What is Ondo Finance (ONDO)? Bridging TradFi to DeFi

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Ondo Finance is a decentralized finance (DeFi) platform designed to bridge the gap between traditional finance (TradFi) and DeFi through the tokenization of real-world assets (RWA). Rather than being a single platform, Ondo consists of a suite of products, protocols, and services aimed at offering crypto traders more avenues to trade and earn yield.

For instance, Ondo Finance brings institutional-grade assets like U.S. Treasuries onto the blockchain. Its flagship products include USDY, an interest-bearing stablecoin, and OUSG, a tokenized version of a short-term U.S. Treasury ETF.

This article explores how Ondo Finance works, its core products, benefits, limitations, and its role in the expanding RWA market.

Understanding Ondo Finance

Ondo Finance is a decentralized platform built primarily on Ethereum that provides exposure to financial products traditionally limited to institutional investors. Its mission is to democratize access to high-quality, yield-generating assets through blockchain technology.

The two primary offerings are USDY and OUSG. USDY offers yields pegged to the U.S. dollar, while OUSG provides blockchain-based exposure to U.S. Treasuries. These products have also enabled complementary services like Flux Finance, a lending protocol where users can borrow stablecoins using tokenized Treasuries as collateral.

Because Ondo deals with regulated real-world assets like U.S. government securities, it must adhere to strict compliance standards. Some products require KYC verification, and others are restricted to accredited investors in the U.S.

As an early mover in the RWA tokenization space, Ondo has positioned itself as a lower-risk yield option in the DeFi ecosystem, attracting significant interest during the 2024 market expansion.

History and Development

Ondo Finance was founded in 2021 by Nathan Allman and Pinku Suran, both former Goldman Sachs employees. Allman worked on the digital assets team, while Suran led blockchain development efforts.

The project raised $20 million in a token sale in 2022, followed by an additional $20 million in a Series A round led by investors including Coinbase Ventures and Tiger Global.

Ondo launched on the same day it was announced, initially offering liquidity vaults. These were later phased out to make way for Ondo Finance V2, which introduced the current product lineup centered around tokenized RWAs.

How Ondo Finance Works

Ondo Finance tokenizes real-world assets like U.S. Treasuries, allowing them to be traded on blockchain networks. This process combines the stability and yield of traditional assets with the efficiency, transparency, and accessibility of DeFi.

Below are the core products and mechanisms that enable Ondo’s operation.

USDY: U.S. Dollar Yield

USDY is a yield-bearing stablecoin backed by short-term U.S. Treasuries and bank demand deposits. It allows global users to gain exposure to U.S.-based yield assets, which are typically restricted to U.S. investors. The current yield is approximately 5.2%.

USDY is issued by Ondo USDY LLC, a specially established entity with an independent board and director. The token is over-collateralized by 3% to buffer against short-term Treasury price fluctuations. Ankura Trust serves as an independent verification agent to ensure collateral safety and can liquidate assets to protect token holders if needed.

To purchase USDY, users must complete a KYC process and register approved wallet addresses. The steps are:

  1. After verification, deposit funds via USDT, USDC, or a USD wire transfer (if over $100,000).
  2. Tokens are issued after 40–50 days, but token certificates are provided immediately, allowing users to start accruing interest during the waiting period.
  3. Once minted, USDY tokens are sent to the user’s designated wallet.

Holders can then trade, transfer, or use USDY in DeFi applications while continuing to earn yield.

OUSG: Tokenized U.S. Treasuries

OUSG offers tokenized exposure to short-term U.S. Treasuries—government-issued securities considered low-risk due to the stability of U.S. monetary policy.

OUSG integrates with BlackRock’s tokenized fund, BUIDL, which holds cash, U.S. Treasuries, and repurchase agreements. Ondo moved all OUSG’s total value locked (TVL) into BUIDL, enhancing security and liquidity.

Key advantages of OUSG include:

OUSG is only available to accredited investors in the U.S., typically requiring a net worth exceeding $1 million or an annual income above $200,000.

Flux Finance

Flux Finance is a decentralized lending protocol launched by Ondo in February 2023. It is a fork of Compound V2 and enables permissionless lending and borrowing of stablecoins like USDT and DAI, using OUSG as collateral.

Users can lend OUSG to earn yield or borrow stablecoins against it. Although developed by Ondo, Flux was later sold to Neptune Foundation to allow Ondo to focus on its core RWA tokenization business.

Token Bridge and Converter

Ondo provides two tools to improve usability:

ONDO Tokenomics and Distribution

ONDO is the native governance token of Ondo Finance, with a total supply of 10 billion tokens. Distribution is as follows:

A total of 400 million tokens were sold in May 2022, raising $20 million. Most tokens are locked under vesting schedules. The circulating supply is approximately 1.389 billion.

ONDO holders can participate in governance decisions, including protocol upgrades, treasury management, and new product introductions.

Advantages of Ondo Finance

Limitations of Ondo Finance

Conclusion

Ondo Finance is pioneering the integration of traditional finance with decentralized ecosystems through RWA tokenization. Its products offer enhanced accessibility, instant settlement, and comparatively safe yields.

That said, the RWA sector is still emerging. Traditional finance moves slower than crypto, and regulatory hurdles remain. Nonetheless, Ondo demonstrates strong demand for institutional-grade on-chain assets and may well catalyze broader adoption of tokenization across finance.

For those interested in exploring real-world asset protocols further, you can discover more RWA platforms and tools.

Frequently Asked Questions

How does Ondo Finance operate in the DeFi ecosystem?

Ondo Finance brings traditional financial products like U.S. Treasuries onto the blockchain through tokenization. It enables DeFi users to access yield-generating assets typically available only in traditional markets, combining the benefits of both worlds.

What financial products does Ondo Finance offer?

As of mid-2024, Ondo offers two primary products: USDY, a yield-bearing stablecoin backed by short-term U.S. Treasuries, and OUSG, a tokenized ETF that provides exposure to U.S. Treasury securities.

Can anyone invest in Ondo Finance products?

No. Both products require K verification. Additionally, OUSG is restricted to accredited investors in the U.S., meaning users must meet specific financial criteria to participate.

How does Ondo Finance generate yield?

Yield is generated through the real-world assets that back its tokens—primarily short-term U.S. Treasuries and bank deposits. The returns from these assets are passed on to holders of USDY and OUSG.

Is Ondo Finance regulated?

Ondo operates with a strong emphasis on regulatory compliance. Its products are structured to meet U.S. securities laws, including working with registered entities and adhering to investor accreditation requirements.

What makes Ondo Finance different from other RWA projects?

Ondo stands out due to its institutional partnerships, focus on low-risk assets, and strict compliance framework. Its association with BlackRock’s BUIDL fund also adds a layer of trust and security.