ONDO soars 140% as tokenisation boom trumps Fed risk — for now

Investors just pushed real world asset protocol Ondo Finance’s ONDO token to a new all-time high. But forecasted rate cuts from the US Federal Reserve could cut the party short.

ONDO soared 140% last week to an all-time high of $0.97. At current prices, Ondo Finance commands a fully-diluted market value of over $9 billion.

Ondo Finance makes revenue by offering DeFi users the ability to invest in tokenised versions of US Treasuries. If the Fed lowers interest rates, the yield on Ondo’s US Treasury-backed products will drop, making them less appealing to investors.

“Moderately lower rates may impact Ondo’s growth but only slightly at most,” Justin Schmidt, chief operating officer at Ondo Finance, told DL News.

The spike in ONDO’s price comes days after asset manager BlackRock filed with the US Securities and Exchange Commission to create the BlackRock USD Institutional Digital Liquidity Fund in partnership with asset tokenisation firm Securitize.

Securitize’s presence means the fund has something to do with the tokenisation of real-world assets — like the products Ondo offers.

Bernstein analysts said the fund is “the next evolution of financial markets, similar to the ETF wave of the last two decades.”

Ondo brings high interest rates to DeFi

Last year, protocols like Ondo soared in popularity as the Fed raised interest rates to 5.25% to 5.5% — their highest level in more than 20 years. DeFi users piled into Ondo to take advantage of the high yields offered on US Treasuries, pushing its TVL — the total value of user deposits on the protocol — to over $200 million.

But with rate cuts on the horizon and higher stablecoin yields in DeFi, the appetite for tokenised Treasuries could cool substantially.

At the recent Federal Open Market Committee meeting on March 21, Fed Chair Jerome Powell again signalled that he will lower rates to 4.5% to 4.75% by the end of the year.

According to Guy Young, founder of stablecoin protocol Ethena, a fall in interest rates could impact demand for such tokenised Treasuries.

Ethena offers USDe — a dollar-pegged cryptocurrency that earns yield from a combination of Ethereum staking yields and derivatives positions.

“Lower risk-free rates will significantly impact the demand for real-world asset related products,” Young told DL News.

Ondo Finance offers other real-world asset products in addition to its tokenised Treasuries.

But with its US Treasury-backed products making up the vast majority of the protocol’s deposits, a decline in demand will likely impact the protocol.

DeFi yields leapfrog Treasury returns

Schmidt said that even if interest rates fall to 4.5%, it’s still “likely prudent” for investors to put their money in US Treasuries instead of bank accounts to stay safe from the risk of a bank insolvency.

But in DeFi, investors have access to higher — and riskier — yields on dollar-backed assets.

The sector has already experienced a 25% loss in market share versus stablecoins since October last year when crypto yields began to exceed Treasury rates by a wide margin, Young said.

Aave, the leading lending protocol on Ethereum with over $11.6 billion of deposits, is one example of such crypto yields.

It offers over 11% APY on Circle’s USDC stablecoin. Aave’s rates fluctuate based on borrowing demand. The high yield indicates a high demand for borrowing USDC.

In comparison, Ondo’s Short-Term US Government Treasuries product offers a 5% annual return on USDC.

Instead of trying to grow its tokenised Treasuries, it may be that Ondo focuses more on its other products — at least for the time being.

“Ondo’s Global Markets business focuses broadly on tokenisation of many public securities, not just interest-rate sensitive ones,” Schmidt said.

Ondo Global Markets aims to provide access to traditional securities — like shares in companies like Amazon or Google — for onchain investors and protocol developers.

Compared to other traditional brokerages like Goldman Sachs, Robinhood, and Apex Clearing, Ondo Global Markets is the only platform with smart contract compatibility and distribution and settlement of assets happening on the same rails as crypto assets.

“We have a large addressable market for the foreseeable future,” Schmidt said.

Tim Craig is DL News’ Edinburgh-based DeFi Correspondent. Reach out with tips at tim@dlnews.com.