, 24/7, among many other advantages.

Solv Protocol states: Currently, most cryptocurrency asset management services come from CeFi 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 infrastructure and an 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 cryptocurrency market.

Solv Protocol investors 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 some intermediaries ) such as fund distributors ( to a certain extent and enhance the digital level of the fund market, but the market will not develop overnight. For fund managers and investors, the most realistic aspect that will inevitably change with tokenization is the settlement method for fund subscription and redemption.

) 3.1 Tokenization fund settlement

Currently, funds are generally priced based on net asset value. Fund managers settle by collecting or paying cash through the banking system, with settlement occurring three days later on ( T+30 19283746565774839201 by issuing or redeeming fund shares. However, the pricing of tokenized funds is calculated multiple times a day, and since subscriptions and redemptions will settle "automatically" on the blockchain, the settlement method based on the banking system ) T+30 19283746565774839201 will be replaced. We can see in the case of Solv Protocol how a fully blockchain-based tokenized fund can achieve real-time pricing and real-time settlement, creating a 24/7 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, i.e., when the transfer of one asset occurs, the transfer of another asset simultaneously takes place. In other words, the prerequisites for settlement are that the buyer and seller have cash and fund shares available for exchange in their electronic wallets, and the settlement ultimately depends on simultaneous exchange. If cash or shares are not delivered, the transaction will not occur. This settlement method eliminates counterparty risk while allowing real-time settlement, significantly enhancing the efficiency of transactions.

Bitcoin was designed from the beginning 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 transmission processes. This atomic settlement method applied to the cross-border payment field can solve the issues of high costs, low efficiency in cross-border transfers, and high expenses found 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 with physical assets, if the underlying securities in the basket of securities ) of 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 in the asset scale.