Ondo Finance: A New Star in the RWA Sector

As the unsustainability of high-yield projects in the bear market becomes increasingly evident, and the total locked value in the DeFi sector has significantly shrunk, the narrative of real-world assets led by MakerDAO, (RWA), is gradually rising. The market is beginning to shift its focus towards real-world assets, especially low-risk, stable-yield assets like U.S. Treasury bonds that can be applied on a large scale.

Against this backdrop, Ondo Finance has rapidly emerged as a leading project in the RWA sector. Recently, the Ondo Foundation announced the unlocking of ONDO token circulation on the 18th, and subsequently, a trading platform also announced the inclusion of Ondo Finance(ONDO) in its listing plan. This decision will bring more incentives and liquidity to the Ondo Finance ecosystem.

Although Ondo Finance was briefly introduced before, we can take this opportunity to provide a more comprehensive overview of this leading RWA project.

1. Introduction to Ondo Finance

Ondo Finance is a RWA tokenization investment protocol that launched the Ondo v2 tokenized U.S. Treasury fund in January 2023, aiming to provide institutional-level investment opportunities for everyone. Ondo introduces low-risk, stable yield, and scalable fund products ( such as U.S. Treasuries, money market funds, etc. ) to the blockchain, offering on-chain investors an alternative to stablecoins and allowing holders, rather than issuers, to earn the majority of the underlying asset's returns.

According to statistics from the data platform, the total market value of the RWA US Treasury bond sector has soared from an early $110 million to the current $863 million (, excluding a certain project's RWA US Treasury bond scale of over $2 billion ). Among them, Ondo's market size in the RWA US Treasury bond field has reached $125 million, ranking third, only behind two other major projects.

2. Ondo Finance's Tokenized Products

Ondo has launched the $OUSG tokenized U.S. Treasury bonds and the $OMMF tokenized money market fund products through fund tokenization, allowing stablecoin holders to invest in bonds and U.S. Treasury bonds. Investors will receive a certificate of entitlement for the tokenized funds, and Ondo charges an annual management fee of 0.15%.

In August 2023, Ondo launched a tokenized note project backed by short-term U.S. Treasury bills and bank demand deposits – the $USDY interest-bearing stablecoin. The innovation of USDY lies in its permissionless nature, providing global investors with an investment tool that can both store the value of the dollar and generate dollar returns.

Due to regulatory compliance reasons, tokenized fund products are only available to clients who have passed KYC. To this end, Ondo has partnered with the DeFi protocol Flux Finance to provide stablecoin collateralized lending services for tokens like $OUSG that require permission, enabling permissionless participation at the protocol's backend.

2.1 Yield Stablecoin $USDY

$USDY is a dollar interest-bearing product aimed at non-U.S. residents and institutions, with underlying assets consisting of short-term U.S. Treasury bonds and bank demand deposits. Investors must complete KYC to participate and can earn U.S. Treasury yields while maintaining a dollar peg. The current TVL has reached $65.37 million.

$USDY is independently issued by Ondo USDY LLC, which is a bankruptcy-remote independent SPV that issues $USDY backed by its assets/equity, designating $USDY holders as the ultimate beneficiaries through a trust arrangement.

2.2 Tokenized US Treasury Fund $OUSG

$OUSG is a tokenized U.S. Treasury bond fund aimed at global institutional users, with underlying assets being a short-term government bond ETF. Investors must complete KYC before participating, and the current TVL has reached $114 million.

$OUSG is issued by the Ondo Tokenized Fund. Investors contribute USDC as LP, and the Ondo Tokenized Fund withdraws to a custodian through a trading platform for fiat custody, with the custodian acting as a broker to purchase ETFs. New earnings will be reinvested, thereby automatically generating a higher compound interest rate.

2.3 Tokenized Money Market Fund $OMMF

$OMMF is a currency market fund pegged to the US dollar, with relatively low risk. Although information is currently limited, it can be inferred that this is a SEC-compliant currency market fund that has been tokenized based on a rebase model.

2.4 Flux Finance solves the problem of permissionless investment

Flux Finance is a decentralized lending protocol developed by the Ondo team based on a certain lending protocol, and its basic principles are similar to that protocol.

Due to the KYC requirements for Ondo's front-end products, Ondo collaborates with Flux Finance on the back end to provide collateralized lending services in USDC, USDT, DAI, and FRAX for tokens like OUSG that require permissioned investment. The other side of the lending protocol does not require permission, allowing any DeFi user to participate.

As of January 18, Ondo's TVL is $179 million, its lending protocol Flux Finance has a TVL of $24.32 million, and the borrowing amount has reached $14.11 million.

3. The Development of Ondo Finance

3.1 Financing Situation

Ondo was founded in 2021 by two former employees of financial institutions. The founders previously served as vice president of the technology team at a large financial institution, leading the institution's blockchain research and development team. Team members have extensive experience in several well-known financial institutions and protocols.

In August 2021, Ondo completed a $4 million seed round financing, led by a well-known investment institution, with participation from multiple other institutions. In addition, several industry experts also participated as angel investors in this round of financing.

In April 2022, Ondo completed a $20 million Series A financing round, led by two well-known investment institutions, with participation from multiple other institutions.

On May 12, 2022, Ondo completed an ICO financing of over $10 million through a certain platform, with the token amount accounting for 2% of the total.

3.2 Token Economy

According to the proposal from the Ondo Foundation: the total supply of ONDO is 10 billion tokens, with an initial circulation of about 14.3%, and more than 85% of the ONDO tokens will still be locked. The locked tokens will be gradually unlocked after the initial token unlock at 12, 24, 36, 48, and 60 months.

Private investors ( do not include certain platform round investors ) and the tokens of core contributors will be locked for at least 12 months and will be gradually released over the next four years. Certain platform round investors ( 2% ) of the tokens will be fully unlocked, thus accounting for a large portion of the initial circulating supply.

The token allocation is as follows: platform round investors ( 2% ), ecological incentives ( 52.1% ), protocol development ( 33% ), private placement investors ( 12.9% ).

4. Project Evaluation

The Ondo project team has an excellent background and has received support from top-tier capital, establishing its position in the RWA U.S. Treasury field. The project has high compliance, having undergone multiple rounds of audits, and the trading architecture of $USDY draws on established models. Compared to some projects that only have simple product descriptions, Ondo's foundation is more solid.

Ondo entered the RWA US Treasury bond sector early on, demonstrating unique insight. US Treasury bonds, as low-risk, stable yield, and scalable assets, are currently the main beneficiaries in the RWA space, with significant room for future development. This process is smoother than that of some projects transitioning from credit asset RWA to US Treasury bond RWA.

However, Ondo also faces some challenges. On one hand, there is homogeneous competition from peers, such as a certain yield-bearing stablecoin project launched in September 2023 that surpassed Ondo's TVL in just four months, while another project has formed partnerships with several well-known protocols through a tokenized U.S. Treasury fund. On the other hand, Ondo's product line is relatively limited, and the existing U.S. Treasury RWA products and yield-bearing stablecoin products have low entry barriers. It is worth looking forward to how to expand more channels or launch more attractive products.

In addition, it is worth paying attention to whether the long-term lock-up period of the team's and investors' tokens can create a growth flywheel through token incentives.

In addition to US Treasury RWA, Ondo also needs to explore more development directions.