Ondo Finance: a Brief Research on the Tokenization of Real World Assets in 2024

2024 is the year of institutionalization for crypto, the basement dwelling visionaries that previously dominated cryptoeconomics are now being visited by major asset managers, and the visitors are here to stay.

ondo visual — Ondo visual representation

Introduction to Ondo

Ondo finance kicks off with a simple question, what’s the best, most effective way to tokenize real world assets (RWAs) and who can best help us with that? In short, that means bridging the gap between TradFi and DeFi and getting traditional/institutional investors to enjoy the attractive yield made possible by Defi projects protocols while using assets that they’re comfortable with, if you can’t teach an old dog a new trick, at least give him something shiny to play with.

Sounds ambitious? It is, but it doesn’t stop there, they’ve brought in the big guns, they’ve brought BlackRock as their frontline ally.

Briefly, what are we looking at?

The Ondo Finance project is a decentralized finance (DeFi) platform. It connects investors to profit opportunities through mechanisms such as Liquidity Pools and Yield Farming strategies. This DeFi project utilizes Smart Contracts to automate asset management and the distribution of returns, promoting transparency and security in financial operations.

Trust, Transparency and Risk Management

Ondo appeals to traditional investors by highlighting values that are the bedrock of successful TradFi. According to their ‘’Trust and Security’’, they recognise that these considerations are of utmost importance in crypto as well, which is often plagued by rug-pulls and projects that often don’t live up to their promises.

In other words, there’s a market gap that keeps investors surfing the crypto wave and Ondo intends to fill it. Apparently betting high on the latest memecoin is not something most experienced investors feel excited about, who would have thought?

To seal the deal, Ondo tells the investor exactly what he's getting into, with a philosophy that transparency and disclosure should exceed or even surpass the best standards of TradFi, there’s detailed info about their funds in the product page, that means pricing, strategy, historical performances and more.

Team

Still on the topic of transparency, Ondo’s team makes their DeFi/TradiFi wedding clean with their project team, we’re talking WallStreet, BlackRock, Goldman Sachs, McKenzie and more. To illustrate, Chris Tyrrel, their head of compliance, was the head of compliance for Goldman Sachs, that’s some heavy background.

Ecosystem

Currently, Ondo’s ecosystem has 82 partners, including chains, custody, liquidity and service providers. While most of the hype surrounds BlackRock, there’s still serious integration going on across 10 different chains, including Ethereum, Solana, Polygon and others. In short, their products are incorporated by first-class digital assets services.

RWA

The RWA (Real-World Assets) sector within the Ondo Finance ecosystem refers to the tokenization of real-world assets, meaning traditional physical or financial assets such as real estate, securities, commodities, among others, converted into digital tokens that can be traded on the blockchain.

While the concept has been maturing for some time now and we’re already familiar with it to some extent through popular Stablecoins like USDT, which are around as far back as 2015, RWAs represent the next step of integrating TradFi with the convenience and Tech of DeFi, that means your uncle Ben that lives in Warren Buffets basement can now buy the digital representation of those house marketing bonds that he keeps yapping about without worrying too much or doing it by himself. Regulatory oversight, real value, asset value growth, that’s all digital now.

Larry Fink, the CEO of BlackRock stated the following in a 2023 interview at the New York Times DealBook Summit.

"I believe the next generation for markets, the next generation for securities, will be tokenization of securities," Fink, Larry

In this speech, he also mentioned that having a technology that provides instantaneous information about who is buying and selling and what they’re buying or selling is a game changer for the entire ecosystem, in other words, blockchain criptoeconomics is the natural evolutionary step for asset management.

By exploring the RWA sector, Ondo Finance aims to bridge the gap between decentralized finance (DeFi) and traditional financial (TradiFi) markets, providing access to a broader range of assets, increasing liquidity, and diversifying investment opportunities within the DeFi space.

Tech: how does it work?

Flux Protocol is Ondo’s lending and borrowing platform that allows the use of tokenized bonds as collateral.

flux visualization — Flux protocol visualization

Flux Protocol: Features and Benefits

Tokenized Bonds as Collateral: A cornerstone of Flux Protocol is its ability to accept tokenized bonds as collateral for loans. This opens up new avenues for borrowers, allowing them to access liquidity without having to sell their underlying assets.
Efficiency: By utilizing blockchain technology, Flux Protocol streamlines the lending and borrowing process. Smart contracts automate many aspects of the process, reducing the need for intermediaries and speeding up transaction times.
Transparency: The decentralized nature of blockchain ensures that all transactions on Flux Protocol are transparent and verifiable. This level of transparency fosters trust and confidence among participants.
Diversification: The ability to use tokenized bonds as collateral provides borrowers with greater diversification options. This can help to mitigate risk and potentially improve investment returns.

It’s promising solutions for borrowers and lenders of tokenized bonds.

Utility

Who are the holders? When it comes to centralization, Ondo holds their traditional investment roots close to heart, most of their coins are being held by the project developers and early adopters, raising questions about how much voice will new adopters have when it comes to governance.

It’s crypto/blockchain tech, but TradiFi rules. That can spell trouble when it comes to utility, because that’s the main utility for the token, governance, the fundamental value is tied to how well will it be adopted and how useful will the platform be down the road.

Moving on from the token itself, it’s impossible to ignore the $10 Trillion dollars elephant in the room that is directly tied to Ondo, BlackRock isn’t just another partner or clueless TradFi senior trying their luck, it’s the largest assets manager in the world with 36 successful years of experience as main player in finances, and they have an exciting vision for the future of digital assets, which were already doing very well without ETFs or the help of Traditional investors, that vision it to tokenize this tsunami of assets by 2030.

For budding investors, we may be looking at a match made in heaven for the early future unlike anything we've seen before. And if BlackRock and other TradFi players want to tokenize their assets and make crypto mainstream, there can be a lot of room for Ondo and the crypto landscape to grow with it.

Tokenomics

The tokenomics of Ondo are centered around two main digital assets, OUSG and UDSY.

OUSG (Ondo Short-Term US Government Treasuries) is a tokenized version of BlackRocks treasury ETF, that means on-chain exposure to US government bonds. It’s a stable and low-risk investment option with predictable returns. In other words, an option for those who want a hassle-free investment opportunity without gambling away their finances.

There’s two versions of the coin, OUSG and rOUSG. OUSG is currently priced at $107.67 gain value as if it was a ‘’share’’. sOUSG in paid out daily as a reward to liquidity providers, it’s constantly valued at $1.

Most of the portfolio is with BlackRock, at their Institutional Digital Liquidity Fund (BUIDL), which is an on-chain fund on Ethereum, with all activities recorded on the blockchain. another portion with BlackRock’s FedFund (TFDXX), another in bank deposits, and USDC for liquidity purposes.

OUSG and rOUSG can be minted, redeemed or converted directly through Ondo. It supports 446 wallet options, including Metamask, Coinbase and Trust.

USDY (Ondo US Dollar Yield Token) is a token that pays yield to buyers that hold it, but instead of being backed solemnly by ‘’Cryptoverse speculation’’, there’s Uncle Sam keeping afloat, that’s because like OUSG, there’s real-world assets to back it up.

Deposits for USDY also come from TradFi, which are Morgan Stanley and the First Citizens Bank, that equal 65% of their allocation, while the US Treasuries makes up 35%, so far, these Ondo’s only investments.

For many non-blacklisted (more on that later) internet users that always wanted to tap into the rich investment opportunities of the US from the comfort of their homes, Ondo provides attractive solutions.

We need to talk about USDY’s Depeg

Around the end of February, the Solana and Mattle’s version of Ondo’s stablecoin USDY dropped its peg by around 20%, for a stablecoin that’s supposed to stay as close as possible to $1 that’s a huge red flag, worst yet and that the community heart nothing from the team about it, raising questions about how transparent the project really is.

Briefly, how profitable has it been?

$Ondo’s MOIC between January 17, 2024 at 21:00 (launch) and its all time high (ATH) in June 4, 2024 at 21:00 = 6,64x.

$Ondo MOIC between January 17, 2024 at 21:00 (launch) and its total value on August 25, 2024 at 13:00 = 3,41x.

Who are the holders?

When it comes to centralization, Ondo holds their traditional investment roots close to heart, most of their coins are being held by the project developers and early adopters, raising questions about how much voice will new adopters have when it comes to governance. It’s crypto/blockchain tech, but TradiFi rules. That can spell trouble when it comes to utility, because that’s the main utility for the token, governance, the fundamental value is tied to how well will it be adopted and how useful will the platform be down the road.

Circulation

As of now, the total circulating supply of Ondo is about 13,89% of the total supply.

Competition

While Ondo has the pioneer's advantage, they are not the only ones that saw the great opportunities that RWAs bring, others are already on the move to grab their own slice of that sweet market share. Projects like Pendle and Chintai are some to keep and eye out for.

Another hiccup is due to strict KYC requirements, which throws privacy off the window and is a big no to many crypto users, also many countries aren’t whitelisted to trade with Ondo, including the USA, which is in a way, is kinda funny. While this limitation isn’t within Ondo’s interest or it’s fault, it is undoubtedly a weakness.

As if that’s not enough, compared to BlackRock, Ondo is like Davi facing Golias without the slingshot, this means that while the partnership looks promising now, there isn’t much stopping BlackRock from topping over Ondo with their own tokenized assets, this isn’t mere speculation, since BlackRock already have BUILD on the Ethereum Blockchain, which is what allow investors to gain yield on OUSG. If BlackRock decides to create a direct rival to OUSG and USDY, Ondo can be in big trouble.

Last but not least, is the fact that the integration between TradFi and DeFi resurfaces an age-old issue that decentralized crypto, namely Bitcoin, attempts to solve. Just how far can users trust centralized traditional finance institutions to pull the strings? The subprime crisis of 2008 spearheaded by excess confidence in the housing market by big financial institutions proved an economic disaster, and taxpayers were left with the bill. This ain’t to say that the tokenization of TradiFi is in itself an issue, but caution should be exercised. The 2008 cautionary tale should not be forgotten.

Conclusion

While there’s valid concerns for the future, it isn’t enough to eclipse all the promises and achievements of Ondo, which currently sits as a leader in the RWA criptoeconomics. While traditional assets like BTC founded the whole hype, the world truly opened their eyes to the potential of crypto as game changer and possibly the future of finances when stablecoins entered the game, and Ondo surfs this wave with it’s USDY while forging key partnerships to bring RWA to the crypto game.

So far, all the hype has been paying off and 2024 has been a heck of a year for Ondo, their well-timed strategy and solid team combined with BlackRocks ambitious view for the early future gives us much to look forward to. Projects like Ondo prove that the best days of cryptoeconomics are still ahead of us.