Let capital flow at internet speed

Article author: Prathik Desai

Article compiled by Block unicorn

Tokenization stitches together two radically different worlds: one is always-on and permissionless Decentralized Finance protocols whose prices fluctuate every few seconds; the other is traditional funds, whose settlement follows management periods governed by a set of licensed custodians.

Blending the two together requires exceptional coordination skills, but for those who can successfully achieve this, immense value lies within. In today’s article, I will explore who is operating behind the scenes to manage the bridge connecting these two worlds and who is capturing the value generated.

tokenized real-world assets (RWA) The pool exceeds $33 billion in size, with tokenized U.S. Treasury securities accounting for approximately $15 billion. Notably, however, their share has declined from 55% to under 45% in just one year. Meanwhile, otherTokenized Fundssegments have 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 treasurers or CFOs managing corporate cash a range of options aligned with varying risk appetites. Investors seeking low-risk, low-yield but highly liquid assets can opt for Treasury funds, while those pursuing higher yields and greater programmability may choose riskier investment alternatives. The safety of returns is no longer as concerning as it once was. These instruments,government bondsbacked by such funds, are audited by the same auditing firms that audit traditional bonds.

This is real-worldasset tokenizationand represents the strongest argument yet for an upcoming surge in adoption among institutional investors.

If someone were to ask me what distinguishes off-chain money from on-chain money, I would say it’scomposabilityIt is precisely composability that allows a single dollar to work harder across multiple channels, thereby achieving higher compounding returns. The ability to instantly redeem and deploy capital more efficiently makes these funds appear like they’ve been turbocharged.

Traditional finance forces us to choose among yield, liquidity, and transferability. Tokenized funds, if managed properly, can deliver all three simultaneously.

But 'managed properly' is no easy feat. The composability of funds presents an engineering challenge.

Blockchain brings speed, cost efficiency, and rapid settlement to tokenized risk-weighted assets (RWA). Yet tokenized money market funds remain funds—not stablecoins. They still require net asset value (NAV) updates on the fund manager’s schedule—once per business day. They still need to maintain a KYC-compliant holder base. For example, Blackrock’s BUIDL has a minimum investment threshold of USD 5 million, while Circle’s USYC is restricted to non-U.S. persons. They still must adhere to redemption cutoff times because their underlyinggovernment bondssettlement relies on off-chain infrastructure, which enforces a cutoff time of 5 p.m. Eastern Time.

This legal substance is integral to the product. If daily NAV calculations are eliminated, it ceases to be 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 established timelines, holder structure, and redemption windows while enabling its tokenized shares to move at internet speed? The fund requires purpose-built infrastructure—to preserve NAV at period-end, support epoch-based settlement, and enforce strict legal boundaries when transferring assets across blockchains. This is a thorny coexistence problem.

A recent joint report from LayerZero and Centrifuge describes how they’ve addressed this challenge.

Three conflict points determine whether this coexistence model can succeed. If the coordination layer properly addresses these conflicts, funds can operate at internet speed without crossing legal boundaries.

First is thePricing。

What is the value of the token between two net asset value (NAV) settlement cycles? Some issuers freeze the token price at yesterday’s level and accept this stagnation. When interest rates fluctuate during the day, such price freezes are easily manipulable. Continuously changing prices are harder to manipulate but also more difficult to reconcile with the fund’s actual accounting.

Next isComplianceFactors.

Where does the whitelist verification layer run? If it operates on every transfer, the token cannot access open DeFi and can only move between approved wallets. If this layer is encapsulated within a vault, the vault holds the regulated shares and issues a freely tradable receipt token to holders who have completed KYC once. This receipt can be composited through DeFi, with compliance embedded in the vault rather than checked on every transfer. Centrifuge’s deRWA framework is a prime example of this approach.

The third conflict arises whentransferring assets across chains.

When tokenized funds are deployed across nine chains, you need a unified data source to clearly establish ownership and valuation. Although on-chain infrastructure can update in real time, discrepancies still require reconciliation and updates across all nine chains. The more potential failure points there are, the greater the likelihood of errors.

LayerZero and Centrifuge address this issue by building a hub-and-spoke model. In this model, a single authoritative chain manages NAV, accounting, and compliance. A messaging layer—coordinated here by LayerZero—pushes these updates to the spoke chains where tokens are actively used.

Centrifuge’s V3 architecture is built precisely on this model, where each pool selects a central chain as its data source and uses spoke chains as distribution endpoints for deposits, enabling DeFi composability. LayerZero handles the transmission of operational data across chains to ensure synchronization of NAV updates, compliance instructions, and cross-chain balance states.

What I previously mentioned is precisely this enviable yet critical coordination mechanism that creates value for those who can execute it. Whoever maintains consistent authoritative fund states across chains becomes difficult to replace. While fund managers still control timing and blockchains retain composability, some intermediary participant must reconcile both simultaneously.

The most vulnerable part of asset transfers lies in thereconciliation of assets in transit.When assets move between chains, they may temporarily disappear from the fund’s visible balance sheet. Centrifuge V3 issues tokenized attestations for assets in transit, ensuring continuity on the fund’s balance sheet even while the underlying tokens are still being transferred. This is effectively an on-chain version of trade-date accounting—dull but essential.

Despite these conflicts, why should institutional investors still consider tokenized funds?

One of the best ways to optimize idle capital through tokenization is via looping transactions. A treasurer can deposit tokenized treasury assets and use them as collateral to borrow stablecoins. If the borrowing rate is lower than the fund’s yield, holding the fund becomes profitable. The treasurer can then redeploy the stablecoin proceeds into other yield-generating opportunities and repeat the cycle.

Only by resolving the aforementioned conflict points can the entire looping transaction function effectively. This represents the next challenge for builders of tokenized infrastructure. These conflict points have been exploited in the past—for example, if the on-chain net asset value (NAV) price of a smaller tokenized product remains unchanged for two to four hours and lags behind the underlying asset price, arbitrage opportunities arise ahead of the next NAV spike.

When off-chain NAV triggers liquidity constraints, redemption gate conflicts may occur if a standalone on-chain smart contract attempts to process token redemptions immediately. This can cause the smart contract to hold 'orphaned' or unexecuted token transactions that repeatedly attempt simultaneous execution against the off-chain cap.

Currently, large private credit funds and business development companies (BDCs) are facing exactly this scenario. Three weeks ago, Apollo Global’s $26 billion private credit fund—the Apollo Debt Solutions Fund (ADS)—had to impose a 5% redemption cap after investors sought to redeem approximately 16.8% of their holdings. If a similar situation occurred with a concurrently traded tokenized version of the fund, it would be hard to rule out redemption gate conflicts. In Q2, investors redeemed $15.6 billion from widely held private credit funds, up from roughly $13.9 billion in the prior quarter.

Failures may occur during cross-chain message transmission, leading to positions not being fully settled. Only by monitoring every failure mode and assigning responsibility to qualified personnel can institutional investors' trust be earned.

If tokenization is to realize its demonstrated potential, it must address the following challenges. It’s not as simple as putting U.S. Treasuries on a blockchain or creating a new asset class. Those building the infrastructure must dismantle outdated rules that force investors to choose between yield, liquidity, and transferability. If tokenization enables the dollar to serve multiple functions simultaneously without compromising the credibility provided by existing safeguards, institutions holding tens of billions of dollars in cash will certainly take notice.

I’ve previously written that SWIFT, as today’s coordination layer, has already surpassed in value and influence any single participant at either end of the networks it serves. Similarly, Visa’s value exceeds that of all the global banks it serves—except JPMorgan.

This is the driving force behind playing the role of a coordination layer in the evolving financial world—it secures participants a foothold in capital markets over the next decade. Centrifuge is defining the role for funds, while LayerZero is building the bridges that connect all the pieces.

That’s all for today. See you again in our next article.

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