Dialogue with the decentralized investment bank Ondo: How to improve the capital efficiency of DeFi protocols?

Original Title: 《A Deep Dive Into Ondo: Decentralized Investment Banking》
Compiled by: Biscuit, Chain Catcher

Ondo Finance is a protocol aimed at accelerating mainstream investor adoption of decentralized finance (DeFi) by reducing risks, and it will conduct a token sale on CoinList on May 12.

As an open and decentralized investment bank, Ondo seeks investments in both traditional and decentralized finance, packaging them into risk/reward balanced products that are more friendly to institutional and retail investors.

Ahead of next week's token sale, CoinList engaged in a detailed discussion with the Ondo team about the project's significance and appeal.

1. What is Ondo, and what problems does it primarily address?

Ondo is building a decentralized investment bank.

Traditional investment banks create customized financial products to meet the needs of capital providers (e.g., investors) and capital users (e.g., companies). For example, they might establish a debt company to provide bond services to investors. Traditional investment banks serve clients through extensive marketing, manual services, and other intermediary means.

Ondo automates, composes, and decentralizes financial products through smart contracts, serving a wide range of clients, including investors, companies, and DAOs. In this way, Ondo brings complex financial products and services, typically limited to specific participants, into the DeFi world, allowing anyone to participate.

The first products are structured products based on decentralized exchanges: investment vaults that can decompose traditional liquidity-related risks and allow investors to choose price downside protection or enhanced returns. Previous liquidity providers faced risks such as impermanent loss and could not customize their risk exposure. However, through Ondo, liquidity providers can achieve the right risk-return profile.

Ondo expands liquidity as a service (LaaS), a groundbreaking product that provides liquidity for the protocol. LaaS vaults enable DAOs to significantly enhance liquidity on decentralized exchanges without relying on liquidity mining or centralized market makers, which are too costly for DAOs and their token holders.

Ondo has secured over $120 million in committed funds from leading stablecoin projects (such as Fei, Frax, Terra) to help more than 10 DAOs improve their on-chain liquidity. Innovative projects like Near, Synapse, and UMA will benefit, as Ondo helps them reduce volatility, slippage, and market manipulation risks.

Ondo lays the groundwork for institutional entry into DeFi. Structured products will enable such investors to better manage risks and reduce exposure to certain DeFi-native risks (such as impermanent loss and stablecoin de-pegging). The team is also committed to establishing infrastructure partnerships to facilitate regulation and compliance. Traditional financial institutions (from hedge funds to Ivy League schools—pioneers in DeFi) and strategic infrastructure providers, as well as venture capital (e.g., Founders Fund, Pantera) and blockchain (e.g., Coinbase), reflect this vision.

Ondo's continuously updated suite of products and services will help various stakeholders in DeFi better achieve their financial goals.

2. What is the intrinsic use case of Ondo's native token ONDO?

The Ondo team intends to gradually decentralize the protocol and its operations completely. The ONDO token and DAO governance are crucial steps in achieving this vision.

First, the DAO will manage future token allocations. Setting token allocations requires collaboration between the team and 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 various allocation mechanisms determined by DAO governance (e.g., sales, airdrops, liquidity mining).

Second, the DAO will manage significant changes to the protocol. This primarily includes the value-add mechanisms for the token and DAO, such as vault fees, collateral mechanisms (e.g., veONDO), market-making services, and more. Other proposals include launching new products, integrating and collaborating with other protocols, and deploying in other ecosystems.

Third, over time, the DAO will build and manage a substantial balance sheet. The balance sheet is a moat for traditional investment banks, which use it to underwrite clients, eliminate capital imbalances, and make strategic and opportunistic investments. The Ondo DAO can build a large balance sheet over time (e.g., through protocol revenue and institutional fundraising) for investing in imbalanced parts, market-making liquidity-short positions, underwriting LaaS vaults, and more.

In the future, the DAO can also elect investors outside the core team to provide investment banking services using Ondo vaults. Investors in the "strategist role" will have the right to build, launch, and manage vaults. Currently, only the Ondo team holds this role, but the DAO can elect other members to become strategists.

The DAO will enable the Ondo team, community, and investors to jointly manage the future of the protocol. Although the ONDO tokens purchased from CoinList are locked, they can still vote in the DAO, allowing each member to collectively shape the future of Ondo.

3. Can you describe Ondo's target audience? What types of businesses and use cases are best suited for Ondo?

Ondo's philosophy is that everyone should have access to customized financial products and services, and we hope all participants can easily access crypto products and services. Individual investors, institutions, and DAOs all benefit from Ondo's solutions.

Since Ondo has no minimum deposit limits, individual investors can use the same products as institutions. The recently launched Ondo V2 Vault integrates with Curve and Convex, providing individual investors with a range of new opportunities.

Institutions can safely access DeFi with clearly defined risk exposures. Those large investors typically avoid risks and primarily deposit in fixed income. The latest version of Ondo places a strong emphasis on diversification, meeting the safety requirements of institutional users.

We are also closely monitoring the needs of DAOs and protocols:

• Liquidity as a Service (LaaS) products provide an alternative to traditional liquidity mining, allowing DAOs and protocols to deepen their on-chain liquidity while alleviating the sell pressure on their governance tokens.
• Since the vast majority of protocol funds are idle in multi-signature wallets, we will work closely with DAOs to design products that meet their needs for new revenue sources.

4. How does Ondo bridge the gap between DeFi and traditional finance?

TradFi structured products offer highly customized services for risk-return clients; however, these services are very expensive, require manual operations, and are opaque.

DeFi eliminates intermediaries, using smart contracts to automate the execution of protocols. However, DeFi has some security risks, and the volatility of the crypto market poses significant obstacles for both retail and institutional investors.

Ondo's fixed-income products, along with upcoming risk mitigation products, provide investors with predictable returns and price downside protection. Institutions especially need such products to address DeFi-native risks, such as impermanent loss and stablecoin de-pegging. Vaults can help institutions earn yields in DeFi with clearly defined risk exposures.

Ondo is also collaborating with infrastructure providers to bring more potential investors into the DeFi space. For example, the team is working with institutional custodians to enable them to provide compliant services to clients regarding DeFi protocols. Later, we will also attempt to collaborate with fintech companies to package and distribute Ondo Vaults to their customers using a B2B2C model.

The team addresses these challenges by combining years of experience in traditional finance (investment banking, private credit funds, hedge funds, etc.) with DeFi products, leveraging the resources of the team's network, such as top-tier VCs (e.g., Founders Fund, Pantera), strategic investors in TradFi (e.g., GoldenTree, managing $46 billion in assets), and key figures from cryptocurrency exchanges (e.g., Coinbase, Genesis), as well as other DeFi protocols (e.g., Aave, Compound), exchanges (e.g., Binance), and financial institutions (e.g., Goldman Sachs).

5. Can you share more about Ondo's protocol design logic and its appeal?

Ondo builds products through composability, usability, and transparency.

In terms of composability, Ondo is combining existing vaults into more complex products. For example, as outlined in Ondo's roadmap, the team is launching self-optimizing vaults that will optimize their strategies based on depositors' risk tolerance.

At the same time, Ondo places a strong emphasis on usability, aiming to allow users to easily deposit assets into vaults while informing them of the associated risks.

Finally, our operations are completely transparent to users, ensuring that user funds are always secure. An upcoming vault information page will include detailed information about protocol deposits, asset risk exposures, automatic compounding frequencies, contract addresses, and more. Ondo has also completed code audits from several security firms, including Quantstamp, Certik, Peckshield, and ABDK.

6. What trends are you most interested in within the crypto space and the broader DeFi landscape?

With the explosive growth of DAOs, many DeFi protocols' funds are not being effectively utilized. There are large amounts of assets sitting idle in vaults, leading to poor liquidity for native tokens.

Ondo is customizing solutions for DAOs and protocols through unique products like liquidity as a service (LaaS), enabling token issuers to enhance their tokens' liquidity on decentralized exchanges at a low cost and gain additional revenue sources. Saddle Finance was the first protocol to use LaaS services, launching its SDL token with Frax as liquidity through LaaS.

Through our continuously updated product suite and cross-chain expansion, we aim to play a significant role in driving value for all participants in DeFi. At the same time, Ondo is collaborating with DAOs to provide tailored fund management solutions for future ecosystems.