Understanding Ondo: Tokenizing Stable Real-World Assets on the Blockchain

Ondo Finance is transforming finance through its decentralized protocol, leveraging blockchain technology to deliver institutional-grade financial products. By tokenizing stable real-world assets (RWAs) like U.S. Treasuries, Ondo combines the reliability of traditional finance with the efficiency, transparency, and accessibility of blockchain.

The Rise of Real-World Asset Tokenization

Asset tokenization is increasingly seen as the future of finance. Major financial leaders, including BlackRock’s CEO Larry Fink, have highlighted tokenization as the next evolution for markets. This shift in perspective is influencing how institutional players engage with blockchain-based assets.

Real-world assets have emerged as a significant asset class within the cryptocurrency ecosystem. As of May 2024, the RWA market has surpassed $6.6 billion, indicating growing investor interest. Projections suggest the tokenized asset market could reach $10 trillion by 2030.

Tokenization involves converting ownership rights of physical or financial assets—such as bonds, stocks, or real estate—into digital tokens on a blockchain. This process enables:

• Fractionalization: Large assets can be divided into smaller, affordable units.
• Enhanced Liquidity: Tokenized assets can be traded more freely on global markets.
• Increased Accessibility: Investors with smaller capital can access high-yield investments.
• Transparency and Composability: Blockchain’s public nature ensures verifiable ownership and easier integration within DeFi applications.

Major asset managers like Franklin Templeton have entered this space, with tokenized U.S. government bonds growing from $114 million in 2023 to $845 million in market capitalization. A recent study from EY also indicated that 64% of high-net-worth individuals and 33% of institutional investors plan to increase their tokenized treasury investments by the end of 2024.

Introduction to Ondo Finance

Ondo Finance operates at the intersection of traditional finance and decentralized technology. Its mission is to offer secure, compliant, and transparent tokenized financial products. The company is structured around two core divisions:

1. Asset Management: Creates and manages tokenized financial products.
2. Technology: Develops the underlying protocols that power these products.

This dual approach allows Ondo to maintain high compliance standards while innovating with blockchain-based solutions.

Ondo’s Core Product Offerings

Ondo currently offers two primary investment products designed for both stability and yield.

USDY (Ondo US Dollar Yield Token)

USDY is a yield-bearing token backed by short-term U.S. Treasuries and bank demand deposits. It is structured as a tokenized note.

• Annual Percentage Yield (APY): 5.30%
• Total Value Locked (TVL): $315.35 million
• Key Features: Offers greater security and transparency compared to traditional stablecoins like USDT or USDC. It is managed by Ankura Trust Company to ensure regulatory compliance and investor protection.
• Target Audience: Non-U.S. individual and institutional investors seeking a compliant yield-generating dollar alternative.

OUSG (Ondo Short-Term U.S. Government Bond Fund)

OUSG provides passive exposure to a tokenized short-term U.S. Treasury bond ETF.

• Annual Percentage Yield (APY): 4.81%
• Total Value Locked (TVL): $221.32 million
• Key Features: A low-risk option for investors looking for steady returns from government-backed securities. Ondo recently migrated a significant portion of OUSG's backing to BlackRock’s tokenized fund, BUIDL, to enable instant settlements.
• Recent Development: Ondo introduced a new version, rOUSG, which allows investors to earn additional yield through a rebasing mechanism.

Flux Finance: Ondo’s Lending Protocol

Flux Finance is a decentralized lending protocol built by the Ondo team. It is based on Compound V2 but introduces support for permissioned, real-world assets like OUSG alongside permissionless stablecoins like USDC.

• Lending and Borrowing: Users can lend stablecoins to earn interest or borrow against their collateral. Borrowing using restricted assets like OUSG requires meeting specific permissioned requirements to ensure compliance.
• Governance: Flux is governed by the Ondo DAO, ensuring community-led development and upgrades.
• Risk Management: To minimize volatility and the risk of bad debt, Flux only accepts stable assets as collateral and uses a reserve fund to cover potential shortfalls.

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Competitive Landscape

The RWA tokenization space is becoming increasingly competitive. Key players include:

• Centrifuge: Focuses on tokenizing structured credit and uses NFTs to represent debt.
• Ethena: Offers synthetic asset exposure, allowing users to gain trading exposure without holding the underlying asset.
• Maple Finance: Provides under-collateralized loans to institutional borrowers with a focus on credit assessment.
• Pendle: Specializes in yield tokenization, enabling users to trade the future yield of an asset separately.

Ondo distinguishes itself through several strategies:

• Strategic Market Focus: It targets the massive U.S. Treasury market.
• TradFi Collaboration: Instead of competing directly, Ondo partners with giants like BlackRock.
• Innovative Products: USDY and OUSG offer unique value propositions of security, transparency, and yield.

ONDO Tokenomics and Utility

The ONDO token is the governance token for the Ondo DAO, which governs both Ondo Finance and Flux Finance.

Token Metrics (as of latest data):

• Current Price: $1.87
• Market Cap Rank: #54
• Fully Diluted Valuation (FDV): $131.5B
• Circulating Supply: 1.44B ONDO (14.27% of total supply)
• Total Supply: 10B ONDO
• Max Supply: 10B ONDO

Vesting Schedule: The majority of the token supply is held by the team and investors, subject to a multi-year vesting schedule. Significant unlocks are scheduled for January 2025 and beyond.

Token Utility: Currently, ONDO’s primary function is governance. Holders can vote on proposals within the Ondo DAO. To submit a proposal, an entity must hold or be delegated at least 100 million ONDO in voting power. Future utility enhancements may be introduced.

Team, Funding, and Key Partnerships

Ondo’s team brings together expertise from both traditional finance and Web3. Key members include CEO Nathan Allman and President Justin Schmidt, both alumni of Goldman Sachs. The team also includes professionals from BlackRock, OpenSea, and MakerDAO.

Funding Rounds:

• Seed Round (Dec 2021): Raised $4M at $0.013 per token.
• Series A (Apr 2022): Raised $20M at $0.02 per token.
• Public Sale (May 2022): Raised $10M at $0.03 per token.

Strategic Partnerships: Ondo has formed crucial alliances to expand its reach and functionality:

• Aptos Foundation: To bring tokenized assets like USDY to the Aptos blockchain.
• Thala Labs: To integrate USDY into Thala’s AMM pools and use it as CDP collateral.
• Wintermute: To provide deep, 24/7 liquidity for USDY across multiple exchanges.
• BlackRock: A significant partnership where Ondo invested $95M into BlackRock’s BUIDL fund, aligning closely with its tokenization goals.

Growth, Adoption, and Future Roadmap

Ondo Finance has demonstrated remarkable growth, with its Total Value Locked (TVL) soaring from $40 million to over $534 million. This growth is fueled by the increasing adoption of its core products.

Future roadmap focuses on three phases:

1. Expansion of Cash Equivalents: Increasing the adoption and liquidity of USDY, OUSG, and OMMF across more blockchains and through new partnerships.
2. Tokenization of Publicly-Traded Securities: Tackling the challenges of liquidity and infrastructure to bring equities and other securities on-chain.
3. Broader Financial Innovation: Leveraging a combination of centralized and decentralized mechanisms to bring the benefits of blockchain to a wider range of financial services.

Bullish and Bearish Considerations

Bullish Factors:

• Positioned in a high-growth industry expected to reach trillions of dollars.
• Strong partnerships with TradFi leaders like BlackRock.
• Rapidly growing TVL and early-mover advantage in the crypto RWA narrative.
• Committed to product development and meeting client demand.

Bearish Factors:

• High Token Concentration: Approximately 85% of ONDO tokens are controlled by the team and early investors, creating potential centralization and sell pressure risks.
• Regulatory Uncertainty: Operating at the TradFi-crypto intersection presents significant regulatory challenges.
• Protocol Risk: Like all DeFi protocols, Flux Finance is exposed to the risk of bad debt if collateral value drops precipitously.

Frequently Asked Questions

What is real-world asset (RWA) tokenization?
RWA tokenization is the process of converting rights to a physical or financial asset—like real estate, government bonds, or commodities—into a digital token on a blockchain. This enables fractional ownership, easier transferability, and increased liquidity for traditionally illiquid assets.

How does Ondo Finance ensure the safety of its tokenized assets?
Ondo partners with regulated trust companies, like Ankura Trust for USDY, to hold the underlying assets. These assets are held in bankruptcy-remote structures, meaning they are separate from Ondo's corporate assets and are protected for the benefit of the token holders.

What is the difference between USDY and a traditional stablecoin like USDC?
USDC is a stablecoin designed to maintain a 1:1 peg with the U.S. dollar and is backed by cash and short-term bonds. USDY is a yield-bearing token. It is backed by short-term Treasuries and bank deposits and is designed to accrue value over time, offering a yield to its holders.

Who can invest in Ondo’s products?
Ondo’s products have specific eligibility requirements, often restricting access to non-U.S. accredited investors only. It is crucial to check the latest terms and conditions on Ondo’s official website and consult with a financial advisor to determine eligibility.

What is the primary use case for the ONDO token?
The primary use case for ONDO is governance. Token holders can vote on proposals that dictate the future development and parameters of the Ondo ecosystem and the Flux Finance protocol.

What are the main risks associated with investing in tokenized RWAs?
Key risks include regulatory changes, smart contract vulnerabilities, counterparty risk from the underlying asset custodian, and market risk associated with the value of the underlying assets (e.g., interest rate changes affecting bond prices).