Reserve Fund | Ondo Finance (USDY)

Applicant information

Name: Ondo Finance Inc. (and our controlled affiliate, Ondo USDY LLC)

Email: partnerships@ondo.finance

Key Information: USDY is a tokenized note secured predominantly by short-term US Treasuries (and a small amount of US bank demand deposits).

Expected APY: 5.35% as of August 12th, 2024

Underlying asset(s): USDY is backed predominantly by short-term US Treasuries, as well as a relatively small amount of US Dollars held in US Demand Deposit Accounts (i.e. Bank Accounts).
Minimum/Maximum transaction size:

  • Investments: US$500 minimum / no maximum
  • Redemptions: US$500 minimum / no maximum

Current AUM for asset: US$331.26M as of August 12, 2024

Volume metrics: Please see RWA.xyz dashboard here.

Proposal Summary

Brief outline of the requested allocation of Ethena’s Reserve Fund to your asset/product and benefit to Ethena.

Basics and background

1. How will this allocation improve the diversification or capital efficiency of Ethena’s Reserve Fund and/or backing assets?

USDY provides high transparency institutional-grade yield directly on-chain, backed by a portfolio of US Treasuries and bank deposits. USDY has been designed with transparency and investor protection in mind. USDY is overcollateralized by a first-loss equity position funded in part by Ondo Finance, creating strong alignment between USDY and Ondo Finance.

2. Please describe any experience your firm has in working with decentralized organizational structures

Ondo Finance Inc. has extensive experience working with decentralized organizational structures. Most recently, for example, we were included in Arbitrum’s Stable Treasury Endowment Program (STEP) for diversifying their treasury.

3. What is your entity’s current assets under management, assets held in trust, total value locked, or equivalent metric for your legal structuring?

As of August 12, 2024, Ondo USDY LLC has US$331.26M in TVL for the USDY token and Ondo I LP has US$226.11M in TVL for the OUSG token.

Legal design

1. Do holders of your product have any shareholder, investor, creditor or similar rights?

Yes, USDY holders have creditor rights that are protected by a first-priority, perfected security interest, as well as other significant protections. USDY has been designed with transparency and investor protection in mind.

Ondo USDY LLC, has granted a first-priority, perfected security interest in its US Treasuries and US Bank Demand Deposit Assets to Ankura Trust Company, an independent third party who acts as collateral agent for the benefit of the USDY holders. Specifically, in the event of a payment, portfolio or credit default of the LLC, Ankura has obligations to seize and repossess the collateral under its security interest and distribute the collateral (less expenses) to USDY holders.

To further protect investors, Ondo USDY LLC is obligated to overcollateralize its obligations to USDY holders, to absorb short-term fluctuations in US Treasuries prices. As of August 12, 2024, the overcollateralization ratio is 3.17%.

Finally, Ondo USDY LLC has been structured to maximize bankruptcy-remoteness, including issuance from a separate, special-purpose-vehicle legal entity managed by a Board of Directors with an independent director, segregation of assets from Ondo Finance Inc., and separate books and accounts. An international law firm has delivered a legal opinion regarding the bankruptcy-remoteness of Ondo USDY LLC from Ondo Finance Inc.

2. Describe the legal and contractual structuring for your product, specifically naming any regulatory bodies overseeing the product, if applicable.

Ondo USDY LLC is a money services business that is registered with and regulated by FinCEN, a bureau of the US Treasury Department. Ondo USDY LLC offers and sells USDY in reliance on the Regulation S exemption from the registration requirements of the US Securities and Exchange Commission, which requires, among other things, that USDY is only offered and sold to non-US persons outside the United States.

3. How would the proposed allocation be treated in a bankruptcy or insolvency situation?

As part of maintaining these security interests, we have entered into control agreements with Ankura Trust Company, as Collateral Agent for USDY, and each of the US Treasuries custodians and banks holding assets backing USDY. These agreements give Ankura the legal right and obligation in its role as Collateral Agent, subject to requisite USDY tokenholder approval, to take control of Ondo USDY LLC’s assets and distribute payments to USDY tokenholders in the event of a payment, portfolio or credit default (including bankruptcy or insolvency) of Ondo USDY LLC. The events that trigger such an action include a failure to repay redemptions, a failure to keep USDY adequately capitalized, or Ondo USDY LLC filing for bankruptcy.

Smart Contract/Architecture

1. How many smart contract audits have been completed with respect to your tokenized product? Please name the auditors and provide a copy of reports.

USDY’s smart contracts have been audited 8 times in total by Code4rena, Nethermind, Cyfrin, Zokyo, and Halborn. The reports are available here:
Audits | Ondo Finance Docs

2. Is the asset/product permissioned? If so, how are you managing user identities? Any blacklisting/whitelisting features?

To invest in or redeem USDY through its issuer, Ondo USDY LLC, you must meet geographic eligibility requirements and complete onboarding with Ondo USDY LLC, which includes standard KYC/B and AML checks. To buy or sell USDY on secondary markets, a (prospective) holder does not need to onboard with the issuer. Once minted, tokens are transferable to anyone within eligible geographies at the holder’s discretion, including selling, utilizing within DeFi, and buying more tokens from others.

USDY has an on-chain blocklist for Ethereum addresses, located at 0xd8c8174691d936E2C80114EC449037b13421B0a8. USDY’s contract for transferring tokens also blocks transfers where either the sending address or the receiving address are listed as sanctioned by the Chainalysis Sanctions Oracle.

More information on eligibility is available here: : Eligibility | Ondo Finance Docs

3. Is the asset/product present on several chains? Are there any cross chain interactions?

As of July 10, 2024, USDY is natively available on Ethereum, Mantle, Solana, Aptos, Sui, and Noble (Cosmos ecosystem). Onchain liquidity is available on each network.

Ondo provides a USDY bridge between Ethereum and Mantle (using Axelar’s bridge technology, enhanced with additional protection) available here: USDY Bridge | Ondo Finance. Ondo can help facilitate bridging between other networks on a one-off basis.

4. Are the applicable tokens being used in any other protocols? Please describe the various components of the ecosystem.

USDY is usable similarly to stablecoins across a wide variety of DeFi applications, including AMMs, borrow/lend markets, and perpetuals protocols.

Many of these protocols are listed here: Ecosystem | Ondo Finance

5. How are trusted roles/admins managed in the system? Which aspects of the solution require trust from users?

Investors trust Ondo and their audited smart contracts to facilitate burns and mints of USDY. All administrative permissions for the USDY smart contract system are secured by industry leading Gnosis Safe multi-signature wallets.

6. Is there any custom logic required for your token/product? If so please give any details.

No custom logic is required. The EVM-compatible USDY token is ERC20 compliant and inherits from the Open Zeppelin ERC20 Standard. On non-EVM chains, USDY is issued under analogous token standards.