In the past decade, financial markets have changed in ways that would have been hard to imagine even a few years ago. People used to think about investing only through banks, mutual funds, and traditional stock exchanges. Today, decentralized finance is opening new paths for people to access professional-grade strategies without going through the usual middlemen. A striking example of this evolution is the idea of On-Chain Traded Funds, or OTFs, pioneered by projects such as Lorenzo. These can be seen as the next step in how assets are managed, packaged, and shared in both decentralized and traditional markets.
To understand why OTFs matter, it helps to picture the familiar world of investment funds first. Traditional finance has long used structures like mutual funds and exchange-traded funds (ETFs) to give investors access to diversified portfolios of stocks, bonds, and other assets. A mutual fund pools money from many investors and uses it to buy a group of assets according to a specific investment strategy. These funds are usually priced once per day and have rules about when you can buy or sell your share. ETFs are similar, but they trade throughout the day on exchanges like a regular stock, and their price reflects the net value of the assets inside. Investors use these tools to spread risk and access professional management without owning individual assets directly.
On-Chain Traded Funds take these familiar ideas and bring them onto a blockchain so the same kinds of strategies can operate in a fully transparent, programmable way. An OTF is a tokenized financial product. When someone invests in an OTF, they receive a token that represents a share of an underlying fund’s portfolio. This token tracks real gains and losses from the strategies inside the fund. What makes Lorenzo’s OTFs distinctive is that they are built completely onchain, with smart contracts handling subscriptions, redemptions, net asset value accounting, and yield distribution in a transparent way.
One of the ways these OTFs differ from mutual funds or ETFs is transparency. Traditional funds hide much of their internal structure from investors. Only periodic reports show what a fund owns and how it manages risk. With onchain OTFs, every transaction, every position, and every change in value is recorded on a public ledger. Anyone can independently verify how much capital is in the fund, what strategies it is using, and how yield is generated. This reduces information asymmetry between fund managers and investors, giving everyday participants more visibility into what is happening behind the scenes.
Another area where OTFs change the game is liquidity. Traditional mutual funds may have redemption windows, meaning investors can only buy or sell at certain times or under certain conditions. ETFs improve on this by being tradable during market hours, but they still rely on centralized exchanges and market makers to facilitate trading. Onchain, OTF tokens can be moved freely at any time, subject only to the rules coded into the smart contract. This could make it easier for investors to enter and exit positions at times of their choosing, without waiting for markets to open or close.
Beyond transparency and liquidity, the way automation works in OTFs is fundamentally different from traditional structures. Smart contracts automate many tasks that human managers or intermediaries currently perform. Tasks like rebalancing the portfolio, calculating net asset value, growing yields, and distributing returns can all be executed without manual intervention. This means costs can be lower and settlement times much faster than in traditional funds, where human processes and legacy systems often slow things down and add expense.
Lorenzo’s approach also brings a deeper level of composability. Because OTFs exist onchain, other decentralized applications can integrate these funds directly. A wallet or financial tool could let users deposit stablecoins into an OTF and then use the resulting fund tokens in other parts of the decentralized ecosystem, such as collateral in lending markets or input for automated strategies. This is something that traditional funds simply cannot do. They are siloed investments managed offchain, and moving them into other financial uses usually requires lengthy settlement processes and custodial agreements.
A real example of this new model in action is the USD1+ OTF launched on BNB Chain, which pools multiple yield sources into a single onchain product. It combines tokenized real-world assets, quantitative trading strategies, and decentralized yields, then packages them into one tradable token that reflects the overall performance of these strategies. Investors receive a non-rebasing token that increases in value over time as the returns of the underlying strategies accumulate.
Comparing OTFs with mutual funds and ETFs highlights how onchain tokenization could reduce barriers to complex strategies. In traditional finance, access to sophisticated trading methods like volatility harvesting or risk-parity portfolios is usually limited to institutional investors or high net worth individuals. OTFs can democratize this access by letting smaller participants hold fractional shares of the same strategies, all governed by open code.
As blockchain technology continues to evolve, tokenized funds like OTFs could blur the line between DeFi and traditional asset management even further. Their promise lies in financial products that are transparent, programmable, and composable across decentralized ecosystems while maintaining the professional structure that experienced investors expect. If these ideas continue to mature, they may influence not only how people invest in digital markets but also reshape expectations for accessibility and automation in asset management worldwide.
