Ondo Finance (ONDO) has recently surged by over 14 times from its historical low, driven by the growing interest in Real-World Assets (RWA). But what exactly is Ondo Finance, and how does its tokenized note, USDY, differ from traditional stablecoins? This article explores the platform, its products, and the potential benefits and risks involved.
What is Ondo Finance?
Ondo Finance is a decentralized investment platform founded in 2021 by Nathan Allman, a former Goldman Sachs employee. Leveraging his expertise in traditional finance, Allman led the company into the RWA space in January 2023. According to Defillama, Ondo Finance ranks third in the RWA sector by Total Value Locked (TVL), with $464 million across six blockchains: Ethereum, Solana, Mantle, Polygon, Sui, and Aptos.
Focusing specifically on tokenized securities, which include bonds and bond ETFs, data from Dune Analytics shows that the market cap for these assets has been growing steadily since February 2023, now exceeding $968 million. BlackRock, the Wall Street giant that entered the space this year, leads with its BUIDL fund at a $450 million market cap, accounting for 45% of the total. Ondo Finance holds second place with a market cap of $303 million.
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Ondo Finance's Key Tokenized Products
In January 2023, Ondo Finance announced the launch of tokenized treasury products, allowing stablecoin holders to invest in U.S. Treasuries and investment-grade corporate bonds through tokenized funds. The platform currently offers two main products: OUSG for professional investors and USDY for non-U.S. individuals and institutions.
OUSG: Investing in BlackRock Funds
OUSG is designed for professional investors holding significant stablecoin assets. It initially invested in BlackRock iShares ETFs (ticker: SHV) but has since shifted most of its assets to BlackRock's tokenized fund, BUIDL, which is issued on the Ethereum blockchain. The remainder is held in BlackRock Federal Fund (TFDXX), bank deposits, and USDC for liquidity purposes.
The minimum investment for OUSG is $100,000, and its current assets under management (AUM) stand at $215 million. The management fee is 0.2%, with 0.15% going to BlackRock for fund expenses.
USDY: Tokenized Notes
Launched in August 2023, USDY is a tokenized note backed by short-term U.S. Treasuries and bank demand deposits. It is available to non-U.S. investors with a minimum purchase of just $500. After a holding period of 40-50 days, USDY can be transferred on-chain.
USDY represents debt issued by Ondo USDY LLC, a special purpose vehicle (SPV) fully owned by Ondo Finance. Managed by a board including independent directors, the SPV is structured to maximize bankruptcy remoteness.
Key partners include Morgan Stanley and StoneX, which hold the short-term U.S. Treasuries, while First Citizens and Coinbase Prime provide backing through bank deposits and cash equivalents (less than 0.01% of the total).
Investors can purchase USDY using USDC or USDT, and bank wire transfers are available for investments over $100,000. USDY supports Ethereum personal wallets like MetaMask and multi-signature wallets but is not compatible with custodial accounts such as those on Coinbase or Binance.
Flux Finance: A Collateralized Lending Protocol
Ondo Finance also operates Flux Finance, a collateralized lending protocol that brings the U.S. Treasury repo market on-chain. This decentralized, global, and transparent system allows users to leverage their tokenized assets for additional yield.
In response to the growing trend of restaking, Ondo Finance partnered with ether.fi to launch a USDY-WEETH liquidity pool on Curve Finance. These initiatives expand the utility and earning potential of Ondo's tokenized funds through various DeFi applications.
Is USDY a Stablecoin?
Although USDY is classified as a stablecoin on CoinMarketCap, it does not maintain a strict peg to a fiat currency. Instead, USDY features a floating interest rate adjusted monthly by Ondo, with yields automatically compounded. This means the dollar value of USDY gradually increases daily, and its price should theoretically appreciate at an annual rate of around 5% (assuming constant yields). Currently, USDY is priced at $1.04.
Ondo Finance highlights key differences between USDY and traditional stablecoins, particularly regarding bankruptcy isolation and yield distribution. While stablecoin issuers like Tether and Circle invest their reserves in U.S. Treasuries and bank deposits, the interest earned typically benefits the issuers rather than the holders. For example, Tether reported a record $4.52 billion profit in Q1 2024, with approximately $1 billion coming from U.S. Treasury holdings.
In contrast, Ondo Finance distributes the yield (after fees) directly to USDY holders, offering an annualized return of up to 5%. USDY is issued under the SEC's Reg S exemption, ensuring compliance for non-U.S. investors.
The ONDO Governance Token
ONDO's Meteoric Rise on RWA Hype
According to Crunchbase, Ondo Finance is backed by investors such as Pantera Capital, Founders Fund, Coinbase Ventures, and Tiger Global. The platform conducted its initial coin offering (ICO) for the ONDO token in July 2022 via CoinList, with the token serving as governance for Ondo DAO and Flux Finance.
ONDO began trading on January 18, 2024, and its price surged over 14 times from the January low, fueled by the RWA narrative. However, ONDO currently functions solely as a governance token with no additional utility, making its value largely speculative based on investor confidence in Ondo Finance's future.
The ICO, held just days after the Terra collapse, attracted 18,000 participants and raised $10 million, though the official issuance price was not disclosed. With only 13.9% of the total token supply in circulation, the token's price is susceptible to volatility. Investors should conduct thorough research (DYOR) and practice risk management.
Skepticism from Industry Experts
Mike Dudas, founder of The Block, expressed skepticism about ONDO, highlighting promotional tweets from influencers that emphasized the BlackRock partnership and limited circulating supply. Dudas argued that Ondo's approach of labeling its products as securities does not entirely mitigate regulatory risks and could lead to unfavorable outcomes.
Frequently Asked Questions
What is Ondo Finance?
Ondo Finance is a decentralized platform offering tokenized real-world assets, such as U.S. Treasuries and corporate bonds, allowing crypto investors to access traditional finance yields.
How does USDY differ from stablecoins like USDT?
Unlike stablecoins, USDY does not maintain a fixed peg but appreciates in value through yield compounding. It also offers bankruptcy isolation and direct yield distribution to holders.
Can U.S. investors purchase USDY?
No, USDY is available only to non-U.S. investors under the SEC's Reg S exemption.
What is the minimum investment for USDY?
The minimum investment is $500, making it accessible to retail investors.
What are the risks of investing in ONDO?
ONDO is primarily a governance token with limited utility and a low circulating supply, making it highly volatile. Regulatory uncertainties also pose risks.
How does Flux Finance work?
Flux Finance is a lending protocol that allows users to collateralize tokenized assets like USDY for loans, bringing traditional repo market mechanics on-chain.
Conclusion
Ondo Finance is at the forefront of the RWA revolution, offering innovative products like USDY that bridge traditional finance and blockchain. While the potential for yield and growth is significant, investors should remain cautious of regulatory hurdles and market volatility. As the space evolves, Ondo's ability to navigate these challenges will be critical to its long-term success.