- Ondo Finance is launching three tokens representing deposits in popular ETFs managed by Blackrock and PIMCO.
- The tokenized funds will bring the risk-free rate on-chain, making traditional capital markets more accessible to stablecoin holders.
- The tokenized funds will be available to only qualified purchasers who go through KYC and AML procedures.
Decentralized finance (DeFi) has seen a significant evolution in recent years, with new offerings emerging to adapt to the changing macroeconomic climate. One such offering is Ondo Finance, a crypto startup that aims to develop tokenized investment funds.
Recently, the firm revealed the imminent launch of three tokens representing deposits in popular ETFs managed by asset management giants Blackrock and PIMCO. The three tokens and the ETFs backing them are the US Government Bond Fund (OUSG), the Short-Term Investment Grade Bond Fund (OSTB), and the High Yield Corporate Bond Fund (OHYG).
How Ondo Finance is Bringing the Risk-Free Rate On-Chain
Ondo Finance is bringing the risk-free rate on-chain, making traditional capital markets more accessible to investors holding more than $100 billion of non-yield-bearing stablecoins. The tokenized fund interests are transferable on-chain, including through approved intelligent contracts, which will help create a compliant on-chain financial ecosystem supporting permissioned and permissionless assets, with the ultimate goal of improving the accessibility, transparency, and efficiency of the markets.
The tokenized fund will start with short-term US treasuries and bonds through large, highly liquid ETFs managed by institutions like Blackrock and PIMCO. Ondo Capital Management will be the investment adviser facilitating the purchase and sale of these ETFs, and Ondo Finance will charge a 0.15% per annum management fee.
The tokenized fund will be available only to qualified purchasers who go through Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures. Ondo Finance is betting that some of the $100B of stablecoins on-chain will jump at the chance to earn a low-risk yield without investors having to bring those assets back into the traditional financial system.
Security Tokens and their potential in the DeFi space
Given the astronomical yields that characterized DeFi’s early days, the rates of return offered by traditional financial products offered little attraction in 2020 and 2021. As interest rates rose and DeFi crashed, crypto has entered an environment where the yields on Treasuries and other savings products are above those found on lending protocols like Compound and Aave.
This has created tension for DeFi, as yields no longer pull people into the space. To attract and retain capital, other value-adds must be developed. Offerings like Ondo’s tokenized funds may reawaken an old use case that has been around crypto since at least 2017 — security tokens or tokens that represent real-world securities.
“Security tokens have been around for several years but haven’t seen any meaningful traction,” said Nathan Allman, Ondo’s CEO, and founder.
He suggests that the on-chain capital today doesn’t have a prominent home because of DeFi’s depleted yields.
“I think the combination we have today of lots of on-chain capital, a lack of attractive on-chain investment opportunities, and robust on-chain financial infrastructure finally creates a compelling reason for security tokens to existing.”
Projects like Polymath Network, launched in 2017 with much fanfare, have broadly fallen off the map as token security solutions have yet to gain traction. However, projects like Goldfinch Finance and collateralized lender MakerDAO have progressed in integrating real-world assets.
