What is Ondo Finance (ONDO)? Bridging TradFi to DeFi

Ondo Finance is a decentralized finance (DeFi) platform that’s designed to bridge the gap between traditional finance (TradFi) and DeFi through the tokenization of real-world assets (RWA). Ondo isn't a single platform. Instead, it's developed a range of products, protocols, and services aimed at offering crypto traders more avenues to trade.

For example, Ondo Finance has brought institutional-grade assets to the blockchain. This includes products such as the interest-bearing stablecoin USDY, and OUSG, a tokenized exchange-traded fund (ETF) for short term U.S. treasury yields.

Read on to learn more about Ondo Finance and the various products under its umbrella.

What is Ondo Finance?

Ondo Finance is a decentralized platform on the Ethereum blockchain that gives traders exposure to a range of products typically only seen in TradFi. Its goal is to make institutional-grade financial products available to everyone.

The two main products from Ondo Finance are USDY and OUSG. USDY offers U.S. dollar yields, while OUSG provides exposure to U.S. treasuries via an ETF. These products have also given rise to new services such as Flux Finance — launched by Ondo Finance — where users can lend and borrow stablecoins against tokenized U.S. treasuries.

Since Ondo Finance deals with highly regulated assets such as U.S. treasuries, the company itself must meet robust compliance requirements. Some products require the strict screening of prospective traders, including diligent know your customer procedures. Other products require traders to be registered as accredited investors in the U.S. before they can access them.

Ondo Finance is an early player in the RWA space, generating yield through regulated assets. The entity saw significant growth during the first half of 2024 as many RWA projects increased in value and adoption. While various platforms offer potentially high yields, many consider Ondo Finance to be among the lowest-risk yield-generating options.

History of Ondo Finance

Ondo Finance was founded by Nathan Allman and Pinku Suran in 2021 with a goal to make institutional-grade financial products and services available to more people. Both Allman and Suran previously worked at Goldman Sachs, with Allman a member of the digital assets team and Suran the VP of a dedicated tech team, leading blockchain development efforts.

Ondo Finance raised $20 million through a token sale in 2022. During the same period, the entity also raised an additional $20 million in a Series A funding round led by Coinbase Ventures, Tiger Global, and other major investors.

The protocol went live on the same day it was announced in 2021. However, Ondo Finance was very different back then, offering vaults with liquidity. The vaults were later suspended to create Ondo Finance V2, which introduced the new products we have today.

How does Ondo Finance work?

Ondo Finance has successfully tokenized various real-world products, such as U.S. treasuries. This allows TradFi products to benefit from blockchain technology, offering fast settlement and better liquidity.

Let’s look at the various products offered by Ondo Finance to understand how it works.

USDY: U.S. Dollar Yield

U.S. Dollar Yield (USDY) is a token backed by short-term U.S. treasuries and bank demand deposits. Usually, these assets are only available to traders in the U.S.. However, through USDT, almost any trader and institution worldwide can gain exposure to them. Better still, USDY generates a safer stablecoin yield, which is currently at 5.2%.

USDY was issued by Ondo USDY LLC in August 2023. It's a company set up specifically for this purpose, with a board and an independent director. USDY is also over-collateralized by 3% to protect against short-term fluctuations in U.S. treasury prices. Ankura Trust acts as an independent verification agent to help preserve the safety of the collateral. Ankura Trust also has the authority to seize the collateral and repay USDY holders if Ondo Finance were to cease operations.

USDY has a strict KYC process users must complete. Users must also confirm the wallet addresses they intend to purchase USDY with, and only use approved addresses.

Here’s how you can purchase USDY:

1. After you’re verified, you can deposit your funds to Ondo Finance. You can fund your account using USDT and USDC, or through a USD bank wire transfer if the value is more than $100K.

2. You’re assigned a date when the tokens can be issued. It usually takes about 40 to 50 days for the tokens to be issued.

3. Meanwhile, token certificates are issued as soon as the funds are deposited. These aren't tokens, and they can’t be traded. However, the token certificates allow you to start gaining interest while you wait for your tokens to arrive.

4. The final step is token minting and claiming. You’ll receive the USDY tokens in your designated wallet.

Once you have the tokens in your wallet, you can use them however you want. They can be sold, transferred, or used to take out loans for other DeFi activities, all while your USDY accumulates interest.

OUSG: U.S. treasuries

The second major product Ondo Finance offers is OUSG (Ondo short-term U.S. treasuries). This product provides tokenized short-term exposure to U.S. treasuries. Treasuries are securities issued by the U.S. government to raise money. They’re considered a lower-risk option for traders due to the market’s faith in U.S. monetary policy.

OUSG incorporates Blackrock’s new tokenized fund, BUIDL — a tokenized fund on the Ethereum blockchain. BUIDL invests 100% of its assets into cash, U.S. treasuries, and repurchase agreements. Ondo moved the entire total value locked (TVL) funds of OUSG into BUIDL, bringing key advantages to users:

• Traditionally, U.S. treasury bonds can only be purchased and traded during limited trading hours on business days. Through tokenization, a limited amount of OUSG can be minted and redeemed instantly 24/7. Ondo Finance is working to increase the limits of instant settlement with better liquidity.

• OUSG provides instant settlement for both buying and redemption.

• Two versions of the product are available: OUSG and rOUSG. OUSG is the accumulation version, where the yield is earned with an increasing redemption price. rOUSG on the other hand is a rebasing type token, which is distributed daily as rOUSG tokens. The tokens can be claimed without redeeming the entire position, and users can choose the type of ONSG token they want.

Trading OUSG has strict KYC checks and you must be a U.S.-accredited investor to access the product. The common criteria is a net worth of over $5 million, or $25 million in assets. It’s important to note that this is a restriction placed by regulators in the U.S. for anyone wanting to trade such assets.

Flux Finance

Flux Finance was launched in February 2023 as a side project by Ondo Finance. It's a fork of Compound v2 and enables permissionless lending and borrowing of stablecoins like USDT and DAI. Flux Finance also supports OUSG, making it an on-chain treasury repo marketplace.

Traders can buy OUSG and lend it on Flux Finance to generate additional yield. They can also borrow stablecoins such as USDT against OUSG to trade and perform other DeFi activities.

After being developed and rolled out by Ondo Finance, Flux was sold to Neptune Foundation. The sale allowed Ondo Finance to focus more on asset tokenization and its RWA products.

Ondo token bridge and converter

The token bridge and converter are tools created by Ondo Finance to make using USDY and OUSDG convenient.

Ondo token bridge: Ondo Finance partnered with Axelar and Layer Zero to enable cross-chain bridging of RWA tokens. While bridging, tokens aren't locked in the source chain. Instead, they’re burnt in the source chain, and new tokens are minted in the destination chain. This prevents the loss of funds in bridge hacks. For now, the token bridge only supports the bridging of USDY between Ethereum and Mantle.

Ondo token converter: Two versions of OUSG are offered: OUSG and rOUSG. Using the Ondo token converter, you can swap between the two product versions whenever you want, without any slippage.

Tokenomics and distribution of ONDO

ONDO is the native token of Ondo Finance, with a total supply of 10 billion.

ONDO has been distributed in the following way:

• 5.21 billion for ecosystem growth.

• 3.3 billion for protocol development.

• 1.29 billion for private sales.

• 198 million for community access sale.

Ondo Finance sold 400 million tokens in May 2022, raising $20 million. Most of the tokens are locked up with various vesting periods. At the time of writing, the circulating supply of ONDO is around 1.389 billion.

ONDO is a governance token, allowing holders to vote on proposals, token distribution, protocol changes, asset treasury management, and other factors influencing the direction of Ondo Finance.

Benefits of Ondo Finance

• By supporting the tokenization of RWAs such as U.S. treasuries, Ondo Finance bridges the gap between TradFi and DeFi. TradFi traders can take advantage of faster blockchain settlement, while DeFi traders gain exposure to TradFi assets just as they would a cryptocurrency.

• Access to institutional products in partnership with leading fund manager Blackrock. Blackrock’s backing provides greater trust and security for users of Ondo Finance products.

• Ondo Finance prioritizes strict regulatory compliance and transparency, making their products safer for all users.

• Ondo Finance uses USDY, which is considered one of the lowest-risk stablecoin yields out there.

Limitations of Ondo Finance

• Considered by some to have a limited offering. Two major products are available as of mid-2024.

• Although Ondo Finance is a DeFi project, users must complete a strict KYC process before they can gain access, which may present a barrier to adoption.

• The OUSG product is only available to accredited investors, placing it out of reach for many traders.

• Most of ONDO’s supply is locked up with various vesting periods. However, the token’s supply is still very concentrated, and a significant portion of the asset is held by the team and investors.

The final word

Ondo Finance is helping to pioneer a new future where the benefits of DeFi can reach over to the TradFi space. The project has succeeded in increasing accessibility to TradFi assets through the tokenization of RWAs, while also enabling instant settlement at any time and providing safer yields for TradFi assets.

However, it's wise to keep in mind that this is still a new industry. Traditional finance has been around for decades, and often can't match the rapid pace of adoption experienced in the crypto space. Regardless, the progress made by Ondo Finance demonstrates there's an appetite for change

There’s much interest today around the potential for tokenization of RWAs, particularly when we consider the relative slow pace of evolution often seen from TradFi entities. Projects like Ondo Finance could be a catalyst for faster change in the traditional space as the benefits of decentralization become clear.