Ondo Finance: Successful Transition to RWA Track,Token Utility Remains Unclear

RWA (Real World Assets) are touted as the key to unlocking DeFi 2.0, but they seem ‘distant’ for most ordinary investors. After all, purchasing RWA products requires KYC and meets certain asset conditions, which are too high for most retail investors.

How to seize the investment opportunity in the RWA track before it fully explodes and get a piece of the “pie”? One way is to buy tokens of RWA projects; the other is to purchase RWA products with lower entry barriers.

The first method requires investors to understand the project’s fundamentals, product design, and risk control. Most RWA products need an SPV (Special Purpose Vehicle) for fund control to achieve risk isolation, which involves ensuring that the entity complies with local laws to avoid unknown project risks. Buying tokens is a major investment method for most crypto investors and, relatively speaking, offers the highest profits.

The second method involves tokenizing real assets, such as the U.S. dollar and U.S. Treasury bonds, for RWA products. If investors meet the investment criteria, the returns are relatively stable and the risk is lower. However, there are currently few RWA products available for participation, and the KYC and asset standards are mostly unsuitable for crypto investors.

Combining the above two situations, Odaily Planet Daily has identified Ondo Finance as a suitable candidate in the RWA track. This article will introduce Ondo Finance’s history, products, and token situation, hoping to provide readers with a suitable RWA investment target.

After one year, Ondo Finance has successfully transitioned

Ondo Finance was established in 2021, initially focusing on the Liquidity-as-a-Service (LaaS) track. However, as the market entered a bear phase, with a decrease in DeFi market capitalization and on-chain liquidity, the project encountered development bottlenecks. Consequently, in January 2023, it transitioned to the Real-World Assets (RWA) track, a process taking one year. As of now, according to Defillama data, Ondo Finance’s Total Value Locked (TVL) ranks third in the RWA track, with a TVL of $183 million.

Ondo Finance’s third-place ranking in TVL can be attributed to its product design. RWA products fundamentally do not require special design; they involve tokenizing subjects from traditional finance, necessitating a closer and more secure connection between the real and virtual worlds. This is the challenge in RWA product design. Ensuring the safety and standardization of the process for investors to buy or redeem RWA assets is the goal of product design. Ondo Finance has currently launched three RWA products: OUSG, USDY, and OMMF.

OUSG (U.S. Treasury Bond)

OUSG is the main contributor to the TVL of Ondo Finance, with a TVL of $117 million. The underlying assets of OUSG primarily come from BlackRock’s short-term U.S. Treasury ETF, iShares Short Treasury Bond ETF (NASDAQ code: SHV), with a small portion in USDC and USD for liquidity. The SHV ETF, established in 2007, invests in short-term Treasury bonds with investment periods of less than one year, tracking the ICE U.S. Short Treasury Bond Index. According to Yahoo data, the current opening price of the SHV ETF is $110.42 USD, with total assets of about $18.4 billion and an annual return rate of 5.17%, with a Standard & Poor’s rating of AA.

The current price of OUSG is $104.66 USD, with an annual yield of 4.69%. It supports purchases on the Ethereum, Polygon, and Solana blockchains. Notably, Ondo I LP acts as the fund manager for investors’ purchases of SHV ETF shares. Ondo I LP, as the SPV for OUSG, is a U.S. entity company, which is beneficial for investors’ risk isolation, helping users redeem shares in emergencies (such as project bankruptcy).

Regarding fees, OUSG charges a 0.15% fund management fee, up to 0.15% for payments to fund managers, auditors, and other service providers, and an ETF management fee of 0.15% charged by the ETF issuer, BlackRock.

However, purchasing OUSG has high requirements, with KYC verification as a prerequisite, and investors must meet the “Qualified Purchasers” criteria, requiring at least a $5 million investment portfolio, and a minimum purchase amount of $100,000 USDT for OUSG.

Compared to the severe price fluctuations during the bear market phase, investing in RWA products like short-term U.S. Treasury Bond ETFs with an annual yield of around 5% is a suitable target. Thus, in the past year, OUSG’s TVL size has grown rapidly, becoming the main product of Ondo Finance.

USDY (U.S. Dollar Yield)

USDY (U.S. Dollar Yield) is a tokenized note backed by short-term U.S. Treasuries and bank demand deposits. It targets general investors, requiring a minimum purchase amount of $500, and allows for on-chain minting and transfer 40-50 days after purchase. Currently, USDY is priced at 1.02 USD, with an annual yield of 5.10%, and a Total Value Locked (TVL) of 66.2 million USD.

USDY, unlike the commonly used stablecoins in the crypto world such as USDT and USDC, functions more like a stablecoin with interest. It could be categorized under the yield-generating stablecoin sector. However, it distinguishes itself from other yield-generating stablecoins by being backed by traditional banking and adhering to U.S. regulatory standards, as disclosed on its official website.

The structural design and risk management of USDY are crucial since it can be minted and circulated on the blockchain after a certain period, acting as a stablecoin. The key aspects of USDY’s design and regulatory approach include:

Structural Design: USDY is issued by Ondo USDY LLC as a Special Purpose Vehicle (SPV). Its assets are managed separately from Ondo Finance, ensuring independent books and accounts. This structure isolates the collateral backing USDY from potential financial risks associated with Ondo Finance.

Overcollateralization: As a risk mitigation measure, USDY utilizes overcollateralization. A minimum first loss position of 3% is reserved to buffer against short-term fluctuations in the price of U.S. Treasuries. Currently, USDY is overcollateralized with a first loss position of 4.64%.

First Priority: USDY investors have “first priority” on the underlying bank deposits and Treasuries. Ankura Trust acts as the collateral agent, overseeing the security interests of USDY holders. Control agreements established with banks and custodians holding the assets grant Ankura Trust the legal rights and obligations to control and repay Token holders in specific default situations or through accelerated repayment initiated by USDY holder votes.

Daily Transparency Reports: Ankura Trust, serving as the verification agency, provides daily transparency reports detailing reserve statuses. These reports ensure transparency and accountability by detailing asset holdings and are independently verified for additional reliability.

Asset Allocation: USDY adopts a conservative investment strategy to maintain the safety and liquidity of funds, targeting an asset allocation of 65% in bank deposits and 35% in short-term U.S. Treasuries. This conservative approach focuses on safer and more liquid instruments, minimizing risk exposure.

Asset Custody: The U.S. Treasuries backing USDY are held in “cash custody” accounts at Morgan Stanley and StoneX, ensuring asset safety. These assets are not re-pledged. Ankura Trust verifies the existence of these deposits daily.

By implementing the aforementioned measures, USDY isolates assets from crypto projects, reducing project “rug pull” risks; employs overcollateralization to buffer against interest rate risks of Treasuries; appoints Ankura Trust as the regulatory body to ensure the safety of investors’ funds and returns; and secures collateral in traditional bank cash custody accounts to ensure funds are not re-utilized.

Compared to other Real World Asset (RWA) products, USDY has a relatively low investment threshold and offers purchase options both on-chain with USDC and through wire transfer.

USDY is subject to certain legal constraints and offers a yield advantage over other stablecoins. However, its utilization rate is currently relatively low.

OMMF (U.S. Government Money Market Fund)

OMMF is a Real-World Asset (RWA) token based on the U.S. Government Money Market Fund (MMF), which has not yet been officially released. Additional information will be provided following its release.

Flux Finance (Lending Platform)

In February 2023, Ondo Finance launched the Flux Finance lending platform. Built on the Compound V2 lending protocol, it boasts a fund utilization rate of over 85% according to official website disclosures.

Flux Finance, as one of the three channels provided by the project for redeeming RWA products, offers a new liquidity solution to the time cost issues associated with official channel redemptions. Official channel redemptions cannot be directly processed on-chain and require waiting for the RWA product’s Special Purpose Vehicle (SPV) to sell the product before redemption, incurring a time cost of 1-5 days.

Currently, Flux Finance supports the lending of OUSG products. As for USDY, it can be transferred on-chain through DEXs after minting.

Betting on the Success of the RWA Track, but the Future Use of Tokens Remains Unclear

Before its transformation, Ondo Finance issued the ONDO token, which was publicly sold on Coinlist. The tokens were subject to a one-year lock-up period and were released monthly thereafter. The tokens could be used for governance voting in Flux Finance.

Following a community vote on-chain, the ONDO token was unlocked for circulation on January 18 this year. Currently, the price of the ONDO token is 0.27 USDT, nearly 2.5 times higher than its price post-unlock.

Concurrently, Coinbase added Ondo Finance (ONDO) to its asset launch roadmap. Coinbase is not only an investor in Ondo Finance but also serves as the exclusive channel for converting USDC to U.S. dollars in RWA products.

However, in the past two days, addresses associated with the Ondo project have transferred ONDO tokens to exchanges multiple times, indicating potential market making or unloading activities. Investors should proceed with caution.

According to official articles, the ONDO token serves as the governance token for Ondo DAO and Flux Finance. Since it is currently unclear whether the ONDO token will be linked to RWA products, it does not rule out the possibility of using the ONDO token as an incentive for RWA products such as USDY in the future. Given that investors and the Coinlist public sale account for only 16% of the total token supply, the allocation of the remaining 84% of tokens has not been clarified.

If the ONDO token can be integrated with RWA products, using Flux Finance as the platform to incentivize the on-chain liquidity of RWA products with the ONDO token would undoubtedly bring RWA products to the attention of the broader crypto investment community.

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