What is Ondo Finance?
The crypto economy has seen remarkable growth, propelled by the evolution and increased integration of stablecoins like Tether (USDT) and Circle’s USD Coin (USDC). These digital currencies, pegged to stable assets like the US dollar, have emerged as vital tools in the crypto landscape, offering the benefits of digital and permissionless currencies without the volatility typically associated with assets like Bitcoin and Ethereum. USDT, the pioneer, has played a pivotal role in this domain by providing users with a digital representation of the US dollar, facilitating easier and faster transactions across borders. Similarly, USDC has gained traction for its transparency and compliance with regulatory standards, assuring investors of its reliability and stability.
Stablecoins have become indispensable for several reasons. Primarily, they bridge the traditional financial world with the digital asset space, offering a stable medium of exchange in a traditionally very volatile market. This stability is crucial for traders and investors, who use stablecoins as a safe haven to hedge against crypto market fluctuations. Stablecoins enable smoother, cheaper, and faster cross-border transactions compared to traditional banking systems, making them essential for global commerce in the digital age.
In this evolving landscape, Ondo Finance is carving out its niche by revolutionizing Real-World Assets (RWAs) through its innovative product offerings. Ondo’s approach centers around tokenizing stable, income-generating assets from the traditional financial world, thereby merging the best of both worlds - the reliability and familiarity of traditional finance with the efficiency and accessibility of blockchain technology.
Ondo Finance represents a pioneering venture in the realm of cryptocurrency and decentralized finance. At its core, Ondo is dedicated to democratizing access to institutional-grade financial products and services through the innovative use of blockchain technology. This mission is rooted in the belief that blockchain can not only enhance the infrastructure of financial products and services but also broaden their accessibility to a wider audience. The key to achieving this lies in integrating the best practices from traditional finance, which includes a strong emphasis on investor protections, transparency in reporting, adherence to legal and regulatory compliance, intelligent product structuring, and superior client service.
The structure of Ondo Finance is split into two primary arms: the asset management arm and the technology arm. The asset management arm is responsible for creating and overseeing tokenized financial products. These products are intricately designed to embody the characteristics of traditional financial instruments while leveraging the benefits of blockchain technology. On the other hand, the technology arm of Ondo is focused on developing decentralized finance protocols, which are integral to the functioning and scalability of Ondo’s financial offerings.
Ondo Finance has introduced a range of products that are easily accessible via their website. Each product is detailed comprehensively, covering aspects such as the underlying assets, operational mechanisms, expected yields, risks involved, and eligibility criteria. A notable example is the USDY (US Dollar Yield Token), a unique offering in Ondo's portfolio. USDY is essentially a tokenized note, secured by short-term US Treasuries and bank demand deposits, aimed at providing non-US individual and institutional investors with a combination of stablecoin accessibility and high-quality US dollar-denominated yield.
A distinctive aspect of Ondo's approach lies in its protocol development. The protocols, once established, are designed to operate independently of Ondo. This independence is reflected in their governance and web interfaces, which are managed by separate entities not controlled by Ondo. This separation underscores Ondo’s commitment to creating decentralized and autonomous financial ecosystems.
In the volatile realm of cryptocurrency, trust and security are paramount. Ondo addresses these concerns by collaborating with established, reputable partners in various operational aspects. For instance, the OUSG fund, managed in partnership with BlackRock and involving entities like BNY Mellon, Citi, JP Morgan, and State Street, exemplifies Ondo’s commitment to quality and security. Additionally, the use of Coinbase for crypto asset custody further reinforces this commitment.
Ondo sets high standards for transparency and disclosure, striving to meet or exceed those in traditional finance. This is evident in their detailed reporting on product and protocol details, audit status of code, and regular financial and information security audits. Ondo’s conservative approach towards legal and regulatory compliance, involving consultations with multiple experts, reflects its commitment to risk management and adherence to regulatory norms.
USDY Explainer and Overview of Ondo?
USDY is a standout product in Ondo’s suite, offering a blend of stablecoin accessibility and yield generation. Its operation involves a meticulous process, including onboarding through KYC, depositing funds, cohort assignment, certificate generation, and token minting. The redemption process is equally structured, ensuring compliance with US laws and regulations. Notably, USDY distinguishes itself from traditional stablecoins in terms of bankruptcy-remoteness, yield, asset security, regulatory status, and third-party oversight.
Comparatively, USDY differs from other Ondo products like OUSG and OMMF in terms of intended audience, use cases, and structural nuances. While OUSG and OMMF cater to a more institutional audience with specific geographic and accreditation requirements, USDY is more accessible and offers different return and risk profiles.
Cash management, in the context of organizations overseeing substantial capital, is a critical function that balances the need for stability and liquidity against the erosive effects of inflation on idle capital. This practice is especially pertinent in the crypto-centric world, where market volatility is a constant concern. The essence of cash management lies in optimizing the use of financial resources to maximize returns while meticulously managing risks. This concept is fundamental for mature organizations, but surprisingly, many in the crypto domain lack comprehensive knowledge about it. Given the current market conditions, understanding and implementing effective cash management strategies is more crucial than ever.
This initial step involves developing a conservative estimate of expected income and expenses over an 18-24 month period, with an emphasis on cash rather than accrual accounting. This forecast serves as the foundation for all subsequent cash management decisions. Stress-testing the forecasts under various scenarios (such as revenue drops or unexpected expenses) is essential. Converting all figures into a single base currency simplifies comparison and analysis.
Once the cash flow forecast is established, the next step involves planning liquidity management. This could mean cutting costs or seeking external financing if a cash shortfall is anticipated, or investing excess cash if a surplus is forecasted. Investments should prioritize capital preservation, liquidity, and yield, in that order. For instance, stablecoins offer liquidity and capital preservation but low yield, whereas short-term US Treasury bonds offer higher yields but are less liquid and carry more risk.
Continual monitoring and updating of cash flow forecasts and investment allocations are crucial to respond to changing financial conditions effectively. Cash management, in the context of organizations overseeing substantial capital, is a critical function that balances the need for stability and liquidity against the erosive effects of inflation on idle capital. This practice is especially pertinent in the crypto-centric world, where market volatility is a constant concern. The essence of cash management lies in optimizing the use of financial resources to maximize returns while meticulously managing risks. This concept is fundamental for mature organizations, but surprisingly, many in the crypto domain lack comprehensive knowledge about it. Given the current market conditions, understanding and implementing effective cash management strategies is more crucial than ever.
More on Ondo Processes
In traditional finance, there are several high-quality investment options available, such as cash, money market accounts, sweep accounts, and short-term US Treasuries, based on the time horizon for capital needs. In contrast, Ondo Finance offers unique solutions for on-chain finance, such as OUSG and OMMF, which invest in bond ETFs and Money Market Funds managed by top asset managers. These funds provide a blend of liquidity, capital preservation, and yield suitable for different investment horizons in the crypto domain.
The onboarding process for Ondo I LP, whether for individuals or legal entities, involves a straightforward yet thorough KYC (Know Your Customer) procedure. This includes verifying identity and eligibility, reviewing financial and legal documentation, and ensuring compliance with anti-money laundering and sanctions regulations. Ondo's commitment to legal and regulatory compliance is evident in its diligent onboarding process, which is designed to safeguard both the investor and the organization.
To invest in Ondo I LP shares, one must fulfill the criteria of being both an accredited investor and a qualified purchaser. This involves meeting specific financial thresholds or holding certain designations or statuses. For example, an individual might need a net worth exceeding $1,000,000 or an annual income above $200,000 to qualify as an accredited investor. The criteria for a qualified purchaser are more stringent, often involving higher financial thresholds or professional expertise.
Ondo’s Mission and more on RWAs
Ondo Finance is an organization founded on the conviction that the worlds of traditional and decentralized finance will increasingly converge, with public blockchain technology playing a central role. This belief drives their mission to create and offer institutional-grade products and services that embody security, transparency, compliance, thoughtful structuring, and exceptional customer experience. The aim is not just to participate in the emerging value of this convergence but to be a leader in capturing and shaping it.
Recognizing the dynamic nature of macroeconomic conditions, the competitive landscape, legal and regulatory environments, and technological advancements, Ondo Finance emphasizes the need for agility and innovation. The company's success hinges on its ability to continuously adapt and improve, maintaining a balance between high-quality development and responsiveness to market changes.
Ondo Finance perceives the current state of the financial markets as ripe for transformation. Traditional financial markets, despite their innovation over the years, face limitations in terms of accessibility and interoperability. The advent of public blockchains and decentralized finance offers solutions to these challenges, improving market transparency and accessibility. DeFi also faces its own set of challenges, such as its limited connection to the real economy and reliance on stablecoins like Tether (USDT). Ondo Finance sees an immense opportunity in bridging these gaps, particularly through the tokenization of real-world assets.
As of early 2024, Ondo has developed four primary products, positioning itself as a leader in the RWA space. These products include OUSG (a tokenized wrapper of a BlackRock short-term US Treasuries ETF), OMMF (a tokenized BlackRock money market fund), USDY (a yield-bearing alternative to traditional stablecoins), and the Flux Finance protocol (supporting tokenized securities collateral). These products are meticulously designed to ensure compliance, transparency, and investor protection, and have already seen substantial adoption and success. Here’s an example of what the OUSG ETF is composed of:
USDY, as an example of Ondo's products, showcases the company's commitment to transparency, cost-effectiveness, and compliance. It features daily independent verification by Ankura Trust, competitive yield to holders, and stringent KYC/AML checks. Furthermore, USDY is structured to maximize bankruptcy remoteness and provides robust investor protections, making it a superior alternative to traditional stablecoins.
Beyond direct tokenization, Ondo develops protocols to enhance the utility of these tokens, like the Flux Finance protocol and the Ondo Bridge. These innovations facilitate efficient treasury repo markets and cross-chain transfers, ensuring security and scalability for RWAs across different blockchain networks.
Looking ahead, Ondo Finance envisions an expansive role in the financial industry. The Ondo Ecosystem, a collaborative network including Flux Finance, Ondo DAO, Ondo Foundation, and partnerships with blockchain platforms like Solana and Polygon, is central to this vision. The ecosystem leverages the synergies among its members to drive the utility and distribution of tokenized products, create efficient cross-chain liquidity, and enhance the decentralized finance landscape.
Ondo Finance's roadmap for the coming years is structured into three strategic phases:
Phase 1 - Drive Use of Tokenized Cash Equivalents: Focus on driving adoption, integrations, and liquidity for products like USDY, OUSG, and OMMF, including partnerships with various blockchains and enhancing tools for cross-chain transfers and conversions.
Phase 2 - Expand into Other Public Securities: Introduce new initiatives to tackle the tokenization of publicly traded securities, aiming to overcome challenges like liquidity and infrastructure-layer issues in tokenized securities.
Phase 3 - RWAs & Beyond: While details of this phase are under wraps, Ondo Finance plans to extend its innovation to other players and functions in the traditional financial system, leveraging both centralized and decentralized mechanisms to bring the benefits of blockchain to a broader range of financial services.
Ondo Finance is committed to its mission of making institutional-grade financial products accessible to all. Through its innovative products, collaborative ecosystem, and strategic roadmap, the company aims to transform the financial industry by integrating the best of traditional finance with the advantages of decentralized finance. As the company advances, it seeks to bring a more open, inclusive, and efficient financial system to fruition, leveraging public blockchains to realize this vision.
Brief Overview of Flux Finance
Flux Finance, developed by the Ondo Finance team, represents a significant advancement in decentralized lending protocols. A fork of the renowned Compound V2, Flux Finance introduces additional functionalities, allowing it to support both permissionless tokens like USDC and permissioned tokens such as OUSG (Ondo Short-Term US Government Bond Fund). This unique capability means that while a user can lend USDC without restrictions, borrowing against assets like OUSG as collateral would require adherence to specific permissions, ensuring regulatory compliance and security.
Flux operates on a peer-to-pool (p2pool) model, similar to Compound, enabling users to lend and borrow in an overcollateralized framework. This system is beneficial for lenders, who can earn interest on stablecoins by supplying them to the protocol. Meanwhile, borrowers have the option to borrow stablecoins using their deposited collateral, under the condition that they adhere to the particular asset's permissions. Governed by the Ondo DAO, Flux Finance's governance model ensures decentralized decision-making and alignment with the broader interests of its community.
In Flux Finance, depositing assets like USDC or OUSG results in the minting of fTokens, ERC-20 tokens representing the user's balance in the protocol. These tokens not only enable users to earn interest on their deposits but also allow borrowers to use them as collateral for borrowing other assets. The design of fTokens, inspired by Compound V2's cTokens, incorporates additional functionalities to support permissioned assets and manage the interest accrual process efficiently. Importantly, while fTokens are generally transferable, they respect the transfer restrictions of the underlying permissioned assets and maintain the protocol's integrity and compliance.
Flux Finance's lending mechanism allows users to supply assets to a market, collectively earning interest for the assets in the pool. The protocol then allocates these assets to borrowers, with the interest rates fluctuating based on market utilization. On the borrowing side, Flux operates as an overcollateralized lending platform, where borrowers must provide collateral exceeding their debt value. This model helps maintain a balance between supply and demand for each asset and ensures the protocol's stability and liquidity.
Despite its robust structure, Flux Finance accounts for the possibility of liquidations in extreme market conditions. The protocol is designed to manage such scenarios autonomously, with third-party liquidators incentivized to maintain the system's equilibrium by buying collateral at a discount in case of liquidations. Such instances are expected to be rare, given the stable nature of the assets supported by Flux.
Recent Developments and Next Steps
With that out of the way, we can explore some of the recent announcements from Ondo and get a look at what they’ve been busy building.
USDY and Solana
Ondo Finance's recent launch of USDY on the Solana blockchain marks a significant milestone in the evolution of stablecoins. This initiative allows users within the Solana ecosystem to seamlessly access USDY, either by onboarding through Ondo or via various decentralized applications. The introduction of USDY on Solana is a collaborative triumph, made possible through partnerships with key players in the ecosystem like Jupiter Exchange, Raydium Protocol, Orca, and others. These alliances are instrumental in integrating USDY into the Solana network and pioneering sophisticated yield farming methods.
USDY offers a compelling 5.2% APY, primarily backed by US Treasury Bills and Bank Deposits, providing users with a stablecoin's utility and an attractive yield. To acquire USDY on Solana, users can visit any launch partner platform, where enhanced liquidity is anticipated in the coming weeks. Platforms such as Jupiter Exchange, Orca, and Raydium Protocol, among others, facilitate easy exchange and liquidity provision for USDY. Additionally, cross-chain swaps via deBridge Finance enable the seamless conversion of tokens from EVM chains to USDY on Solana.
Once acquired, USDY holders can employ their tokens across the Solana ecosystem, benefiting from the native 5.2% APY yield and participating in dynamic vaults provided by partners like Meteora and Kamino Finance. These partnerships promise to enhance USDY's functionality, including options for leveraging and strategic liquidity deployment.
Two crucial elements that bolster USDY's integration into the Solana ecosystem are the oracle price feeds provided by Switchboard and the use of multi-sigs via Squads for managing USDY's minting and freezing. Switchboard's dual price feeds ensure robust use cases, enabling USDY to be utilized as collateral based on both primary and secondary market prices. The multisig arrangement through Squads reinforces the security and governance of USDY within the Solana blockchain.
Ondo and Injective
Injective, a blockchain designed for decentralized financial applications, has embarked on a major collaboration with Ondo Finance. This partnership marks a significant advancement in the realm of decentralized finance by introducing the ability for users to access US Treasuries-backed yield through the integration of Ondo’s USDY token. This integration is a game-changer, bridging the gap between traditional financial assets and the DeFi ecosystem, and making these assets accessible across Injective's native dApps and the broader cosmos ecosystem.
Eric Chen, co-founder and CEO of Injective Labs, has expressed great enthusiasm about this collaboration. He recognizes Ondo's impactful role in transforming the real-world asset market and highlights the unprecedented opportunity this collaboration offers. For the first time, users will have direct access to tokenized treasuries across Injective’s platform. This integration is more than just a technical achievement; it's a significant step towards merging the traditional finance world with blockchain technology, aligning with Injective’s vision of a unified financial ecosystem.
The collaboration allows users various methods to engage with USDY. They can bridge the token from the Ethereum Mainnet to Injective via the Injective Hub or acquire it through numerous dApps developed on Injective, such as Helix. This offers users in the Cosmos ecosystem an opportunity to earn non-speculative yield backed by the structural and operational integrity of USDY. It’s an attractive proposition for those seeking to store dollar-denominated value while enjoying the benefits of a yield-bearing digital asset.
USDY stands as the world’s first tokenized note secured by a bankruptcy-remote portfolio of US Treasuries and bank deposits. Designed for non-US individual and institutional investors, it combines the stability of stablecoins with high-quality, US dollar-denominated yield. Key features include global accessibility, yield-bearing nature, daily liquidity, high-quality collateral, compliance with regulations, and bankruptcy remoteness. More information about this strategic collaboration can be found on Ondo's website.
The Ondo Bridge
Ondo Finance is proud to announce the launch of Ondo Bridge, a cutting-edge solution for seamlessly transferring Ondo tokens across various blockchains. This initiative, in collaboration with Axelar, integrates advanced multi-chain communication technologies with a unique Ondo risk management layer. The bridge facilitates the efficient and secure transfer of assets, enhancing the versatility and utility of Ondo's investment products for a broader range of investors.
A key focus of the Ondo Bridge is facilitating the transfer of USDY, Ondo's tokenized note backed by short-term US Treasuries, between Ethereum and Mantle networks. USDY offers the stability and functionality similar to stablecoins, along with an attractive variable yield currently at 5.1% APY. The bridge's launch marks a significant milestone in making this innovative financial product more accessible and liquid across multiple blockchain ecosystems.
Ondo Bridge's architecture is a testament to technological sophistication and rigorous security measures. It employs a dual-layered approach: the foundational layer powered by Axelar's decentralized cross-chain communication and an additional security layer implemented by Ondo. This structure ensures robust risk management, with the number of validations for a transfer increasing with the transaction size, providing an adaptable and secure bridge for transfers of varying magnitudes.
Using Ondo Bridge is designed to be user-friendly and straightforward. The interface, accessible on both desktop and mobile, allows users to easily connect their wallets, select transfer parameters, and initiate token transfers with clear visibility on cross-chain fees. The bridge supports permissionless tokens and smart contracts, ensuring a wide range of assets can be transferred smoothly. Furthermore, bridge aggregators and cross-chain swap platforms can effortlessly integrate Ondo Bridge into their services, expanding its reach and functionality within the decentralized finance ecosystem.
Ondo and Pendle
Ondo recently announced its integration with Pendle Finance. The collaboration between Ondo Finance and Pendle Finance marks a significant advancement in the decentralized finance space. This partnership aligns Ondo's expertise in tokenized cash equivalents with Pendle's innovative approach to yield management and trading. Pendle Finance specializes in permissionless yield-trading protocols, enabling users to maximize and manage their yield exposures effectively. The integration with Ondo's tokenized products within Pendle's ecosystem is poised to enhance the composability and utility of these financial instruments.
Pendle's core functionality revolves around yield tokenization, where yield-bearing tokens are wrapped into standardized yield tokens and split into principal (PT) and yield (YT) components. This process allows users to actively trade these components based on their yield management strategies. For instance, users can opt for fixed yield strategies, long yield positions, or even increase their yield without additional risk by providing liquidity. Pendle's platform, therefore, offers a dynamic environment for yield optimization, catering to various market conditions and user preferences.
Integrating Ondo's tokenized cash equivalents, such as USDY, into Pendle's growing ecosystem brings several benefits. First, it allows users on Pendle to access stable, yield-bearing assets backed by real-world securities like US Treasuries. This collaboration means that Ondo's products can be utilized in Pendle's yield management strategies, providing users with more stable and predictable returns. The partnership effectively bridges the gap between traditional financial assets and DeFi, offering DeFi participants a more diverse range of investment options.
The partnership between Ondo and Pendle is a forward-thinking move with significant potential for mutual growth. For Ondo, this collaboration extends the reach and application of its products within the DeFi space, potentially increasing adoption and liquidity. For Pendle, access to Ondo's stable and reliable financial instruments enhances its platform's appeal to users seeking yield opportunities with a traditional finance flavor. Looking ahead, this partnership is likely to play a pivotal role in shaping how DeFi participants engage with yield-bearing strategies, especially in an environment where traditional and decentralized finance continue to converge.
Disclaimer: This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.