Ondo Finance: A Leader in the RWA Field

As the unsustainability of high-yield projects in the bear market becomes more evident, and the total locked value in the decentralized finance space significantly shrinks, the narrative around Real World Assets (RWA) is gradually gaining attention. The market is focusing on real-world assets, especially low-risk, stable-yield, and scalable assets like U.S. Treasury bonds.

Ondo Finance has risen as a leading RWA project against this backdrop. Recently, the Ondo Foundation announced that it will unlock the circulation of ONDO tokens on the 18th. Subsequently, a well-known trading platform included Ondo Finance (ONDO) in its listing plan. This decision is expected to bring more incentives and liquidity to the Ondo Finance ecosystem.

Although Ondo Finance was mentioned in previous articles, we can take this opportunity to comprehensively sort out this leading project in the RWA field.

1. Overview of Ondo Finance

Ondo Finance is a protocol focused on RWA tokenization investment, which launched the Ondo v2 version of the tokenized US Treasury fund in January 2023, aiming to provide institutional-level investment opportunities for a wide range of investors. Ondo introduces low-risk, stable yield, and scalable fund products (such as US Treasury bonds, money market funds, etc.) onto the blockchain, offering on-chain investors an alternative to stablecoins, enabling holders rather than issuers to receive most of the returns from the underlying assets.

According to data statistics, the total market value of RWA U.S. Treasury bonds has surged from an early $110 million to the current $863 million (not including the scale of over $2 billion of a large project in RWA U.S. Treasury bonds). Among them, Ondo's scale in the RWA U.S. Treasury bond market reached $125 million, ranking third, only behind two large U.S. Treasury bond funds.

2. Tokenized Products of Ondo Finance

Ondo has launched $OUSG tokenized US Treasuries and $OMMF tokenized money market fund products through fund tokenization, allowing stablecoin holders to invest in bonds and US Treasuries. Investors will receive a certificate of rights for the tokenized fund, 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. Treasuries and bank demand deposits – the $USDY interest-bearing stablecoin. Unlike traditional stablecoins, the innovation of USDY lies in its ability to provide a permissionless investment tool for global investors that can both store value in USD and generate USD returns.

Due to regulatory compliance requirements, tokenized fund products can only be offered to verified customers. To this end, Ondo has partnered with the DeFi protocol Flux Finance to provide stablecoin collateralized lending services for tokens such as $OUSG that require licensed investment, enabling permissionless participation at the backend of the protocol.

2.1 Yield Stablecoin $USDY

$USDY is a dollar-yielding 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 undergo identity verification to participate, allowing them to earn Treasury bond yields on a dollar-denominated basis. Currently, its total locked value has reached $65.37 million.

$USDY is independently issued by Ondo USDY LLC, which is a bankruptcy-remote independent special purpose entity that issues $USDY collateralized by its assets/equity, and designates $USDY holders as ultimate beneficiaries through a trust.

2.2 Tokenized US Treasury Fund $OUSG

$OUSG is a tokenized US Treasury fund aimed at global institutional users, with underlying assets consisting of short-term treasury bond ETFs. Investors must complete identity verification to participate, and the total locked value currently reaches $114 million.

$OUSG is issued by the Ondo tokenized fund. Investors contribute USDC as liquidity providers, and the Ondo tokenized fund transfers the funds to a broker for fiat custody via a cryptocurrency exchange, which then purchases ETFs. The new earnings are reinvested, automatically generating a higher compound interest rate.

2.3 Tokenized Currency Market Fund $OMMF

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

2.4 Flux Finance solves the problem of permissionless investing

Flux Finance is a decentralized lending protocol developed by the Ondo team based on Compound V2, with basic principles similar to Compound.

Due to the requirement of permission access for Ondo's front-end products, Ondo collaborates with the DeFi protocol Flux Finance on the backend to provide collateral lending services for tokens requiring permissioned investment, such as OUSG, using USDC, USDT, DAI, and FRAX. The other side of the lending protocol is permissionless, allowing any DeFi user to participate.

As of January 18, the total locked value of Ondo is $179 million, with the total locked value of its lending protocol Flux Finance reaching $24.32 million and the loan amount reaching $14.11 million.

3. The Listing Journey of Ondo Finance

3.1 Financing History

Ondo was founded in 2021 by two former Goldman Sachs employees. The founder, Pinku Surana, was a vice president of the technology team at Goldman Sachs, leading the company's blockchain research and development team. Team members have extensive experience in traditional financial institutions such as Goldman Sachs, Fortress Investment Group, Bridgewater, and several well-known blockchain projects.

In August 2021, Ondo completed a $4 million seed round financing, led by a well-known venture capital firm, with participation from several cryptocurrency investment institutions. Additionally, the founders of Aave, the founders of Quantstamp, and a former investment director of a certain exchange also participated as angel investors in this round of financing.

In April 2022, Ondo completed a Series A funding round of $20 million. This round was led by two well-known venture capital firms, with participation from several prominent cryptocurrency investment institutions and trading companies.

On May 12, 2022, Ondo completed an ICO financing of over $10 million through a token issuance platform, with the token quantity accounting for 2% of the total. Among them, 3 million ONDO were sold at a price of $0.03, with a lock-up period of 1 year and linear release within 18 months after unlocking; 17 million ONDO were sold at a price of $0.055, with a lock-up period of 1 year and linear release within 6 months after unlocking.

3.2 Token Economic Model

According to the proposal from the Ondo Foundation: the total supply of ONDO is 10 billion tokens, with an initial circulation of approximately 14.3%. Over 85% of ONDO tokens will still be locked, and these locked tokens will be unlocked in batches after 12, 24, 36, 48, and 60 months following the initial token unlock.

Tokens for private investors (excluding ICO round investors) and core contributors will be locked for at least 12 months and gradually released over the next four years (a total of five years). Tokens for ICO round investors (accounting for 2%) will be fully unlocked, making their tokens a significant portion of the initial circulating supply.

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

IV. Conclusion

The elite background of the Ondo project team and the support of top-tier capital have established its position in the RWA U.S. Treasury market. The project emphasizes compliance and has undergone multiple audits, with its trading framework for $USDY drawing on established models. Compared to some projects that only have simple product descriptions, Ondo's foundation is much more solid.

Ondo aimed at the RWA U.S. Treasury market early on, demonstrating unique insight. U.S. Treasuries, as low-risk, stable, and scalable assets, are currently the biggest beneficiaries in the RWA field, with vast potential for future development. This transition is smoother than that of some projects moving from credit asset RWA to U.S. Treasury RWA.

However, Ondo also faces challenges. On one hand, there is homogeneous competition from peers, such as the interest-bearing stablecoin project launched in September 2023, which surpassed Ondo's total locked value in just four months. On the other hand, Ondo's current product line is relatively singular, with only the U.S. Treasury RWA product and interest-bearing stablecoin product having a low entry barrier. It is worth looking forward to how they will expand more channels or launch more attractive products.

Of course, whether teams and investors with a longer unlock period can create a growth flywheel through token incentives is also worth paying attention to.

In addition to the U.S. Treasury RWA, Ondo needs to make breakthroughs and innovations in other areas.