DeFi Insight: Investing in Bonds and US Treasuries with Ondo Finance

Ondo Finance launched a tokenized fund that allows stablecoin holders to invest in bonds and US Treasuries, making traditional capital markets more accessible to investors. The goal of Ondo Finance is to make it easy for investors to convert between stablecoins and traditional assets with a focus on highly liquid and low-risk products like short-term US Treasuries. By tokenizing ownership of the fund, Ondo Finance aims to pave the way for a compliant on-chain financial ecosystem powered by real-world assets. Investors in the fund will receive tokenized ownership in the funds and can transfer their ownership to other whitelisted investors. The fund will be launching with three share classes providing a range of institutional-grade yield offerings, Ondo US Short-Term Government Bond Fund (OUSG), Ondo Short-Term Investment Grade Bond Fund (OSTB), and Ondo High Yield Corporate Bond Fund (OHYG).

Authors: Valentin Kalinov, Christian Viehof

Bringing real-world assets to DeFi

Bringing real-world assets such as US treasuries to the DeFi (Decentralized Finance) space can be a game changer for crypto because it can increase the overall stability and credibility of the DeFi ecosystem. By allowing investors to collateralize their investments with real-world assets, the risk of losing their money due to the price volatility of the underlying crypto assets is greatly reduced. Additionally, the inclusion of real-world assets can also attract more traditional investors to the DeFi space, as they may feel more comfortable investing in assets that they are familiar with. This can lead to an influx of capital and liquidity, which can further drive the growth and development of the DeFi ecosystem.

Demand For Low-Risk Yield

The demand for low-risk yields in DeFi refers to the desire for high returns on investments with low risk. This is in contrast to traditional investments such as stocks or bonds, which often carry a higher degree of risk. The need for low-risk yields in DeFi is driven by the fact that the DeFi ecosystem is relatively new and untested, and many investors are hesitant to put their money into investments that could be highly volatile or even lose their value entirely. Additionally, DeFi protocols often have a high degree of complexity and risk, which can be difficult for investors to understand and manage. As such, low-risk yields are seen as a way to attract more investors to the DeFi ecosystem, as they provide a more predictable and stable way to earn returns on investment.

What are US Treasuries?

US Treasuries are debt securities issued by the United States Department of the Treasury to finance the federal government’s spending. They are considered among the safest investments in the world, as they are backed by the full faith and credit of the US government. The US Treasury issues several types of securities, including Treasury bills, Treasury notes, and Treasury bonds, which have different maturities and yields. Treasury bills have the shortest maturity, typically 4 weeks to 52 weeks, while bonds have the longest maturity, typically 30 years. Treasury notes have maturities between bills and bonds, typically 2 to 10 years. The yields on these securities are determined by the market, and they are generally considered to be a benchmark for other interest rates. US Treasuries are widely held by individuals, banks, and other financial institutions, as well as foreign governments and central banks. They are considered a safe haven during economic downturns, as investors flock to them as a relatively safe place to park their money.

Figure 1: Funds offered by Ondo Finance (source: ondo.finance)

The Funds

Ondo Finance is launching three different funds for investors, each with its own specific focus and investment strategy.

1. Ondo US Short-Term Government Bond Fund (OUSG): This fund will invest exclusively in short-term US Treasuries, initially through the Blackrock US Treasuries ETF (SHV). The fund is designed for investors seeking a low-risk, liquid investment option that is backed by the US government.
2. Ondo Short-Term Investment Grade Bond Fund (OSTB): This fund will invest in short-term investment grade corporate bonds, initially via the PIMCO Enhanced Short Maturity Active ETF (MINT). This fund is designed for investors who are looking for a slightly higher yield than the US Government Bond Fund while still maintaining a relatively low-risk investment option.
3. Ondo High Yield Corporate Bond Fund (OHYG): This fund will invest in high-yield corporate bonds, initially via the Blackrock iBoxx $ High Yield Corporate Bond ETF (HYG). The fund is designed for investors who are willing to accept a higher level of risk in exchange for the potential for higher returns.

The above-mentioned tokens will be only transferable between whitelisted investor addresses, as well as any smart contract that passes a compliance review. Overall, Ondo Finance offers a range of investment options for stablecoin holders to move their assets from low and risky on-chain yields to more safe, liquid and higher-yielding alternatives. Interestingly, the tokenized fund interests are transferable on-chain via approved smart contracts. There are management fees (0.15%)+ ETF fees, and investors need to go through a KYC process. The minimum size of investment is 100k USDC.

Connecting TradFi to DeFi with Flux

Ondo is launching Flux Finance, where ‘decentralized lending meets tokenized securities.’ Flux is a fork of Compound V2, and it will support permissionless (e.g., USDC) and permissioned (e.g., Ondo’s OUSG) tokens. The protocol will allow users to lend and borrow stablecoins against U.S Treasuries.

What is the idea behind Flux?:

• Users deposit USDC to Ondo and receive OUSG to earn TradFi yields. The OUSG tokens are then deposited to Flux to borrow USDC (probably at a lower rate than lending interest). These steps can be repeated multiple times. Alternatively, with the USDC, users can borrow other cryptos to use in different DeFi protocols.

Flux Finance is governed by the Ondo DAO. ONDO token holders exercise control over the protocol, including economic parameters and smart contract upgrades, through on-chain governance proposals. Initially, the ONDO token will not be transferable and will only be part of the governance mechanism. However, documentation indicates that the transferability could be changed through a vote by the community. The initial token supply of ONDO is 10 billion.

The classification of ONDO according to the ITC:

Figure 2: The ONDO Tokenbase entry (Source:https://itin.itsa.global/SWSDFT273)

Economic Purpose (EEP): ONDO is listed as a Governance Token (EEP22NT02). The token is non-transferable. Therefore, it is listed as a Non-Transactional Utility Token and is currently only used as part of the protocol’s governance. This might change with a future DAO vote.

Industry Type (EIN): The issuer of ONDO is active in the field of Decentralized Lending, Saving and Asset Management (EIN06DF02).

Technological Setup (TTS): ONDO is an Ethereum ERC-20 Standard Token (TTS42ET01). The Class “Ethereum ERC-20 Standard Token” captures every token that is implemented by means of the ERC-20 Standard on top of the Ethereum blockchain. A unique feature of the ONDO token is the non-transferability. However, this might change with a future DAO vote.

Legal Clam (LLC): The ONDO token does not entitle its holder to any legal claim or rights against the issuing organization; therefore, it is listed as a No-Claim Token (LLC31).

Issuer Type (LIT): The dimension “Issuer Type” provides information on the nature of the issuer of the token. Flux was developed by Ondo Finance Inc. Therefore, the issuer type of ONDO is Private Sector Legal Entity (LIT61PV)

Regulatory Framework (EU) (REU): The dimension “Regulatory Status EU” provides information on the potential classification of a token according to the European Commission’s proposal for a Regulation on Markets in Crypto Assets (MiCA, Regulation Proposal COM/2020/593 final). The ONDO token qualifies as a Utility Token (REU51UT) according to the definition provided in Article 3 (5) of Regulation Proposal COM/2020/593 final.

Consensus Mechanism (TCM): The dimension describes the mechanism that is deployed to achieve consensus on the token’s distributed ledger. ONDO tokens are issued on the Ethereum chain; therefore, they are listed as Proof-of-Stake (TCM71PS)

Type of Maximum Supply (EMS): The dimension describes the token’s type of maximum supply. The initial token supply of ONDO is 10 billion, and it is Fixed (EMS81).

Primary Mode of Origination (EMO): The dimension describes how the majority (>50%) of the circulating token supply got allocated to its owners. ONDO’s origination is from a token sale on CoinList. Therefore, it is listed as Sale (EMO92)

Taxes (RTA): One common distinction can be drawn between crypto-assets: those crypto-assets that resemble ‘conventional’ assets, like securities, and which are merely recorded on DLT systems (Conventional Asset Tokens DTA71), and those assets and activities that raise new regulatory challenges such as virtual currencies (New Asset Tokens DTA 72; OECD 2020). ONDO is listed in the Tokenbase as a New Asset Token (RTA72).

The International Token Standardization Association (ITSA) e.V.

The International Token Standardization Association (ITSA) e.V. is a not-for-profit association of German law that aims at promoting the development and implementation of comprehensive market standards for the identification, classification, and analysis of DLT- and blockchain-based cryptographic tokens. As an independent industry membership body, ITSA unites over 100 international associated founding members from various interest groups. In order to increase transparency and safety on global token markets, ITSA currently develops and implements the International Token Identification Number (ITIN) as a market standard for the identification of cryptographic tokens, the International Token Classification (ITC) as a standard framework for the classification of cryptographic tokens according to their inherent characteristics. ITSA then adds the identified and classified token to the world’s largest register for tokens in our Tokenbase.

• The International Token Identification Number (ITIN) is a 9-digit alphanumeric technical identifier for both fungible and non-fungible DLT-based tokens. Thanks to its underlying Uniform Token Locator (UTL), ITIN presents a unique and fork-resilient identification of tokens. The ITIN also allows for the connecting and matching of other media and data to the token, such as legal contracts or price data, and increases safety and operational transparency when handling these tokens.
• The International Token Classification (ITC) is a multi-dimensional, expandable framework for the classification of tokens. Current dimensions include technological, economic, legal, and regulatory dimensions with multiple sub-dimensions. By mid-2021, there will be at least two new dimensions added, including a tax dimension. So far, our classification framework has been applied to 99% of the token market according to the market capitalization of classified tokens.
• ITSA’s Tokenbase currently holds data on over 4000 tokens. Tokenbase is a holistic database for the analysis of tokens and combines our identification and classification data with market and blockchain data from external providers. Third-party data of several partners is already integrated, and API access is also in development.

Remarks

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Valentin Kalinov is an Executive Director at International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database, including a classification framework and unique token identifiers and locators. He has over five years of experience working at BlockchainHub Berlin in content creation and token analysis as a project manager at the Research Institute for Cryptoeconomics at the Vienna University of Economics and token analyst at Token Kitchen. You can contact Valentin via valentin.kalinov@itsa.global and connect on Linkedin if you would like to further discuss ITSA e.V. or have any other open questions.

Christian Viehof is an Executive Director at the International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database, including a classification framework and unique token identifiers and locators. He completed his Bachelor in Economics at the University of Bonn, the Hong Kong University and the London School of Economics and Political Science with a focus on Behavioral Economics and Finance. Currently pursuing his Master of Finance at the Frankfurt School of Finance and Management, you can contact him via christian.viehof@itsa.global and connect with him on Linkedin, if you would like to further discuss ITSA e.V. or have any open questions.

References:

• Announcing Tokenized US Treasuries and Bonds, blog.ondo.finance
• Ondo Finance Launches Tokenized US Treasuries and Corporate Bonds, thedefiant.io
• Ondo Finance Official Website
• Ondo Launches Tokenized US Treasuries and Bonds, Targeting $100 Billion Stablecoin Market, prnewswire.com
• Ondo Finance Docs
• Peter Thiel’s Founders Fund co-leads $20 million Series A for Ondo Finance, theblock.co
• Flux Finance Official Website
• Ondo DAO Launch, blog.fluxfinance.com
• The ONDO Token, docs.fluxfinance.com