Ondo Finance: Successful Transformation from Liquidity Services to RWA Sector

Ondo Finance was established in 2021, initially focusing on Liquidity services (LaaS). However, as the market entered a bear market phase, the contraction of DeFi market value and on-chain Liquidity led to bottlenecks in project development. To address this challenge, Ondo Finance decisively transformed to enter the RWA( Real World Assets) track in January 2023. After a year of efforts, Ondo Finance has achieved significant results in the RWA field, with its total locked value(TVL) reaching 183 million USD, ranking third in this track.

The success of Ondo Finance is largely attributed to its product design. RWA products essentially tokenize underlying assets in traditional finance, with the key being how to securely and effectively connect the real and virtual worlds. Ondo Finance has currently launched three main RWA products: OUSG, USDY, and OMMF.

OUSG: US Treasury Bond ETF

OUSG is Ondo Finance's flagship product, with a TVL of up to $117 million. The product primarily invests in BlackRock's short-term US Treasury Bond ETF (iShares Short Treasury Bond ETF, ticker SHV), while keeping a small amount of USDC and USD as liquidity reserves.

The SHV ETF was established in 2007 and invests in short-term government bonds with maturities of one year or less, tracking the ICE U.S. Treasury Short Bond Index. Currently, the opening price of the SHV ETF is $110.42, with total assets of approximately $18.4 billion, an annualized return of 5.17%, and a S&P rating of AA.

The current price of OUSG is $104.66, with an annualized yield of 4.69%, supporting purchases on Ethereum, Polygon, and Solana chains. Ondo I LP, as the fund manager, is responsible for managing the SHV ETF shares of OUSG purchased by investors. Ondo I LP is a U.S. entity, which benefits investors through risk isolation and ensures users' redemption rights in extreme situations.

OUSG charges a fund management fee of 0.15%, with up to 0.15% used to pay for services such as fund management and auditing, in addition to a 0.15% ETF management fee charged by the ETF issuer BlackRock.

However, the investment threshold for OUSG is relatively high. In addition to completing KYC verification, investors must also meet the requirements of being a "qualified purchaser", which means holding an investment portfolio of at least $5 million, with a minimum purchase amount of 100,000 USDT.

Nevertheless, during the bear market phase, investing in short-term U.S. Treasury bond ETFs with an annualized return of about 5% is still a relatively suitable choice for RWA products. This also explains the rapid growth of TVL for OUSG in the past year.

USDY: US Dollar Interest Rate Product

USDY is a tokenized note backed by short-term U.S. Treasury bonds and bank demand deposits. Compared to OUSG, USDY is more suitable for ordinary investors, with a minimum purchase amount of $500, and it can be minted and transferred on-chain 40-50 days after purchase. Currently, the price of USDY is $1.02, with an annualized return of 5.10%, and a TVL of $66.2 million.

USDY can be regarded as an interest-bearing stablecoin, belonging to the category of yield-bearing stablecoins. Unlike other yield-bearing stablecoins, the support behind USDY comes from traditional banks, and according to official statements, it complies with U.S. regulatory requirements.

The design focus and risk control measures of USDY include:

1. Structural Design: Issued by Ondo USDY LLC and managed as a special purpose entity (SPV), separate from Ondo Finance assets.

2. Over-collateralization: Using a minimum of 3% first loss position, currently at 4.64%, to mitigate short-term fluctuations in U.S. Treasury prices.

3. First Priority: Investors have priority over the underlying bank deposits and government bonds, with Ankura Trust acting as the collateral agent.

4. Daily Transparency Report: Ankura Trust provides independently verified daily asset holding reports.

5. Asset allocation: The goal is 65% bank deposits and 35% short-term U.S. Treasury bonds.

6. Asset Custody: U.S. Treasury securities are held in cash custody accounts at Morgan Stanley and StoneX, verified daily by Ankura Trust.

USDY has reduced project risks through these measures, ensuring the safety of investors' funds. Compared to other RWA products, USDY has a lower investment threshold, supporting participation not only through on-chain USDC subscriptions but also via wire transfers.

OMMF: U.S. Government Money Market Fund

OMMF is an RWA token based on the US government money market fund (MMF), which has not yet been officially released.

Flux Finance: Lending Platform

In February 2023, Ondo Finance launched the lending protocol Flux Finance built on Compound V2. The platform currently has a capital utilization rate of over 85%, providing an additional liquidity channel for RWA products and addressing the time cost issue of the official redemption channel, which takes 1-5 days. Currently, Flux Finance supports lending for OUSG products.

ONDO Token: Future Uses Still Unclear

Ondo Finance issued the ONDO token before its transformation, which was unlocked for circulation on January 18 of this year after a community vote. Currently, the price of the ONDO token is 0.27 USDT, an increase of nearly 2.5 times since its unlocking. Coinbase has added ONDO to its listing roadmap.

The ONDO token currently serves primarily as the governance token for Ondo DAO and Flux Finance. However, the specific association of the token with RWA products is not yet clear. Considering that the allocated tokens only account for 16% of the total supply, the possibility of using ONDO tokens as incentives for RWA products in the future cannot be ruled out.

If the ONDO token can be integrated with RWA products, using Flux Finance as the platform and serving as an incentive for the on-chain liquidity of RWA products, it may promote the further popularization of RWA products. However, the project team has recently been frequently transferring ONDO tokens to exchanges, and investors should remain cautious.