Author: Fu Ruhe

RWA (Real World Assets) is hailed as the key to the start of DeFi 2.0, but it seems "distant" to most ordinary investors. After all, purchasing RWA products requires KYC and certain asset conditions, which are too high for most retail investors.

How to seize the investment opportunity in the RWA track before it fully erupts and get a share of the pie? One is to purchase tokens of RWA projects; the other is to purchase RWA products with lower entry barriers.

In the first method, investors need to understand the project's fundamentals, as well as the project's product design and risk control. Most RWA products require an SPV (Special Purpose Vehicle) as the fund control party to achieve risk isolation, which requires attention to whether the entity complies with local laws to avoid unknown project risks. Purchasing tokens should be the main investment method for most crypto investors and, relatively speaking, the most profitable method.

In the second method, RWA products generally tokenize real-world assets, such as the US dollar and US government bonds. If investors meet the investment criteria, the return rate is relatively stable and the risk is lower. However, there are currently few RWA products that investors can participate in, and KYC and asset standards are mostly not suitable for crypto investors.

Combining the above two situations, Odaily Star Daily has found Ondo Finance that meets the criteria in the RWA track. This article will introduce Ondo Finance's past history, products, and token situation, hoping to provide readers with a suitable RWA investment target.

After 1 year, Ondo Finance successfully transformed

Ondo Finance was founded in 2021, initially focusing on the Laas (Liquidity as a Service) track. However, as the market entered a bear market and the DeFi market value and on-chain liquidity decreased, the project's development encountered bottlenecks, leading to a transformation to the RWA track in January 2023, after a year. As of now, according to Defillama data, Ondo Finance's TVL ranks third in the RWA track, with a TVL of $183 million.

Ondo Finance's high TVL can be attributed to the design of its products. RWA products essentially do not require special designs. They essentially tokenize the targets in traditional finance, which requires closer and safer connections between the real and virtual worlds. The security and standardization of the process for investors to purchase or redeem RWA assets are the purposes of product design.

Ondo Finance currently offers 3 RWA products: OUSG, USDY, and OMMF.

OUSG (US Treasury Bonds)

OUSG is the main contributing product to Ondo Finance's TVL, with a TVL of $117 million. The underlying assets of OUSG mostly come from the iShares Short Treasury Bond ETF, a short-term US Treasury bond ETF under BlackRock: iShares Short Treasury Bond ETF (NASDAQ code: SHV), with a small portion being USDC and USD for liquidity.

The SHV ETF was established in 2007 and invests in short-term government bonds with a maturity of less than 1 year, tracking the ICE US Treasury Short Bond Index. According to Yahoo data, the current opening price of the SHV ETF is $110.42 USD, with total assets of approximately $18.4 billion, an annualized return rate of 5.17%, and a Standard & Poor's rating of AA.

Currently, OUSG's current price is $104.66 USD, with an annualized return rate of 4.69%, and it can be purchased on the Ethereum, Polygon, and Solana chains. It is worth noting that Ondo I LP, as the fund manager, manages the SHV ETF shares of OUSG purchased by investors. Ondo I LP, as the SPV of OUSG, is a US entity company, which is beneficial for risk isolation for investors and helps users redeem shares in case of emergencies (such as project bankruptcy).

In terms of fees, OUSG charges a 0.15% management fee, up to 0.15% for service providers such as fund managers and auditors, and a 0.15% ETF management fee charged by BlackRock, the issuer of the ETF.

However, the purchase requirements for OUSG are relatively high, with KYC verification as a prerequisite, and also requiring qualification as a "Qualified Purchaser," which requires investors to hold at least $5 million in investment portfolios, with a minimum purchase amount of 100,000 USDT for OUSG.

However, compared to the drastic price fluctuations during the bear market phase, investing in RWA products such as short-term US Treasury bond ETFs with an annualized return of around 5% is a suitable target. Therefore, in the past year, the scale of OUSG's TVL has developed rapidly, making it the main product of Ondo Finance.

USDY (US Dollar Yield)

USDY is a tokenized note backed by short-term US Treasury bonds and bank demand deposits. USDY is aimed at ordinary investors, with a purchase amount of $500 or more, and can be minted and transferred on-chain 40-50 days after purchase. The current price of USDY is $1.02 USD, with an annualized return rate of 5.10%, and a TVL of $66.2 million.

Compared to stablecoins such as USDT and USDC commonly used in the crypto world, USDY is more like an interest-bearing stablecoin and can also be classified as part of the interest-bearing stablecoin sector. However, compared to other interest-bearing stablecoins, its backing is traditional banks, and according to its official website, this USDY complies with US regulatory requirements.

Since USDY can be minted and circulated on-chain after a certain period, it operates as a stablecoin, the structural design and risk control of USDY are particularly important. The following are the key points and regulatory methods of USDY's design.

Structural design: USDY is issued by Ondo USDY LLC and serves as an SPV. Assets are managed separately from Ondo Finance and maintain independent books and accounts. This structure ensures the separation of USDY collateral assets from Ondo Finance's potential financial risks.

Over-collateralization: USDY uses over-collateralization as a risk mitigation measure. A minimum of 3% of the initial loss position is used to mitigate short-term fluctuations in US Treasury bond prices. Currently, USDY has over-collateralization of 4.64% of the initial loss position.

First priority: USDY investors have "first priority" on underlying bank deposits and government bonds. Ankura Trust serves as the collateral agent, overseeing the safety interests of USDY holders. Control agreements have been established with the banks and custodians holding the assets, granting Ankura Trust control of the assets in specific default situations or accelerating loans through USDY holder voting and repayment of token holders' legal rights and obligations.

Daily transparency reports: Ankura Trust serves as the verification institution, providing daily transparency reports on reserve status. These reports detail the asset holdings to ensure transparency and accountability. The reports are independently verified, providing additional reliability assurance.

Asset allocation: USDY adopts a conservative investment strategy to maintain the safety and liquidity of funds. The asset allocation target is 65% bank deposits and 35% short-term US Treasury bonds. This conservative investment approach focuses only on these safe and highly liquid instruments, minimizing risk exposure.

Asset custody: The US Treasury bonds supporting USDY are held in "cash custody" accounts at Morgan Stanley and StoneX to ensure asset security. These assets will not be re-pledged. Ankura Trust verifies the existence of these deposits daily.

USDY products isolate assets from crypto projects, reducing the project's RUG risk; over-collateralization is used as a buffer against the risk of a decline in government bond interest rates; Ankura Trust serves as the regulatory body, ensuring the security of investors' funds and returns; and the collateral is stored in traditional bank cash custody accounts to ensure that the funds will not be reused.

The investment threshold for USDY is relatively low compared to other RWA products, and in addition to purchasing with USDC on-chain, it can also be participated in through wire transfer.

USDY is to some extent subject to legal constraints and, compared to other stablecoins, has certain interest-bearing advantages. However, the current usage rate of USDY is relatively low.

OMMF (US Government Money Market Fund)

OMMF is an RWA token based on the US government money market fund (MMF), and this product has not been officially released yet. Supplementary information will be provided after its official release.

Flux Finance (Lending Platform)

In February 2023, Ondo Finance launched the Flux Finance lending platform, which is based on the Compound V2 lending protocol. According to the official website, the fund utilization rate is above 85%.

Flux Finance is one of the three channels provided by the project party for redeeming RWA products. It provides a new liquidity method for the time cost issue of redeeming through official channels, as the redemption through official channels cannot be directly redeemed on-chain and requires waiting for the RWA product's SPV to sell the product before redemption, which incurs a time cost of 1-5 days.

Currently, Flux Finance supports the lending of OUSG products, and as for USDY, it can be transferred on-chain through DEX after minting.

Betting on the success of the RWA track, but the future use of tokens remains unclear

Before the transformation, Ondo Finance issued the ONDO token and conducted a public sale on Coinlist. The tokens were subject to a one-year lock-up period after purchase, with subsequent monthly releases, and the tokens can be used as voting rights for Flux Finance governance.

However, after an on-chain community vote, the ONDO tokens were unlocked for circulation on January 18th this year. The current price of the ONDO token is 0.27 USDT, nearly 2.5 times higher than the price after unlocking.

At the same time, Coinbase has added Ondo Finance (ONDO) to its asset listing roadmap. Since Coinbase is not only an investor in Ondo Finance but also the only channel for exchanging USDC for USD in RWA products.

However, in the past two days, the Ondo project's address has transferred ONDO tokens to exchanges multiple times, which may be for market-making or selling. Investors need to be cautious.

According to official articles, the ONDO token is the governance token for Ondo DAO and Flux Finance. Since it is not yet clear whether the ONDO token can be associated with RWA products, it is not ruled out that the ONDO token will be used as an incentive for USDY and other RWA products in the future. After all, in the disclosed total token supply, investors and Coinlist only hold 16%, and the remaining 84% of the tokens have not been clearly allocated.

If the ONDO token can be combined with RWA products, using Flux Finance as the platform and the ONDO token as an incentive for the on-chain flow of RWA products, it will undoubtedly bring RWA products into the view of the general crypto investors.

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