For the first time in the 15+ years of blockchain history, institutional adoption of decentralized finance (DeFi) appears to be on the brink of mass adoption. Who could have imagined that TradFi stalwarts like BlackRock (BUIDL) and Franklin Templeton (FOBXX) would have highly liquid investment funds using public blockchains? Simultaneously, blockchain-native companies are spearheading a wave of real world asset (RWA) tokenization, and leading the pack is Ondo Finance. In this post, we’ll dive into what Ondo brings to the table, their strategic beachhead, who their main competitors are, and the road ahead.
A brief introduction to Ondo
Founded in 2021 by former Goldman Sachs employees, Nathan Allman and Pinku Surana, Ondo’s mission is to bring institutional-grade financial products on-chain. Originally positioned to provide structured financial and liquidity products for DeFi, Ondo currently has token offerings representing a highly liquid strategy including short-term U.S. treasuries, bank deposits, and U.S. money market funds. While OUSG (short term U.S. T-bills) and OMMF (U.S. money market funds) are limited to accredited and qualified investors with high net worths, Ondo also has a secured debt offering similar to USD-denominated stablecoins, for general access in qualified regions (USDY), which is backed by short term U.S. treasuries and bank deposits. USDY is available across multiple public blockchains including Ethereum, Solana, Mantle, Sui and most recently Cosmos.
Ondo’s strategic beachhead – the perfect blend of stability, flexibility and low fees
Ondo’s offerings have some solid value propositions which position the company as a potential leader in the RWA tokenization market.
- Offering onchain exposure to low-risk, yield-generating investments. Risk-averse money managers are more likely to gain DeFi exposure if the underlying assets are secure. And that is exactly what Ondo is doing. By providing highly liquid offerings, institutional investors and retail investors are more likely to invest since short term U.S. treasuries, money market funds and bank deposits have negligible risks associated with the loss of money. For instance, USDY is overcollateralized with a 3% initial loss position to cover short term fluctuations in the underlying assets; i.e. every $100 invested is backed by $103 of short term U.S. treasuries and bank deposits. Moreover, with Ankura Trust as the collateral agent, in the event Ondo becomes defunct/ bankrupt, USDY holders would be able to recoup their initial investment.
- 24/7, 365 days/year settlement. A key value proposition for RWA tokenization is instantaneous settlement, at any given time on any given day. And this is starkly different to traditional investment routes, which involve multiple days for settlement especially if cross border transfers and/or business days/hours are not observed. While USDY settlement occurs immediately, Ondo announced this feature will extend to OUSG as well after shifting $95 million of its underlying assets to BUIDL in March 2024.
- Lack of intermediaries = low fees. With no middlemen involved during trading and settlement, fees remain low. USDY has no management fees (Ondo earns the difference between interest paid and earned), while OUSG and OMMF have a 0.15% management fee (lower than severall TradFi counterparts).
Competitive landscape
Per 21.co, the market value of treasury notes tokenized across public blockchains recently crossed $1 billion, demonstrating the huge demand for this asset type, and Ondo is a major player in this market with over $300 million in deposits. On the TradFi side, Blackrock’s BUIDL and Franklin Templeton’s FOBXX are the big-name players going up against Ondo. While BUIDL is limited to accredited investors and has relatively high management fees (0.5%), FOBXX is open to retail investors with nominal fees. BUIDL has the benefit of instantaneous settlement, while FOBXX follows the traditional T+1 settlement time. Other DeFi companies leading the way in interest-bearing low risk investments include Mountain Protocol’s USDM providing a similar product to USDY, and Matrixdock’s STBT, which provides an alternative to OUSG, and is backed primarily by U.S. treasuries. Since we’re still in the early days of RWA tokenization, there just might be enough of the pie for multiple players.
The road ahead
While Ondo certainly has a wide range of attributes which cement its positioning on the leaderboard, there are a couple of challenges which can hamper its potential growth.
- Accessibility: while USDY is available to the masses in qualified areas, OUSG and OMMF is limited to accredited and qualified investors, which requires significant net worth and liquidity. Introducing more investment opportunities to individuals with lower investment appetites, while complying with regulatory and statutory requirements, would be a step towards this goal.
- Regulatory uncertainty: The regulatory landscape related to blockchain-based investments including tokenized RWAs is still evolving, posing potential hurdles for widespread adoption. Case in point, USDY is not available in the US!
There is a lot that Ondo is getting right. They appear to have a competitive advantage in terms of catering to a broad customer base, with OUSG and OMMF for the high net worth individuals and institutions, and USDY for typical retail investors seeking exposure to low risk onchain investments, as well as instantaneous settlement times and low fees. While they can mitigate accessibility by expanding their onchain investment offerings, regulatory uncertainty, especially in the U.S., is a challenge which hinders DeFi and blockchain technology as a whole.