Ondo Finance Research Report: Collaborating with BlackRock to connect TradFi and Web3 RWA protocol

Market Opportunities

BlackRock CEO Larry Fink believes that tokenization is the future of finance and the next evolution of the market, a stance that may influence the attitudes of other major financial players. As we emphasized in previous research on Dusk Network, Real World Assets (RWA) are becoming an important asset class in the cryptocurrency industry. As of May 2024, the RWA market has exceeded $6.6 billion, reflecting investors' growing interest in this innovative financial product. Tokenizing RWAs and introducing them to the blockchain can provide yield opportunities in Decentralized Finance (DeFi). The asset tokenization market is expected to reach $10 trillion by 2030.

Source: Roland Berge

The main attraction of this emerging market is not only to provide income opportunities for DeFi. By digitizing assets into tokens, it achieves the fragmentation of assets - dividing assets such as national debt, stocks, and real estate into smaller shares. This process enhances liquidity and opens the door to investment opportunities for investors with different capital levels.

Chainlink explains the operation of asset tokenization with the following illustration. Its main advantages include increased liquidity and accessibility through interoperable tokenized assets, allowing small investors to invest in high-yield assets with relatively low capital. In addition, due to the public nature of many blockchains, it enhances transparency and enhances composability by connecting the value of real-world assets to the DeFi ecosystem.

Source: Chainlink

The market capitalization of tokenized government bonds in the United States has also risen from $114 million in 2023 to $845 million, with Franklin Templeton being the largest issuer in this asset class, accounting for approximately 38% of the market.

EY's latest research shows that 64% of high-net-worth investors and 33% of institutional investors plan to increase their investments in tokenized government bonds by the end of 2024.

Although still in its infancy, asset tokenization represents one of the most promising and potential applications of blockchain technology. Ondo Finance is well-positioned in this trend with its government bond tokenization service and investor interest continues to rise.

Ondo's Technology

Ondo is transforming finance through its decentralized protocol, utilizing blockchain to provide institutional-grade products. By tokenizing stable assets in traditional finance, Ondo combines reliability with the efficiency of blockchain.

Ondo has two main departments: asset management and technology. The asset management department creates and supervises tokenization financial products, while the technology department develops protocols to support these products.

Currently, Ondo Finance offers two different investment options:

1. USDY**（Ondo US Dollar Yield Token）**

• Tokenized notes backed by short-term US Treasury bonds and bank deposits.

  • Offering an Annual Percentage Yield (APY) of 5.30%, with a total value locked (TVL) of $3.1535 billion.
  • Safer and more transparent than traditional stablecoins (such as USDT/USDC).
  • Managed by Ankura Trust Company to ensure compliance and investor protection.

  | | | | | --- | --- | --- | | | USDT | USDY | | Basic Assets | Government bonds, BTC, unsecured loans | Government bonds | | Bankruptcy Isolation | Uncertain | Yes | | Separate Holding of Reserves and Operating Companies | No | Yes | | Payment Yield | No | Yes | | Investor's Claim to Reserve | Unsecured | Secured | | Third Party Reports | Quarterly | Daily | | Third-party Supervision | No | Yes | | Regulatory Status | Uncertain | Compliance |

  Source: Ondo Finance

2. OUSG** (Ondo Short-Term US Treasury Bonds)**

• Provide low-risk tokenization of short-term US Treasury bonds for passive investors.
  • Offers an Annual Percentage Yield (APY) of 4.81% with a Total Value Locked (TVL) of $221.32 million.
  • In March 2024, the investment will be transferred from BlackRock's SHV to BUIDL.
  • Ondo recently launched a new version of OUSG, called rOUSG, which provides investors with additional income through the rOUSG token.

| | | | | --- | --- | --- | | | OUSG | rOUSG | | Token Type | Cumulative | Heavy Base Type (Distribution Type) | | Distribution Method of Profits | Reflected by the increased redemption price (net asset value per share) | Distributed daily based on the increased balance of rOUSG tokens | | As national debt yields accumulate, token value | pump | remains at $1.00 | | Best for | Buying and holding cash management (some custodians only support accumulative tokens), collateral for smart contracts | Profit settlement or exchange method |

Source: Ondo Finance

Flux Finance by Ondo

Flux Finance, created by the Ondo Finance team, is a significant advancement in decentralized lending. It is based on Compound V2 but has added new features. It supports open tokens such as USDC and restricted tokens such as OUSG (Ondo Short-Term US Government Bond Fund). This means that you can freely lend USDC, but using OUSG as collateral for borrowing requires specific licensing requirements to ensure compliance and security.

Flux uses a point-to-point pool (p2pool) model similar to Compound, allowing users to borrow in an over-collateralized manner. Lenders can earn interest on the stablecoins they provide, while borrowers can borrow stablecoins using their collateral and comply with the asset's permission requirements. Flux Finance is governed by Ondo DAO.

Competitors

Given Ondo's relationships with giants like BlackRock, Ondo seems to be emerging in the encryption RWA category in traditional finance, complementing other TradFi companies.

In the field of decentralized finance, competition is intensifying. Centrifuge focuses on tokenizing structural credit and uses NFT to issue debt. Ethena provides exposure to synthetic assets, allowing users to trade without holding the assets. Maple Finance offers low-collateral loans to institutions, emphasizing credit assessment and lending. Pendle deals with tokenized yield trading, allowing users to separate and trade the yield portion of assets.

Ondo Finance stands out for several reasons. It integrates traditional finance and blockchain, targeting the vast US Treasury market with wide market coverage. Its complementary approach involves cooperation with traditional financial giants such as BlackRock, avoiding direct competition. In addition, Ondo offers innovative products such as USDY and OUSG, providing safer and more transparent alternatives to traditional stablecoins.

tokenomics

Summary of ONDO Token Economics

Current Price: $1.87

Market Cap Ranking: #54

Fully diluted valuation (FDV): $131.5B, ranking #16

Circulating Supply: 1.44 billion ONDO (14.27% of total supply)

Total Supply: 100 billion ONDO

Maximum supply: 10 billion ONDO

Next Unlock: 1.67 million ONDO (about $2.19 million), 5 days later

Token Distribution

Source: Dropstab

Upcoming Unlock Event

June 18, 2024: 1.67 million ONDO (about $2.19 million)

July 18, 2024: 1.67 million ONDO (approximately $2.19 million)

August 18, 2024: 1.67 million ONDO (approximately $2.19 million)

September 18, 2024: 1.67 million ONDO (about $2.19 million)

October 18, 2024: 1.67 million ONDO (about $2.19 million)

November 18, 2024: 1.67 million ONDO (approximately $2.19 million)

December 18, 2024: 1.67 million ONDO (approximately $2.19 million)

January 18, 2025: 1.94 billion ONDO (approximately $25.5B)

January 18, 2026: 1.94 billion ONDO (approximately $25.5B)

January 18, 2027: 1.94 billion ONDO (about $25.5B)

January 18, 2028: 1.94 billion ONDO (approximately $25.5B)

Token Usage

ONDO Token is the governance token of Ondo Finance and its Flux Finance protocol. Holders have the right to vote on various proposals within Ondo DAO to ensure that all decisions are transparently conducted on-chain.

To initiate a proposal, an individual must hold or be entrusted with at least 100 million ONDO voting rights.

It is not yet clear whether there will be additional use cases for ONDO holders in the future.

Team, Fundraising and Ecosystem

The Ondo Finance team consists of a diverse group of individuals from traditional finance and Web3 fields. Founder and CEO Nathan Allman and President and COO Justin Schmidt both come from Goldman Sachs. Another important member, Katie Wheeler, comes from BlackRock. In addition, the team includes developers from OpenSea, MakerDAO, and Boson Protocol. This combination of expertise aligns closely with Ondo Finance's unique vision and goals.

.

Source: Ondo Finance

Fundraising Summary

Seed Round: In December 2021, Ondo Finance raised $4 million at a price of $0.013 per token, achieving a 99.87x return on investment (ROI). A total of 300 million tokens (3% of total supply) were sold, with Pantera Capital leading the round. The tokens have a 1-year initial lock-up period, followed by a 24-month release period.

Public Sale: On May 12, 2022, $10 million was raised at a price of $0.03 per token, achieving a 43.28x return on investment (ROI). A total of 100 million tokens (1% of total supply) were sold on Coinlist with a 1-year lockup period followed by an 18-month release period.

Series A Financing: In April 2022, $20 million was raised at a price of $0.02 per token, achieving a return on investment (ROI) of 64.92 times. A total of 1 billion tokens were sold (10% of the total supply), with Founders Fund as the lead investor. There is an initial lock-up period of 1 year, followed by a 24-month release period.

Partner Relationships

Ondo Finance has formed several key partnerships to enhance its blockchain and Financial Service:

• Aptos Foundation: This collaboration will demonstrate the integration of global assets and blockchain technology, starting with the tokenization of the US treasury product USDY.
• Thala Labs: Collaborate to launch USDY for use in Thala's AMM pool and as collateral for collateralized debt positions (CDPs), enhancing liquidity and DeFi solutions.
• **Wintermute：**Collaborate to enhance the liquidity of the stablecoin USDY for USD yield across multiple blockchain platforms.
• BlackRock: By investing $95 million in BlackRock's BUIDL fund, it demonstrates a commitment to expanding tokenization efforts and integrating with Ondo products.

Adopt and roadmap

Ondo Finance aims to connect traditional finance and decentralized finance through public blockchain technology. Their focus is on creating secure, transparent, and compliant financial products.

Main Products:

• OUSG： Tokenization of BlackRock Short Duration U.S. Treasury Bond ETF.
• OMMF: Tokenization of BlackRock Money Market Fund.
• USDY: An alternative to stablecoins for stable income.
• **Flux Finance：**Supports the protocol of tokenized securities as collateral.

These products have driven significant growth, with Ondo's TVL increasing from $40 million to $534 million. Looking ahead, Ondo plans to expand the use of USDY, OUSG, and OMMF and liquidity to extend the tokenization of its cash equivalents. This will involve establishing partnerships and developing cross-chain tools to facilitate these processes.

Source: DeFillama

In the next phase, they aim to tokenize publicly traded securities, addressing challenges related to liquidity and infrastructure. Ultimately, Ondo hopes to innovate in traditional finance by extending the advantages of blockchain to a broader range of financial services, using a combination of centralized and decentralized mechanisms. This approach will help bring the advantages of blockchain technology to a wider range of financial operations.

Basic Factors of Bullish Fundamentals

• The tokenization industry will see significant rise, and Ondo Finance's collaboration with BlackRock strategically positions to bring tens of trillions of dollars into Web3.
• Ondo Finance's TVL has seen a significant rise since the beginning of 2024. Real-world assets represent a fresh and promising narrative in the field of encryption, with strong potential for early adoption.
• Ondo Finance is committed to developing its products to meet customer needs.
• Most of OUSG's investments initially were in BlackRock's iShares Short Treasury Bond ETF (SHV). In March 2024, they shifted to BlackRock's USD Institutional Digital Liquidity Fund (BUIDL), aligned with Ondo's focus on tokenization of assets.
• Ondo Finance is a leader in the encryption RWA field and the preferred choice.
• Ondo Finance holds approximately 38% of the current supply of BUIDL.

Fundamental Factors for Bearish Sentiment

• The use of ONDO token displays significant centralization risks.
• Although all holders can participate in governance, the largest holder has the greatest influence.
• About 85% of the total ONDO supply is controlled by the Ondo Finance team.
• Operating at the intersection of TradFi and cryptocurrencies, Ondo Finance enters a relatively untapped market where regulation poses significant challenges.
• Bad debt is a major risk of DeFi protocols, including Flux from Ondo Finance. Bad debt occurs when the value of the collateral from the borrower is lower than their debt. If the borrower's equity becomes negative, Flux will use its reserve to mitigate the loss. To minimize volatility and reduce the risk of bad debt, Flux only accepts stable assets as collateral.