Ondo Finance is a decentralized finance (DeFi) platform designed to bridge the gap between traditional finance (TradFi) and DeFi through the tokenization of real-world assets (RWA). Rather than a single platform, Ondo has developed a suite of products, protocols, and services to offer cryptocurrency traders more trading opportunities.
For example, Ondo Finance has brought institutional-grade assets onto the blockchain. This includes products like 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 it offers.
Understanding 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.
Ondo Finance's two main products are USDY and OUSG. USDY offers yields in U.S. dollars, while OUSG provides exposure to U.S. Treasury bonds through an ETF. These products have also led to new services like Flux Finance, launched by Ondo Finance, where users can lend and borrow stablecoins against tokenized U.S. Treasury bonds.
Because Ondo Finance deals with highly regulated assets like U.S. Treasury bonds, the company itself must meet robust compliance requirements. Some products require rigorous verification of potential traders, including know-your-customer (KYC) procedures. Others require traders to be registered as accredited investors in the U.S. before they can access them.
Ondo Finance is one of the early participants in the RWA space, which generates yield through regulated assets. The entity experienced significant growth during the first half of 2024, as many RWA projects increased in value and adoption. While several platforms offer potentially high yields, many consider Ondo Finance to be among the options that generate lower-risk returns.
The History of Ondo Finance
Ondo Finance was founded by Nathan Allman and Pinku Suran in 2021 with the goal of making high-level financial products and services available to more people. Both Allman and Suran previously worked at Goldman Sachs, with Allman as a member of the digital assets team and Suran as a vice president of a dedicated technology team that led 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 launched on the same day it was announced in 2021. However, Ondo Finance was very different back then, as it offered liquidity vaults. The vaults were later suspended to create Ondo Finance V2, which introduced the new products we see today.
How Does Ondo Finance Work?
Ondo Finance has successfully tokenized various real-world products, such as U.S. Treasury bonds. This allows TradFi products to benefit from blockchain technology, offering fast settlement and improved liquidity.
Let's look at the different products offered by Ondo Finance to understand how it works.
USDY: U.S. Dollar Yield
U.S. Dollar Yield (USDY) is a cryptocurrency backed by short-term U.S. Treasury bonds and bank demand deposits. Typically, these assets are only available to traders in the U.S. However, through USDY, almost any trader or institution worldwide can gain exposure to them. Even better, USDY generates a safer stablecoin yield, currently at 5.2%.
Ondo USDY LLC issued USDY in August 2023. It is a company created specifically for this purpose, with an independent board and director. USDY is also overcollateralized 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 security of the collateral. Ankura Trust also has the authority to seize the collateral and reimburse USDY holders if Ondo Finance ceases operations.
USDY has a strict identity verification process that users must complete. Users must also confirm the wallet addresses they wish to use to purchase USDY and only use approved addresses.
Here's how you can buy USDY:
- After verification, you can deposit funds into Ondo Finance. You can fund your account with USDT and USDC or via a bank transfer in USD if the amount exceeds $100,000.
- You will be assigned a date when the tokens can be issued. Token issuance typically takes 40 to 50 days.
- Meanwhile, token certificates are issued as soon as funds are deposited. They are not cryptocurrencies and cannot be traded. However, token certificates allow you to start earning interest while waiting for your tokens.
- The final step is minting and claiming the cryptocurrencies. You will receive USDY tokens in your designated wallet.
Once you have the tokens in your wallet, you can use them as you wish. They can be sold, transferred, or used to borrow for other DeFi activities, all while your USDY accumulates interest.
OUSG: U.S. Treasury Bonds
The second major product offered by Ondo Finance is OUSG (Ondo Short-Term U.S. Treasuries). This product provides tokenized short-term exposure to U.S. Treasury bonds. Treasury bonds are securities issued by the U.S. government to raise money. They are 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 in cash, U.S. Treasury bonds, and repurchase agreements. Ondo transferred all total value locked (TVL) funds from OUSG to BUIDL, providing key advantages to users:
- Traditionally, U.S. Treasury bonds can only be bought 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 instant settlement limits with improved liquidity.
- OUSG provides instant settlement for both purchases and redemptions.
- There are two versions of the product available: OUSG and rOUSG. OUSG is the accumulation version, where yield is earned through an increasing redemption price. rOUSG, on the other hand, is a rebase-type token, distributed daily as rOUSG tokens. Tokens can be claimed without redeeming the entire position, and users can choose which type of OUSG token they prefer.
Trading OUSG has strict identity verification controls, and you must be an accredited investor in the U.S. to access the product. The common criterion is a net worth of over $5 million or $25 million in assets. It's important to note that this is a restriction imposed by regulators in the U.S. for anyone wanting to trade such assets.
Flux Finance
Flux Finance was launched in February 2023 as a secondary project of Ondo Finance. It is a fork of Compound v2 and allows permissionless lending and borrowing of stablecoins like USDT and DAI. Flux Finance also supports OUSG, making it an on-chain treasury repo market.
Traders can buy OUSG and lend it on Flux Finance to generate additional yield. They can also borrow stablecoins like USDT against OUSG for trading and other DeFi activities.
After being developed and deployed 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 facilitate the use of USDY and OUSDG.
Ondo Token Bridge: Ondo Finance partnered with Axelar and Layer Zero to enable cross-chain bridging of RWA tokens. During bridging, cryptocurrencies are not locked on the source chain. Instead, they are burned on the source chain and new tokens are minted on the destination chain. This prevents fund loss in bridge hacks. For now, the token bridge only supports bridging USDY between Ethereum and Mantle.
Ondo Token Converter: Two versions of OUSG are offered: OUSG and rOUSG. With the Ondo Token Converter, you can swap between the two versions of the product whenever you want, without any slippage.
ONDO Tokenomics and Distribution
ONDO is the native token of Ondo Finance, with a total supply of 10 billion.
ONDO was distributed as follows:
- 5.21 billion for ecosystem growth.
- 3.3 billion for protocol development.
- 1.29 billion for private sales.
- 198 million for community access sales.
Ondo Finance sold 400 million tokens in May 2022 and raised $20 million. Most tokens are locked 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 RWA, such as U.S. Treasury bonds, Ondo Finance bridges the gap between TradFi and DeFi. TradFi traders can leverage faster blockchain settlement, while DeFi traders gain exposure to TradFi assets in the same way they would with a cryptocurrency.
- Access to institutional products in partnership with leading fund manager BlackRock. BlackRock's backing provides greater confidence and security for users of Ondo Finance's products.
- Ondo Finance prioritizes strict regulatory compliance and transparency, making its products safer for all users.
- Ondo Finance uses USDY, which is considered one of the lower-risk stablecoin yields.
Limitations of Ondo Finance
- Some consider it to have a limited offering. Two main products were available as of mid-2024.
- Although Ondo Finance is a DeFi project, users must complete a strict identity verification process before accessing it, which can present a barrier to adoption.
- The OUSG product is only available to accredited investors, putting it out of reach for many traders.
- Most tokens are locked with various vesting periods. However, the cryptocurrency supply remains highly concentrated, with a significant portion of the asset owned by the team and investors.
Frequently Asked Questions
What is the main goal of Ondo Finance?
Ondo Finance aims to bridge traditional finance (TradFi) and decentralized finance (DeFi) by tokenizing real-world assets like U.S. Treasury bonds. This allows users to access institutional-grade financial products with the benefits of blockchain technology.
How can I buy USDY tokens?
To buy USDY, you must complete a verification process and deposit funds into Ondo Finance. You can use USDT, USDC, or a bank transfer for amounts over $100,000. After deposit, token certificates are issued, and tokens are minted after 40-50 days.
Is Ondo Finance available to non-accredited investors?
While some products like USDY are accessible after verification, others like OUSG require accredited investor status in the U.S. This limits access for many traders due to regulatory requirements.
What makes Ondo Finance different from other RWA projects?
Ondo Finance partners with established institutions like BlackRock and emphasizes compliance and transparency. Its focus on low-risk assets like U.S. Treasuries offers a safer yield compared to higher-risk DeFi options.
Can I use Ondo Finance products for DeFi activities?
Yes, tokens like USDY and OUSG can be used in DeFi protocols for lending, borrowing, or as collateral. For example, Flux Finance allows users to lend OUSG or borrow against it.
What are the risks of investing in Ondo Finance products?
Risks include regulatory changes, asset concentration, and dependency on traditional financial systems. While lower risk than some crypto investments, yields are not guaranteed and market conditions can affect returns.
Final Thoughts
Ondo Finance is helping pioneer a new future where the benefits of DeFi can extend into the TradFi space. The project has successfully increased accessibility to TradFi assets through the tokenization of RWA, while enabling instant settlement at any time and providing safer yields for TradFi assets.
However, it is prudent to note that this is a new industry. Traditional finance has existed for decades and often cannot match the rapid pace of adoption experienced in the cryptocurrency space. Regardless, the progress made by Ondo Finance demonstrates an appetite for change.
There is significant interest today in the tokenization potential of RWA, particularly when considering the relatively slow pace of evolution often seen in TradFi entities. Projects like Ondo Finance could be a catalyst for faster change in the traditional space as the benefits of decentralization become evident.