This week, we will be delving into another RWA protocol — Ondo Finance — which is one of the most promising and successful RWA protocols in the market. This protocol has the potential to be a game-changer in the world of RWA, with an impressive Total Value Locked (TVL) of $103.6M.
Ondo Finance, a security token startup, has launched a stablecoin alternative that pays interest to its holders through a tokenized money market fund. The company’s mission is to provide institutional-grade, blockchain-enabled investment products and services. In just ten weeks since opening to investments, its Short-Term US Government Bond Fund ($OUSG) has surpassed $100 million in assets under management (AUM).
Ondo has three flagship products: the Ondo High Yield Corporate Bond Fund (OHYG), the Ondo Short-Term US Government Bond Fund (OUSG), and the Ondo US Government Money Market Fund (OMMF). The first two products are tokenized ETFs, while OMMF is a game changer, backed by treasuries and serving as a stablecoin.
Ondo High Yield Corporate Bond Fund (OHYG)
Most of the fund will be in the iShares iBoxx $ High Yield Corporate Bond ETF (NYSE: HYG). It is rated at BB- with 7.82% APY.
Ondo Short-Term US Government Bond Fund (OUSG)
Most of the fund will be in the iShares Short Treasury Bond ETF (NASDAQ: SHV). It is rated at AAA with 4.77% APY.
Ondo US Government Money Market Fund (OMMF)
Most of the fund will be in a MMF (to be announced). It is rated at AAA with 4.5% APY. OMMF will allow for stablecoin and fiat subscriptions and redemptions, with tokens minted and redeemed for exactly $1. Interest will be distributed daily in the form of new tokens, making it a stablecoin replacement for settlement and collateral in OTC trading and lending.
How it works
OUSG and OHYG
OUSG does not use a trust structure. Instead, it employs a traditional LP/GP structure that provides enhanced investor protection and lower risk compared to existing stablecoins. OUSG is also bankruptcy remote, ensuring that investors have the sole claim on fund assets. This fund structure is well understood by both investors and regulators. Note that both OUSG and OHYG are only available to accredited investors.
The OMMF token will be pegged to US$1 and backed by money market funds that trade on traditional exchanges. Investors will be able to mint and redeem OMMF tokens on business days, and interest will be paid out daily in the form of new OMMF tokens. Unlike leading stablecoins such as Tether’s USDT and Circle’s USDC, which do not pay interest to holders, Ondo is only targeting institutional investors due to concerns that paying interest would strengthen the case that such stablecoins are unregistered securities.
How can retail investors access OMMF? Flux Finance, backed by Ondo, enables retail investors to lend non-yield stablecoins like USDT and USDC into Flux. Whitelisted institutional clients can borrow these stablecoins from the Flux pool and mint OMMF, earning a small spread and paying out some yield to the protocol. This yield is then passed on to retail investors.
Ondo Finance is similar to TProtocol in that it uses RWA, such as US Treasury, as the backing asset of its stablecoin. Stablecoins are a significant part of DeFi, and yield-bearing stablecoins are likely to gain market share. One attractive feature of these stablecoins is that they enable the sender to earn yield up until the point of settlement and the receiver to earn yield thereafter.
Currently, this niche market is in its early stages with limited competition, probably due to barriers to entry. I believe that in the near future, traditional Wall Street financial institutions will gradually enter this market.
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