Ondo Finance has emerged as a significant player in the decentralized finance (DeFi) landscape, initially launching as a protocol providing liquidity-as-a-service (LaaS) on Ethereum. Following the advent of liquidity mining pioneered by Compound in late 2020, the market witnessed a DeFi boom, with numerous protocols leveraging high-yield incentives to attract users. However, as competition intensified, sustaining these attractive annual percentage yields (APY) became challenging. By September 2021, solutions for sustainable liquidity provisioning gained traction, and Ondo Finance positioned itself as a protocol offering short-term, low-cost liquidity to projects.
Amid the prolonged crypto market downturn and declining total value locked (TVL) in DeFi, attention shifted toward real-world assets (RWA). The narrative of bringing off-chain assets on-chain gained momentum, with established protocols like MakerDAO exploring RWA integrations. Ondo Finance pivoted in its v2 upgrade, focusing predominantly on public bond markets. This article delves into Ondo’s latest products—OUSG and OMMF—their mechanisms, economic model, and current ecosystem developments.
Ondo Finance: An Overview
Founded by former Goldman Sachs employees, Ondo Finance secured $4 million in seed funding led by Pantera Capital in August 2021, followed by a $20 million Series A round in April 2022. The project has raised $24 million to date.
The team is led by Pinku Surana, ex-Vice President of Goldman Sachs’ technology team, who spearheaded the firm’s blockchain R&D efforts. The broader team comprises professionals with backgrounds at institutions like Goldman Sachs, Fortress, Bridgewater, and MakerDAO. Ondo operates under a standard fund structure, involving limited and general partners, alongside qualified custodians, fund administrators, and auditors.
Evolution of Products
Ondo launched in August 2021 with its v1 products: Ondo Vault and DAO Vault. The former offered fixed and variable yields to users, while the latter facilitated token liquidity between decentralized autonomous organizations (DAOs). Both focused on capital management. Initially, Ondo Vaults were subscription-based, with monthly openings. After six months, DAO Vaults took precedence, reducing the frequency of Ondo Vault releases.
With DeFi yields compressing in 2022, Ondo phased out its v1 offerings, launching Ondo v2 in January 2023. This iteration introduced tokenized funds (Ondo Funds) and Flux Finance. Ondo Funds enable stablecoin holders to invest in bonds and U.S. Treasuries, receiving tokenized fund shares transferable on-chain. Products include:
- U.S. Government Bond Fund (OUSG)
- Short-Term Investment Grade Bond Fund (OSTB)
- High-Yield Corporate Bond Fund (OHYG)
A management fee of 0.15% per annum applies. In August 2023, Ondo launched USD Yield (USDY), a tokenized note backed by short-term U.S. Treasuries and bank demand deposits. USDY is unavailable to U.S. users and becomes transferable on-chain after 40–50 days.
How Ondo’s Products Work
Ondo’s core offering involves tokenizing fund shares. Users can invest USDC into fund products like OUSG (U.S. Government Bonds) and OMMF (Money Market Funds), as well as USDY. The process unfolds as follows:
- Users deposit USDC into an Ondo fund product, receiving corresponding fund tokens (e.g., OUSG) at the current rate (e.g., 1 OUSG = $102.82).
- Ondo converts USDC to USD via Coinbase, then purchases U.S. Treasury ETFs through broker-dealers and qualified custodians like Clear Street.
- Returns from underlying assets are reinvested, compounding yields automatically.
- Users can redeem USDC by burning fund tokens.
To expand OUSG utility, Ondo developed Flux Finance, a decentralized lending protocol launched on Ethereum in February 2023. Borrowers use OUSG as collateral, while lenders supply stablecoins like USDC to earn yield. Flux Finance’s pool exceeds $60 million, with OUSG contributions around $37 million and outstanding loans at $25 million.
OMMF, backed by money market funds, allows investors to mint and redeem tokens on weekdays, accruing daily interest.
Tokenomics of ONDO
ONDO is the native token of Ondo Finance, with a total supply of 10 billion. In July 2022, the protocol raised $10 million through a token sale on CoinList, representing 2% of the total supply:
- 3 million ONDO sold at $0.03 with a 1-year lockup, followed by 18-month linear vesting.
- 17 million ONDO sold at $0.055 with a 1-year lockup, followed by 6-month linear vesting.
USDY, a yield-bearing note for non-U.S. investors, requires KYC verification. Deposits process in 2–3 days, with yields accruing immediately. After 40–50 days, USDY becomes transferable. It offers ~5% APY, currently priced at $1.0071, with a TVL of $30 million.
OUSG and OMMF represent tokenized exposures to short-term Treasuries and money market funds, respectively. Both are tradable on secondary markets.
Current Ecosystem Status
OUSG supports Ethereum and Polygon, accepting USDC deposits. Since pivoting to tokenized funds in February 2023, Ondo’s TVL has surged to nearly $200 million. OUSG alone attracts ~$170 million in deposits, offering 5.06% APY, with weekly transactions around 2 million.
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Potential Risks in RWA Tokenization
While RWA tokenization holds immense potential, several risks persist:
- Regulatory Uncertainty: Cryptocurrency regulations remain nascent globally. Legal challenges, including anti-money laundering (AML) compliance, could hinder adoption.
- Off-Chain Vulnerabilities: Data manipulation before on-chain recording is possible. Bribery of auditors or KYC providers may occur, undermining trust.
- Lack of Standardization: Absent unified global standards for asset valuation,清算, and credit assessment, protocols face heightened default risks, especially in cross-border scenarios.
Frequently Asked Questions
What is Ondo Finance?
Ondo Finance is a DeFi protocol specializing in tokenizing real-world assets like U.S. Treasuries and money market funds. It enables crypto users to gain exposure to traditional finance yields through products like OUSG and OMMF.
How does OUSG generate yield?
OUSG invests in short-term U.S. government bonds. Returns from these assets are reinvested, compounding yields for token holders. Ondo charges a 0.15% annual management fee.
Who can invest in Ondo’s products?
Most products are accessible globally, though USDY excludes U.S. users and requires KYC. OUSG and OMMF are available to anyone, subject to platform terms.
What is Flux Finance?
Flux is a lending protocol built by Ondo. It lets users borrow against OUSG collateral or lend stablecoins to earn interest, enhancing capital efficiency for token holders.
Are Ondo’s products audited?
Yes, Ondo works with third-party auditors and custodians to ensure asset integrity. However, off-chain processes still involve traditional finance risks.
What makes RWA tokenization innovative?
It bridges crypto and traditional finance, offering stable yields backed by tangible assets. This diversification reduces reliance on volatile crypto-native yields.
Conclusion
Ondo Finance has strategically pivoted to RWA tokenization, offering products like OUSG, OMMF, and USDY backed by U.S. Treasuries and money market funds. With nearly $200 million in deposits and a skilled team, it holds a first-mover advantage in this emerging sector. While regulatory and operational risks remain, Ondo’s approach exemplifies the growing convergence of decentralized and traditional finance.