A Deep Dive Into Ondo: Decentralized Investment Banking

Ondo Finance, a protocol aiming to accelerate the adoption of decentralized finance (DeFi) among mainstream investors by mitigating risk, will have its Token Sale on CoinList on May 12 at 17:00 UTC.

As an open and decentralized investment bank, Ondo finds investments across traditional and decentralized finance and packages them into more investor-friendly risk/reward balanced offerings for institutional and retail investors.

Leading up to their token sale next week, we sat down with the Ondo team to take a closer look at what they are building, why it matters, and their recent traction.

Let’s dive in.

1. To begin, what is Ondo and what problems does it solve?

Ondo is building a decentralized investment bank.

Traditional investment banks structure bespoke financial instruments that bridge the needs of capital suppliers (e.g. investors) and capital utilizers (e.g. companies). For example, they can manage a bond offering from a company looking to raise debt and investors looking for such opportunities. However, investment banks service their clients in a high-touch, manual, and heavily intermediated way.

Ondo connects and services a wide set of clients — including investors, companies, and DAOs — through investment banking activities that are automated, composable, and decentralized by offering them through smart contracts. In this way, we bring sophisticated financial products and services, usually exclusive to a select group of participants, to the exciting world of DeFi, where anyone can benefit from them.

Our first offerings were structured products on top of decentralized exchanges: investment vaults that decompose the risks associated with traditional liquidity providing and enable investors to choose between downside protection and enhanced returns. Historically, liquidity providers are exposed to risks such as impermanent loss with no ability to customize their exposures; through Ondo, however, they can achieve the right risk-reward profile for their investing goals.

We later expanded with Liquidity-as-a-Service (LaaS), a pioneering program in protocol-owned liquidity. Our LaaS vaults empower DAOs to materially increase their liquidity on decentralized exchanges without relying on liquidity mining or centralized market makers — alternatives that are extremely expensive to the DAOs and their token holders.

Our initial cohorts were an incredible success: Ondo received $120m+ in committed capital from leading stablecoin issuers (Fei, Frax, Terra, and others) to help over 10 DAOs ramp up their on-chain liquidity. Innovative projects such as Near, Synapse, and UMA benefitted from reduced volatility, slippage, and risk of market manipulation.

Ondo is laying the foundation to bring institutions to DeFi. Our structured products will enable such investors to become comfortable with DeFi instruments by allowing them to better manage their risk profile, and reduce exposure to certain DeFi-native risks such as impermanent loss and stablecoins depegging. We are also working on infrastructure partnerships to facilitate custody and compliance. Our investors reflect this vision: they include traditional financial institutions (from hedge funds to an Ivy League endowment — a first in DeFi) and strategic infrastructure providers, in addition to industry leaders in venture capital (e.g. Founders Fund, Pantera) and blockchain (e.g. Coinbase).

Ondo’s growing suite of products and services will help diverse stakeholders in DeFi to better achieve their financial goals.

2. What is the inherent use case for Ondo’s native token, ONDO?

The Ondo Team intends to gradually decentralize the protocol and its operations. The launch of the ONDO token and associated governance DAO is the next major step towards this vision.

First, the DAO will govern future token distributions. We believe that setting the token distribution should be an iterative effort in collaboration with the community. With this in mind, the majority of tokens will be held by the Ondo DAO itself. The team and community can experiment with multiple distribution mechanisms (e.g. sales, airdrops, liquidity mining) as decided by DAO governance.

Second, the DAO will govern major changes to the protocol. One major area is additional value accrual mechanisms for the token and DAO: vault fees (already supported by our vaults, but set to zero at the moment), staking mechanisms (e.g. veONDO wallets get priority for in-demand tranches), market making services, and more. Other areas include the launch of new products, integrations and partnerships with other protocols, and deployments in other ecosystems.

And third, the DAO will build a substantial balance sheet over time and govern its uses. An investment bank’s balance sheet is a moat on top of its services: the bank can underwrite clients, smooth out capital imbalances, and invest strategically and opportunistically. The Ondo DAO can build a substantial balance sheet over time (e.g. through protocol revenue and additional institutional fundraises) for these purposes: investing into imbalanced tranches, market making illiquid positions, underwriting LaaS vaults, and so on.

Later on, the DAO can elect other groups beyond the Core Team to provide investment banking services on top of the protocol. Our contracts have the concept of a ‘strategist role’ which has the permission to structure, launch, and manage vaults (as well as similar responsibilities in upcoming products). Only the Ondo Team holds this role for now, but the DAO can elect additional groups to be eligible as strategists as well.

The DAO will enable the Ondo Team, the community, and investors to collectively govern the future of the protocol. Locked tokens from CoinList purchasers can still vote in the DAO, so starting soon everyone will collectively shape Ondo's distribution and future.

3.  Can you describe your target audience? What types of businesses and use cases are best suited to use Ondo?

Ondo was built on the belief that customized financial products and services should be available to all — we want all participants to feel comfortable accessing the best products and services in crypto. Retail users, institutions, and DAOs alike benefit from Ondo’s solutions.

Retail users gain access to the same products as institutions because there are no deposit minimums. For example, they have been able to deposit in fixed or variable tranches of our previous vaults. Our recently announced Ondo V2 Vaults that integrate with Curve and Convex offer a new suite of opportunities for them.

Institutions gain safe access to DeFi with a defined risk exposure. Those large investors are usually risk-averse and will largely deposit in our fixed tranches. Our latest products have a deep focus on diversification, which allows us to meet the fund safety requirements of institutional users.

We also dedicate close attention to the needs of DAOs and protocols:

1. Our Liquidity-as-a-Service (LaaS) offering provides a powerful alternative to traditional liquidity mining programs. Thanks to LaaS, DAOs and protocols can deepen their on-chain liquidity while removing sell pressure on their governance tokens.
2. As the vast majority of protocol treasuries sit idle in multisig wallets, we’ll work closely with DAOs to design products that fit their needs and drive new sources of revenue.

4. How is Ondo bridging the gap between DeFi and traditional finance?

TradFi structured products facilitate highly customized risk-return objectives, and other sophisticated services; however, processes are expensive, opaque, and manual.

DeFi eliminates intermediaries by instead relying on smart contracts to automate and enforce agreements. However, DeFi is hard to navigate and crypto markets are volatile which poses large barriers to entry for retail and institutional investors.

Our fixed tranches — and similar upcoming risk-mitigating products — provide investors with predictable returns and downside protection. Institutions, in particular, need help navigating DeFi-native risks such as impermanent loss and stablecoins de-pegging; our vaults are well-positioned to help them tap into DeFi with a clearly defined risk exposure.

Ondo is also working with infrastructure providers to help bring a wider audience to DeFi. For example, we are partnering with institutional custodians to enable them to offer their clients access to the protocol in a compliant way. Later on, we’ll also explore ways for fintechs to package and distribute Ondo vaults to their clients in a B2B2C model.

Our team is well-suited to tackle these challenges by combining years of experience in traditional finance — investment banks, private credit funds, hedge funds, and more — with backgrounds in technology and DeFi. Further, we can tap into our best-in-class VCs (e.g. Founders Fund, Pantera), strategic investors in both TradFi (e.g. GoldenTree, with $46B assets under management, and an Ivy League institution with >$10B in its endowment) and crypto (e.g. Coinbase, Genesis), as well as key individuals from other protocols (e.g. Aave, Compound), exchanges (e.g. Binance), and financial institutions (e.g. Goldman Sachs).

5. Can you share more about the protocol design of Ondo and what makes it so attractive to users looking to explore DeFi applications?

Ondo builds its product through the lenses of composability, ease of use, and transparency.

On composability, Ondo is combining existing vaults into more sophisticated products. For example, as described in our roadmap, we are in the process of launching vaults optimized for passive exposure. They will be an entry point to a subset of vaults and strategies optimized for the depositors’ risk tolerance.

Ondo deeply values ease of use. Our UX makes it simple for users to deposit into a vault tranche, and to understand the associated risks. The upcoming passive exposure vaults will furthermore enhance the simplicity of our offering.

Lastly, we aim to be fully transparent with our users, so they are reassured that their funds are safe at all times. A personalized portfolio is already available to them but we want to take this further. We are about to release vault information pages with extensive details regarding deposits in protocols, level of exposure to assets, frequency of auto-compounding, contract addresses, and more. Ondo has also completed security audits with multiple industry-leading firms including Quantstamp, Certik, Peckshield, and ABDK.

6. What trends are you most excited about in the crypto space and DeFi more broadly?

Following the explosive growth of DAO’s, many protocol treasuries are not currently being used efficiently. Liquidity of native tokens is often poor while vast treasuries are not put to use.

Ondo is pioneering customized solutions for DAOs and protocols through unique offerings such as Liquidity-as-a-Service (LaaS), which allows token issuers to cost-effectively double liquidity of their tokens on decentralized exchanges, and can provide extra sources of revenue.

We believe we will see a growing trend that uses Ondo’s LaaS for direct listings. Saddle Finance was the first to do so recently, launching its SDL token via LaaS alongside Frax as the liquidity partner.

LaaS allows for significantly deeper liquidity during the launch of a token, while efficiently utilizing treasuries on both sides of the liquidity pair. We are excited to play an important role driving value for all participants in DeFi with our growing product suite and cross-chain expansion.

We are working with DAOs to offer treasury management solutions specifically tailored for the ecosystem of the future.

7. What is the best way for the community to get involved with Ondo?

Our thriving community is most active in Discord, while regular updates are posted on our Twitter. We also share deep-dives on our Medium and we’ll be posting lots of informative video content on our new YouTube channel, so subscribe there too!

We like to reward our most active community members — join us on our mission to decentralize banking.

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