Ondo Finance Research Report: RWA Protocol Connecting Traditional Finance and Web3

Author: 0xGreythorn

Ondo Finance stands out for several reasons. It targets the massive U.S. Treasury market by integrating traditional finance with blockchain, with broad market coverage. Its complementary approach involves partnering with traditional financial giants such as BlackRock, thereby avoiding direct competition. In addition, Ondo offers innovative products such as USDY and OUSG, providing a safer and more transparent alternative to traditional stablecoins.

Market Opportunity

BlackRock CEO Larry Fink believes that tokenization is the future of finance and the next evolution of the market, and his stance may influence the attitudes of other major financial game players. As we highlighted in our previous research on Dusk Network, Real World Assets (RWA) are becoming an important asset class in the cryptocurrency industry. As of May 2024, the RWA market has exceeded $6.6 billion, reflecting investors' growing interest in this innovative financial product. Tokenizing RWA and introducing it to the blockchain can provide yield opportunities in DeFi (decentralized finance). The asset tokenization market is expected to reach $10 trillion by 2030.

Source: Roland Berge

The main attraction of this emerging market is not just to provide yield opportunities for DeFi. By digitizing assets into tokens, it achieves asset fragmentation - dividing assets such as treasury bonds, stocks, and real estate into smaller shares. This process enhances liquidity and opens the door to investment opportunities for investors with different capital levels.

Chainlink explains how asset tokenization works with the illustration below. Its main advantages include increased liquidity and improved accessibility through interoperable tokenized assets, enabling small investors to invest in high-yield assets with relatively low capital. In addition, due to the public nature of many blockchains, it improves transparency and enhances composability by connecting the value of real-world assets into the DeFi ecosystem.

Source: Chainlink

The market value of tokenized government bonds in the United States has also increased from US$114 million in 2023 to US$845 million. Franklin Templeton is the largest issuer of this asset class, accounting for about 38% of the market.

The latest research by Ernst & Young (EY) shows that 64% of high net worth investors and 33% of institutional investors plan to increase their investment in tokenized treasury bonds by the end of 2024.

Although still in its infancy, asset tokenization represents one of the most promising and potential applications of blockchain technology. Ondo Finance is well positioned to capitalize on this trend with its Treasury tokenization services, and investor interest continues to grow.

Ondo's Technology

Ondo is transforming finance through its decentralized protocol, leveraging blockchain to deliver institutional-grade products. By tokenizing stable assets in traditional finance, Ondo combines reliability with the efficiency of blockchain.

Ondo has two main divisions: asset management and technology. The asset management division creates and oversees tokenized financial products, while the technology division develops the protocols that support these products.

Currently, Ondo Finance offers two different investment options:

1. USDY (Ondo US Dollar Yield Token)

• A tokenized note backed by short-term U.S. Treasuries and bank deposits.

• Offers an annualized yield (APY) of 5.30% with a total locked value (TVL) of $315.35 million.

• It is more secure and transparent than traditional stablecoins such as USDT/USDC.

• Managed by Ankura Trust Company to ensure compliance and investor protection.

  	USDT	USDY
  Underlying assets	Treasury bonds, Bitcoin, unsecured loans	Treasury bonds
  Bankruptcy remote	Uncertain	Yes
  Reserves held separately from operating company	No	Yes
  Support Paying income	No	Yes
  Investor claims on reserves	Unsecured	Secured
  Third-party reporting	Quarterly	Daily
  Third-party monitoring	No	Yes
  Regulatory status	Uncertain	Compliant

  Source: Ondo Finance

2. OUSG (Ondo Short-Term US Treasury Bond)

• Provides low-risk tokenized short-term US Treasury bonds to passive investors.

• Provides an annualized yield (APY) of 4.81% with a total value locked (TVL) of $221.32 million.

• Moving investment from BlackRock's SHV to BUIDL in March 2024.

• Ondo recently launched a new version of OUSG, called rOUSG, which provides investors with yield through additional rOUSG tokens.

Source: Ondo Finance

Flux Finance by Ondo

Flux Finance, created by the Ondo Finance team, is an important advancement in decentralized lending. It is based on Compound V2 but adds new features. It supports open tokens like USDC and restricted tokens like OUSG (Ondo Short-Term US Government Bond Fund). This means you can freely lend USDC, but borrowing using OUSG as collateral requires meeting specific licensing requirements to ensure compliance and security.

Flux uses a peer-to-pool (p2pool) model similar to Compound, allowing users to borrow and lend in an overcollateralized manner. Lenders can earn interest on the stablecoins they provide, while borrowers can borrow stablecoins using their collateral, following the licensing requirements of the asset. Flux Finance is governed by the Ondo DAO.

Competitors

Given that Ondo has established relationships with giants like BlackRock, Ondo seems to be making a name for itself in traditional finance in the crypto RWA category, complementing other TradFi companies.

In the decentralized finance space, competition is heating up. Centrifuge focuses on tokenizing structured credit and issuing debt using NFTs. Ethena provides synthetic asset exposure, enabling users to trade without holding assets. Maple Finance provides low collateralized loans to institutions, emphasizing credit assessment and lending. Pendle handles tokenized yield trading, enabling users to separate and trade the yield portion of an asset.

Ondo Finance stands out for several reasons. It targets the massive U.S. Treasury market by integrating traditional finance with blockchain, with broad market coverage. Its complementary approach involves partnering with traditional financial giants such as BlackRock, thereby avoiding direct competition. In addition, Ondo offers innovative products such as USDY and OUSG, providing safer and more transparent alternatives to traditional stablecoins.

Token Economics

ONDO Token Economics Summary

Current Price: $1.87

Market Cap Ranking: #54

Fully Diluted Valuation (FDV): $131.5B, Ranking #16

Circulating Supply: 1.44B ONDO (14.27% of Total Supply)

Total Supply: 10B ONDO

Max Supply: 10B ONDO

left;">Next unlock: 1.67 million ONDO (about $2.19 million), 5 days later

Token distribution

Source: Dropstab

Upcoming unlock events

June 18, 2024: 1.67 million ONDO (about $2.19 million)

July 18, 2024: 1.67 million ONDO (about $2.19 million)

August 18, 2024: 1.67 million ONDO (about $2.19 million)

September 18, 2024: 1.67 million ONDO (about $2.19 million)

October 18, 2024: 1.67 million ONDO (about $2.19 million)

November 18, 2024: 1.67 million ONDO (about $2.19 million)

December 18, 2024: 1.67 million ONDO (about $2.19 million)

Token Purpose The ONDO token is the governance token of Ondo Finance and its Flux Finance protocol. Holders have the right to vote on various proposals within the Ondo DAO, ensuring that all decisions are made transparently on-chain.

To initiate a proposal, an individual must hold or be delegated voting rights for at least 100 million ONDO.

It is unclear whether other uses will be introduced for ONDO holders in the future.

Team, Fundraising, and Ecosystem

The Ondo Finance team has a diverse mix of people from traditional finance and Web3. Founder and CEO Nathan Allman and President and COO Justin Schmidt both come from Goldman Sachs. Another important member, Katie Wheeler, comes from BlackRock. In addition, the team also includes developers from OpenSea, MakerDAO, and Boson Protocol. This combination of expertise is highly consistent with Ondo Finance's unique vision and goals.

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Source:Ondo Finance

Funding Summary

Seed Round: In December 2021, Ondo Finance raised $4 million at a price of $0.013 per token, achieving a 99.87x return on investment (ROI). A total of 300 million tokens (3% of the total supply) were sold, led by Pantera Capital, with an initial lock-up period of 1 year, followed by a 24-month release period.

Public Offering:$10 million was raised at $0.03 per token on May 12, 2022, achieving a 43.28x return on investment (ROI). A total of 100 million tokens (1% of total supply) were sold on Coinlist, with a 1-year lockup period followed by an 18-month release period.

Series A:$20 million was raised at $0.02 per token in April 2022, achieving a 64.92x return on investment (ROI). A total of 1 billion tokens (10% of total supply) were sold, led by Founders Fund, with a 1-year initial lockup period followed by a 24-month release period.

Partnerships

Ondo Finance has formed several key partnerships to strengthen its blockchain and financial services:

• Aptos Foundation: This collaboration will show the integration of world assets with blockchain technology, starting with the tokenized US Treasury product USDY.

• Thala Labs: Partnering to launch USDY for use in Thala’s AMM pool and as collateral for collateralized debt positions (CDPs), enhancing liquidity and DeFi solutions.

• Wintermute: Partnering to increase liquidity of the US dollar yield stablecoin USDY, providing 24/7 liquidity across multiple blockchain platforms.

• BlackRock:Demonstrated commitment to expanding tokenization efforts and integration with Ondo products through a $95 million investment in BlackRock’s BUIDL Fund.

Adoption and Roadmap

Ondo Finance aims to connect traditional finance and decentralized finance through public blockchain technology. Their focus is on creating secure, transparent and compliant financial products.

Key Products:

• OUSG:Tokenized BlackRock Short-Term U.S. Treasury Bond ETF.

• OMMF:Tokenized BlackRock Money Market Fund.

• USDY:An alternative to yield-yielding stablecoins.

• Flux Finance:A protocol that supports tokenized securities as collateral.

These products have driven significant growth, with Ondo’s TVL increasing from $40 million to $534 million. Going forward, Ondo plans to expand the use of its tokenized cash equivalents by increasing the adoption and liquidity of USDY, OUSG, and OMMF. This will involve building partnerships and developing cross-chain tools to facilitate these processes.

Source: DeFillama

In the next phase, they aim to tokenize publicly traded securities and solve challenges related to liquidity and infrastructure. Ultimately, Ondo hopes to innovate in traditional finance by extending the advantages of blockchain to a wider range of financial services, using a combination of centralized and decentralized mechanisms. This approach will help bring the advantages of blockchain technology to a wider range of financial operations.

Bullish fundamentals

• The tokenization industry will usher in significant growth, and Ondo Finance's partnership with BlackRock is strategically positioned to bring trillions of dollars to Web3.

• Ondo Finance's TVL has grown substantially since the beginning of 2024. Real-world assets represent a fresh and promising narrative in the crypto space with strong early adoption potential.

• Ondo Finance is committed to evolving its product offering to meet client needs.

• The majority of OUSG's investments were initially in BlackRock's iShares Short Treasury Bond ETF (SHV). In March 2024, they moved to BlackRock's USD Institutional Digital Liquidity Fund (BUIDL), in line with Ondo's focus on asset tokenization.

• Ondo Finance is a leader in the crypto RWA space and has emerged as a top pick.

• Ondo Finance holds approximately 38% of the current supply of BUIDL.

  Bearish Fundamentals

• The utility of the ONDO token presents significant centralization risks.

• While all holders can participate in governance, the largest holders have the most influence.

• Approximately 85% of the total ONDO supply is controlled by the Ondo Finance team.

• Operating at the intersection of TradFi and cryptocurrencies, Ondo Finance enters a relatively unexplored market where regulation poses significant challenges.

• Distressed debt is a major risk for DeFi protocols, including Ondo Finance’s Flux. Distressed debt occurs when a borrower’s collateral is worth less than their debt. If a borrower’s equity becomes negative, Flux will use its reserves to mitigate losses. To minimize volatility and reduce the risk of bad debt, Flux only accepts stable assets as collateral.