Preface

Previously, Ondo launched a DeFi protocol on Ethereum that provides liquidity services between protocols, also known as LaaS (Liquidity as a Service). After Compound introduced liquidity mining in October 2020, the market entered DeFi Summer, where many protocols used liquidity mining to bootstrap their projects by offering high mining rewards to attract users. However, as more and more protocols introduced liquidity mining, low APY incentives were no longer sufficient to attract capital and users to provide liquidity to the protocols. To compete for users, protocols chose to bear high costs to attract users to their projects at the beginning by offering extremely high APYs. However, such high APYs are not sustainable. To solve this problem, since September 2021, protocols, like Ondo Finance, that provide sustainable liquidity services for other protocols have gradually emerged in the market. Ondo Finance initially focused on providing short-term low-cost liquidity to projects.

However, with the prolonged bear market in the cryptocurrency space, TVL (Total Value Locked) in the DeFi space has significantly shrunk. The market’s attention has shifted to the vast world of real-world assets, aiming to transfer off-chain assets to on-chain and opening up the narrative of RWA. DeFi blue-chip protocols like MakerDAO have already introduced RWA-related businesses. Ondo Finance has also shifted its business focus in v2 and now specializes in the public bond market. This article will provide a detailed explanation of the operation mechanism of Ondo Finance’s latest products, OUSG and OMMF, as well as analyze the project’s economic model and development status.

Ondo Finance Introduction

The founders of Ondo Finance are two former Goldman Sachs employees. The project completed a $4 million seed funding round in August 2021, led by Pantera Capital. In April 2022, it completed a $20 million Series A funding round, bringing the total funding received to $24 million to date.

Ondo Finance is currently focusing on Real World Assets (RWA) and has launched funds that support a variety of underlying assets, including U.S. government bonds, bills, and money market funds. This offers investors a diversified selection based on their risk appetite. Ondo Finance charges an annual management fee of 0.15%.

The project was founded in 2021 by Pinku Surana, formerly the Vice President of the tech team at Goldman Sachs and led their blockchain development team. Team members have rich backgrounds from various institutions and protocols such as Goldman Sachs, Fortress, Bridgewater, and MakerDAO. The organizational structure of the project team follows a standard fund structure, including limited partners and general partners, as well as qualified custodians, fund administrators, and vault auditors among other third-party service providers.

Product Development

Ondo Finance officially launched in August 2021. Its initial version (v1) primarily offered two products: Ondo Vault and DAO Vault. Ondo Vaults are designed to provide users with fixed and variable returns, while DAO Vaults facilitate token liquidity between different DAOs (Decentralized Autonomous Organizations). Essentially, both are tools for capital management. In the first six months after its launch, the project’s flagship product was the Ondo Vault. A specific number of Vaults would be made available for subscription every month. However, six months after going live, Ondo developed its DAO Vault product, aimed at providing liquidity services between different protocols. This led to a decrease in the frequency of opening new Ondo Vaults.

With the compression of DeFi yields in 2022, the Ondo Finance team decided to phase out Vaults and LaaS (collectively called “Ondo v1”). It introduced Ondo v2, which includes tokenized funds (Ondo Funds) and Flux Finance. It was launched in January 2023. The core feature of Ondo Funds allows stablecoin holders to invest in bonds and US government bonds. Investors will receive tokenized fund shares that can be transferred on-chain, including US government bond fund (OUSG), short-term investment-grade bond fund (OSTB), and high-yield corporate bond fund (OHYG). Ondo Finance charges a management fee of 0.15% per year. In August of this year, Ondo Finance officially launched USD Yield (USDY), a tokenized note backed by short-term US government bonds and bank demand deposits. US users and institutions cannot use USDY, and it can be transferred on-chain after 40 to 50 days of purchase.

Project Logic

Currently, the official website shows support for the OUSG fund product (supporting US government bonds) and the OMMF fund product (supporting US money market funds), as well as the USDY stablecoin, backed by short-term US government bonds and bank demand deposits.

Image Source：https://ondo.finance/ousg

The core of Ondo Finance’s products is to tokenize fund shares. Users can invest stablecoin USDC into fund products through the Ondo platform, by following these steps:

1. Users deposit USDC into the corresponding fund product on Ondo and receive a corresponding amount of fund tokens (such as OUSG) in their wallets (as shown in the image above, 1 OUSG = $102.82).
2. Ondo platform converts the stablecoins (USDC) into USD through Coinbase, and then purchases US government bond ETFs through brokers and qualified custodian Clear Street.
3. When these underlying assets generate income, the income is reinvested to purchase more assets, automatically compounding user earnings.
4. Users can redeem their USDC at any time, and the corresponding fund tokens (such as USDG) will be burned, and they will receive USD.

Ondo previously launched four fund products for US users, supported by different underlying assets. Among them, the largest and most prominently displayed on the official website is the OUSG fund. To expand the use case of OUSG, Ondo developed its own decentralized lending protocol, Flux Finance. In February, it announced the launch on the Ethereum mainnet. Borrowers can use OUSG as collateral, and lenders provide stablecoins such as USDC to earn interest.

Currently, the total value locked (TVL) in Flux Finance’s liquidity pools has exceeded $60 million, with OUSG contributing approximately $37 million. The outstanding loans in the protocol amount to about $25 million.

Image Source：https://fluxfinance.com/markets

Ondo Finance introduced OMMF, a stablecoin based on US government money market funds (MMF), this year. Investors will be able to mint and redeem OMMF on business days and earn daily interest in OMMF tokens.

Tokenomics

The native token of Ondo Finance is ONDO, with a total supply of 10 billion.

The protocol raised $10 million in token sales on Conlist in July 2022, with the token amount accounting for 2% of the total supply. Details are as follows: 1) 3 million ONDO tokens were sold at a price of $0.03, with a lock-up period of 1 year and a linear release within 18 months after unlocking; 2) 17 million ONDO tokens were sold at a price of $0.055, with a lock-up period of 1 year and a linear release within 6 months after unlocking.

USDY is a tokenized note backed by short-term US government bonds and bank current deposits, available for non-US individuals and institutional investors who have undergone the platform’s KYC process. The system processes deposits within 2-3 days after depositing USDC, generating interest income. It takes 40-50 days to mint USDY and send it to the corresponding account. In fact, USDY is an interest-bearing note with an APY of approximately 5%. It is currently priced at $1.0071, with a total TVL of $30 million.

Image Source：https://ondo.finance/usdy

OUSG and OMMF are tokenized fund products on the platform, available for anyone to purchase and trade on the secondary market. OUSG represents the token exposure to short-term government bonds, meaning holding short-term government bonds; OMMF is a tokenized US government money market fund, and the token has not been launched yet.

Development Status

Currently, the OUSG fund product supports Ethereum and Polygon, allowing users to deposit USDC assets. Since announcing the transition to tokenized fund products in February this year, the total locked-in volume has been continuously increasing, with the current fund pool size close to $200 million.

Image Source：https://defillama.com/protocol/ondo-finance

According to official data, the OUSG fund product has attracted $170 million in deposits to Ondo Finance, with an annualized interest rate of 5.06%. The OUSG product has a weekly trading volume of around 2 million transactions.

Image Source：https://dune.com/steakhouse/ondo-finance

Risk Warning

The Real World Assets (RWA) sector holds significant potential this year, with numerous on-chain and off-chain projects already positioning themselves in this space. Ondo Finance has rolled out tokenized public debt products, allowing stablecoin holders to invest in U.S. Treasuries and investment-grade corporate bonds through their tokenized funds. However, it’s worth noting that this sector still carries the following risks:

1. Connecting real-world assets to the blockchain necessitates dealing with a myriad of legal and regulatory issues. The cryptocurrency industry is still in its nascent to early growth stages, and there is not yet comprehensive legal clarity on the valuation and regulation of cryptocurrencies. This ambiguity poses substantial regulatory pressures and could lead to unsolvable legal challenges when tokenizing real-world assets. There’s also the risk of illegal financial activities such as money laundering. \

2. Before being recorded on-chain, off-chain data can be manipulated. There are risks of asset originators bribing auditors, fabricating Know Your Customer (KYC) procedures through third parties, and other fraudulent activities. Even if the data eventually makes it onto the blockchain, the potential for dishonest practices at the off-chain level remains high. Additionally, there is currently no legal framework or authoritative body that endorses the processes for auditing valuations and conducting KYC for tokenizing assets.

3. The industry lacks a unified standard for asset liquidation and auditing. In cross-border cases, issues such as the creditworthiness of borrowers and the presence of local liquidators are significant concerns. The more capital lent out, the greater the risk that the protocol will face non-performing or defaulted assets that cannot be liquidated.

Conclusion

Ondo Finance is currently concentrating on tokenizing Real World Assets (RWA), launching fund products that support various underlying assets like U.S. government bonds and money market funds. The platform charges a 0.15% management fee. Currently, it has attracted nearly $200 million in deposits, primarily in its OUSG fund product.

U.S. Treasuries could potentially serve as the starting point for the widespread adoption of tokenization services. Ondo Finance has pivoted from its previous product offerings to pioneer this area, benefiting from first-mover advantages. The business development is progressing satisfactorily so far. With a team possessing strong backgrounds, the company plans to continually refine products that bridge the cryptographic markets with the real-world economy.