Ondo Finance Research Report: Collaborating with BlackRock to Connect TradFi and Web3's RWA protocol

1. Project Background and Introduction

BlackRock's CEO Larry Fink believes that tokenization is the future of finance and the next evolution of the market, and his position may influence the attitudes of other major financial players. As we emphasized in our 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 RWA and introducing it to the blockchain can provide profit opportunities in Decentralized Finance (DeFi). The asset tokenization market is expected to reach $100 trillion by 2030.

Source: Roland Berge

The main attraction of this emerging market is not only to provide income opportunities for Decentralized Finance. By digitizing assets into Tokens, it achieves the fragmentation of assets—splitting 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 illustration below. Its main advantages include increasing liquidity and accessibility through interoperable asset tokenization, 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 Decentralized Finance ecosystem.

Source: Chainlink

The Market Cap of tokenized government bonds in the United States also rose 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. Ernst & Young's (EY) latest research shows that 64% of high-net-worth investors and 33% of institutional investors plan to increase their investment in tokenized government bonds by the end of 2024.Although still in its early stages, asset tokenization represents one of the most promising and potential applications of blockchain technology. Ondo Finance, with its government bond tokenization service, is well-positioned in this trend, and investor interest continues to rise.

Two, Technical Architecture

Ondo is transforming finance with its Decentralization protocol, using blockchain to provide institutional-grade products. By tokenizing stable assets in TradFi, Ondo combines reliability with the efficiency of blockchain. Ondo has two main departments: Asset Management and Technology. The Asset Management department creates and oversees tokenized financial products, while the Technology department develops the protocols that support these products.

Currently, Ondo Finance offers two different investment options:

(1) USDY (Ondo US Dollar Yield Token)

Tokenization notes supported by short-term US Treasury bonds and bank deposits.

Providing an Annual Percentage Rate (APY) of 5.30% with a Total Value Locked (TVL) of 315.35 million US dollars.

More secure and transparent than traditional stablecoins like USDT/USDC.

Managed by Ankura Trust Company to ensure compliance and investor protection.

Source: Ondo Finance

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

Provide low-risk tokenization short-term US Treasury bonds for passive investors.

Offering an Annual Percentage Rate (APY) of 4.81% with a total value locked (TVL) of $221.32 million.

Investments will be transferred from BlackRock's SHV to BUIDL in March 2024.

Ondo recently launched a new version of OUSG, called rOUSG, to provide investors with additional income through the rOUSG Token.

Source: Ondo Finance

3. Products and Development Roadmap

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

OUSG: tokenization BlackRock Short-Term US Treasury Bond ETF.

OMMF: tokenization BlackRock money market fund.

USDY: An alternative to stablecoin for yield.

Flux Finance: a protocol that supports tokenization securities as Collateral.

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

These products have driven significant rise, Ondo's TVL has increased from $40 million to $5.34 billion. Looking ahead, Ondo plans to expand the use of USDY, OUSG, and OMMF and Liquidity to enhance the tokenization of cash equivalents. This will involve building partnerships and developing Cross-Chain Interaction tools to facilitate these processes.

Flux Finance, created by the Ondo Finance team, is an important advancement in Decentralization lending. It is based on Compound V2, but with added 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 borrow USDC, but using OUSG as collateral for borrowing requires specific permission to ensure compliance and security. Flux operates in a peer-to-peer pool (p2p pool) mode similar to Compound, allowing users to borrow in an over-collateralization manner. Lenders can earn Interest on the stablecoins they provide, while borrowers can borrow stablecoins using their Collateral and adhere to the asset's permission requirements. Flux Finance is governed by Ondo DAO.

Four, Competitor Situation

Given Ondo's relationship with giants like BlackRock, Ondo seems to be emerging in the TradFi arena in the encryption RWA category, complementing other TradFi companies. Competition is intensifying in the Decentralized Finance sector. Centrifuge focuses on the tokenization of structured credit and uses Non-fungible Token issuance for debt. Ethena provides synthetic asset exposure, allowing users to trade without holding the assets. Maple Finance offers low-collateral loans to institutions, emphasizing credit assessment and lending. Pendle handles revenue trading for tokenization, enabling users to separate and trade the income portion of assets.

There are several reasons why Ondo Finance stands out. By integrating TradFi with blockchain and targeting the huge US Treasury market, it has broad market coverage. Its complementary approach involves partnering with TradFi giants like BlackRock, thus avoiding direct competition. In addition, Ondo offers innovative products such as USDY and OUSG, which provide safer and more transparent alternatives to traditional stablecoins.

5. Token Economy

(1) Summary of ONDO Tokenomics

Market Cap ranking: #54

Fully Diluted Valuation (FDV): $131.5 B, ranked #16

Circulating supply: 14.4 billion ONDO (14.27% of total supply)

Total Supply: 10 billion ONDO

Maximum Supply： 100 billion ONDO

Next unlock: 1.67 million ONDO (approximately $2.19 million), 5 days later

(2) Token Distribution

Source: Dropstab

(3) Unlocking event I

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

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

August 18, 2024: 1.67 million ONDO (approx. $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 (about $2.19 million)

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

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

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

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

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

(4) 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 the Ondo DAO, ensuring all decisions are transparently conducted on-chain. To initiate a proposal, an individual must hold or be delegated at least 1 billion ONDO voting rights. It is currently unclear whether there will be additional use cases for ONDO holders in the future.

VI. Team, Financing History and Ecosystem

The Ondo Finance team consists of a diverse group of individuals from the TradFi 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

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

public sale round: On May 12, 2022, $10 million was raised at a price of $0.03 per token, achieving a return on investment (ROI) of 43.28 times. A total of 1 billion tokens (1% of the total supply) were sold on Coinlist, with a 1-year lock-up period followed by an 18-month release period.

A round of 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 leading the investment, with an initial lock-up period of 1 year, followed by a 24-month release period.

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 with blockchain technology, starting with tokenization of the US Treasury product USDY.

Thala Labs: Collaborate to launch USDY for use in Thala's AMM pool, and use it as Collateral for debt positions (CDP) to enhance Liquidity and Decentralized Finance solutions.

Wintermute: Cooperation to enhance the Liquidity of the Stable Coin USDY for higher USD yields, providing round-the-clock Liquidity 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.

7. Summary

There are several reasons why Ondo Finance stands out. By integrating TradFi with blockchain and targeting the huge US Treasury market, it has broad market coverage. Its complementary approach involves partnering with TradFi giants like BlackRock, thus avoiding direct competition. In addition, Ondo offers innovative products such as USDY and OUSG, which provide safer and more transparent alternatives to traditional stablecoins.

Favourable Information因素：

The tokenization industry will see a significant rise, and the strategic partnership between Ondo Finance and BlackRock is positioned to bring trillions of dollars into Web3.

Ondo Finance's TVL has seen a significant rise since the beginning of 2024. Real-world assets in the encryption field represent a fresh and promising narrative, with strong early adoption potential.

Ondo Finance is committed to developing its products to meet customer needs.

Most of OUSG's investments were initially in BlackRock's iShares Short Treasury Bond ETF (SHV). In March 2024, they shifted to BlackRock's USD Institutional Digital Liquidity Fund (BUIDL), aligning with Ondo's asset tokenization focus.

Ondo Finance is a leader in the encryption RWA field and has become the preferred choice.

Ondo Finance holds about 38% of the current supply of BUIDL.

Unfavourable Information因素：

The use of ONDO Token shows significant centralization risks.

Although all holders can participate in governance, the largest holder has the greatest influence.

Approximately 85% of the total ONDO supply is controlled by the Ondo Finance team.

Operating at the intersection of TradFi and Cryptocurrency, Ondo Finance has entered a relatively undeveloped market, where regulation poses significant challenges.

Non-performing debt is the main risk of Decentralized Finance protocols, including Flux from Ondo Finance. Non-performing debt occurs when the value of the borrower's Collateral 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 drop the risk of non-performing debt, Flux only accepts stable assets as Collateral.