Article translation: Block unicorn
Tokenization stitches together two vastly different worlds: one is the always-on, permissionless DeFi protocols whose prices fluctuate every few seconds; the other is traditional funds whose settlements follow a set of time periods managed by authorized holders.
Combining the two requires exceptional coordination skills, but for those who can successfully achieve this, immense value lies within. In today’s article, I’ll explore who is behind the scenes pulling the strings that connect these two worlds and who is capturing the value.
The total size of tokenized real-world asset (RWA) pools exceeds $33 billion, with tokenized U.S. Treasuries accounting for approximately $15 billion. However, their share has declined from 55% to under 45% within just one year. Meanwhile, the scale of other tokenized funds has grown, including institutional credit funds (e.g., Apollo’s ACRED) and private credit funds (e.g., Janus Henderson’s JAAA).
The maturation of tokenization offers treasury managers and CFOs a range of options with varying risk profiles. Investors seeking low risk, low returns, and high liquidity can choose Treasury funds, while those pursuing higher returns and greater programmability can opt for higher-risk investment alternatives. The security of returns is no longer a concern as it once was. These tools, backed byTreasury funds, are audited by the same auditing firms that audit traditional bonds.
This is the strongest argument for why asset tokenization in the real world is about to ignite a surge among institutional investors.
If someone asks me what the difference is between off-chain and on-chain money, I’d say it’s composability. It’s composability that allows a dollar to perform greater functions across multiple channels, enabling higher compounding growth. The ability to instantly settle and make your funds work more efficiently makes them seem like funds on steroids.
Traditional finance forces us to choose between returns, liquidity, and transferability. Tokenized funds, when properly managed, can allow us to achieve all three simultaneously.
But "proper management" is not easy. The compositional nature of funds involves an engineering problem.
Bridging two entirely different worlds
Blockchain brings speed, cost-efficiency, and rapid settlement to tokenized risk-weighted assets (RWA). But tokenized money market funds remain funds, not stablecoins. They still require daily net asset value updates according to the fund manager’s schedule, and they still require maintaining a KYC-verified holder base. For example, BlackRock’s BUIDL has a minimum investment threshold of $5 million, while Circle’s USYC is restricted to non-U.S. persons. They still adhere to redemption cut-off times because the settlement of their underlyingtreasury securitiesdepends on off-chain infrastructure, which has a settlement cutoff of 5:00 PM Eastern Time.
This is the legal essence of the product. If daily net asset value settlement is removed, it is no longer a money market fund. If the whitelist mechanism is removed, the U.S. Securities and Exchange Commission (SEC) will come knocking.
So, how can a fund maintain its scheduled timeframes, holder settings, and redemption windows while allowing tokens representing fund shares to move at internet speed? The fund requires specially built infrastructure to preserve net asset value at period ends, support epoch-based settlement, and adhere to strict legal boundaries when transferring assets across blockchains. This is a challenging coexistence problem.
A recent report jointly released by LayerZero and Centrifuge describes how they solved this issue.
Resolve the conflict points
Three points of conflict determine whether this coexistence model can succeed. If the coordination layer can properly address these points, the fund can operate at internet speed without violating legal boundaries.
First isprice.
What is the value of the token between two net asset value settlement periods? Some issuers freeze the token price at yesterday’s level and accept this stagnation. When interest rates fluctuate at midday, price freezes are easily manipulated. While continuously changing prices are harder to manipulate, they are also harder to align with the fund’s actual accounting.
Secondly, compliance factors.
Where is the whitelist verification layer implemented? If it runs on every transfer, tokens cannot interact with open DeFi and can only be transferred between approved wallets. If this layer is encapsulated within a vault, the vault holds regulated shares and issues freely tradable receipt tokens to holders who have completed a one-time KYC verification. These receipt tokens can then be composed within DeFi, with compliance embedded in the vault rather than checked on every transfer. Centrifuge’s deRWA framework is a prime example.
The third conflict occurs whentransferring assets across chains.
When a tokenized fund is deployed across nine chains, you need a unified data source to clearly establish ownership and value. Although on-chain infrastructure can update in real time, discrepancies still require synchronization and verification across all nine chains. The more potential points of failure, the greater the chance of errors.
LayerZero and Centrifuge address this issue by building a hub-and-spoke model. In this model, a single authoritative chain manages net asset value, accounting, and compliance. The messaging layer (in this case coordinated by LayerZero) pushes these updates to the spoke chains where the tokens are actually used.
Centrifuge's V3 architecture is built on this model, where each pool selects one central chain as its data source and branch chains as endpoints for deposit distribution, enabling DeFi composability. LayerZero handles the transmission of operational data across chains to ensure synchronization of net asset value updates, compliance instructions, and cross-chain balance states.
The admirable yet crucial coordination mechanism I mentioned earlier delivers value to those who can execute it. Whoever maintains the authoritative state of the fund across all chains is very difficult to displace. While fund managers still hold time, and blockchains still offer composability, some intermediary participant must achieve both.
The most vulnerable part of asset transfer is the reconciliation ofassets in transit.
When assets are transferred across chains, they may temporarily disappear from the fund’s visible balance sheet. Centrifuge V3 issues tokenized acknowledgments for assets in transit, ensuring the fund’s balance sheet remains continuous even while the underlying tokens are still being transferred. This is equivalent to on-chain trade date accounting. Though mundane, it is essential.
Despite these conflicts, why should institutional investors consider tokenized funds?
One of the best ways to optimize idle funds through tokenization is cycle trading. Treasury managers can deposit tokenized treasury funds and use them as collateral to borrow stablecoins. If the borrowing rate is lower than the fund’s yield, holding the fund generates profit. The treasury manager can then redeploy the stablecoin funds into other yield sources and repeat the cycle.
Only by resolving the above conflict points can the entire circular trading process function effectively. This is the next challenge faced by those building tokenized infrastructure. These conflict points have been exploited in the past. For example, if the on-chain net asset value price of a smaller tokenized product remains unchanged for two to four hours and lags behind the price of the underlying asset, an arbitrage opportunity arises before the next net asset value surge.
When the off-chain net value triggers a liquidity limit, a redemption gate conflict may occur if an independent on-chain smart contract attempts to immediately process token redemptions. This results in the smart contract holding "isolated" or unexecuted token transactions that continuously attempt to execute simultaneously, in conflict with the off-chain cap.
Currently, large private credit funds and business development companies (BDCs) are facing this situation. Three weeks ago, Apollo Debt Solutions Fund (ADS), a $26 billion private credit fund under Apollo Global, had to set a redemption cap at 5% after investors attempted to redeem approximately 16.8% of its shares. If a similar scenario occurred with a fund that also traded a tokenized version, it would be difficult to rule out the possibility of redemption channel conflicts. In the second quarter, investors redeemed $15.6 billion from widely held private credit funds, up from approximately $13.9 billion in the previous quarter.
During cross-chain message transmission, failures may occur, resulting in incomplete position settlement. Trust from institutional investors can only be earned by monitoring each failure mode and assigning responsibility to qualified personnel.
For tokenization to realize its demonstrated potential, it must address the following challenges. It’s not merely about putting U.S. Treasuries on a blockchain or creating a new asset class. Those building the infrastructure must break down the outdated rules that force investors to choose between yield, liquidity, and transferability. If tokenization can enable the dollar to serve multiple roles without compromising the credibility provided by existing safeguards, institutions holding billions in cash will certainly take notice.
I previously wrote that SWIFT, as the current coordination layer, has more value and influence than either end of the network it serves. Visa’s value also exceeds that of all global banks it serves, except for JPMorgan Chase.
This is the driving force behind playing the role of a coordination layer in an evolving financial world—it enables participants to secure a place in the capital markets over the next decade. Centrifuge is defining the role of funds, while LayerZero is building the bridges that connect each component.
That’s all for today—see you in our next article.