ONDO Token Analysis
Performance, Valuation, and Future Prospects
Introduction
The recent surge in the price of the ONDO token has prompted a closer look at the activity surrounding the ONDO protocol and how it compares to its peers. This article examines the ONDO protocol's performance, its underlying activities, and how its token's value relates to the broader ecosystem of similar protocols. By comparing ONDO to its competitors, we aim to shed light on the factors driving its recent price increase and explore the dynamics between protocol activity and token valuation across the sector.
Project Overview
Ondo Finance offers two key financial products designed to merge the stability of traditional finance with the flexibility of DeFi:
USDY (US Dollar Yield Token): This tokenized note is secured by short-term US Treasuries and bank deposits, providing high-quality, USD-denominated yields. It is accessible to non-US investors and combines stablecoin accessibility with regulated financial security. The onboarding process includes KYC, followed by investment and token minting steps, with a redemption feature compliant with US regulations.
OUSG (Ondo Short-Term US Government Treasuries): This product offers liquid exposure to US Treasuries with 24/7 tokenized subscriptions and redemptions. OUSG comes in accumulating and rebasing versions, providing stable returns and flexibility for various investment strategies. It offers low-risk investment with deep liquidity and instant minting and redemption capabilities, suitable for both retail and institutional investors.
Ondo Finance provides non-US investors a way to earn yields comparable to the US risk-free rate. Both products allow investors to benefit from the stability and high-quality yields of US Treasuries.
Project Metrics
Currently, $470M has been deposited in Ondo, with about half in USDY and half in OUSG. Of this $470M in TVL, approximately $280M has been onboarded since mid-February, showing significant growth during this period.
Holder Distribution
OUSG: 38 holders have over 0.5 OUSG, with all but two on Ethereum. The top 5 holders on Ethereum collectively hold around $170M in tokens.
USDY: Around 1500 wallets have held USDY across five chains, with the largest group of holders on Ethereum.
TVL by Chain
Ethereum: 75%
Solana: 11%
Mantle: 8%
Polygon, Sui, and Aptos: 2% each
Overall, on-chain activity for these tokens is limited due to the project's newness, large redemption amounts required, and the necessity for at least $100K and KYC (Know Your Customer) verification.
UNDO Token Metrics
Use of ONDO Token
The ONDO token serves as the governance token for the Ondo DAO and Flux Finance. Holders of the token exercise control over the protocol by voting on on-chain governance proposals, which include changes to economic parameters and smart contract upgrades. The token ensures stakeholder engagement and decision-making through a structured governance process involving forum discussions and binding on-chain votes. With a total supply of 10 billion tokens and no planned inflation, the ONDO token's distribution and usage are critical for the DAO's operations and future development.
Token Price/Market Cap
The ONDO token launched in February at around $0.20 and has experienced a significant uptrend, increasing by approximately 700% since then. Currently, the price of ONDO is $1.39, resulting in a market cap of $1.92B and a fully diluted market cap of $13.8B, with only 13.8% of the tokens circulating.
Token Unlock Schedule
The token unlock schedule reveals that approximately 7.9B tokens will be unlocked for ecosystem growth, protocol development, and private sales over the next five years. These tokens will be unlocked slightly faster than linearly, with the next major unlock cliff on January 25, which will more than double the circulating supply.
Market Cap Assessment and Comparisons
ONDO offers tokenized treasuries with $470M held but has a market cap of $13B. Comparatively, MakerDAO, a similar stablecoin business, has $6.4B in TVL and a market cap of $2.7B, while Frax has a market cap of $1B for its stablecoin and $472M for its governance token. These stablecoin businesses can likely produce a higher profit-to-TVL ratio since they retain treasury yields rather than distributing them to holders. To justify ONDO’s current market cap at MakerDAO's TVL-to-market cap ratio, ONDO would need $40B in tokenized treasuries instead of the current $470M, or MakerDAO should be valued at $36B.
Currently, there is no profit flow to token holders. Even with a 20% fee on treasury rewards, the protocol would only earn about $4.7M in fees this year at the current rate, resulting in a P/E ratio of 2250. This would need to change by two orders of magnitude to approach a fair P/E ratio. ONDO's treasury tokens have a small user base, with under 2,000 users, primarily used by a few whales, making the market cap to user ratio about $6.5M. ONDO appears overvalued compared to its peers but has the potential for fast growth if it executes well, given its position as the current leader in the tokenized treasury space.
Future Prospects
Ondo Finance has significant potential for growth through several key initiatives:
Integration into DeFi Ecosystems: By integrating into DeFi platforms across various chains, Ondo can enable the use of tokenized treasuries as collateral for lending and liquidity pools, enhancing utility and adoption.
Reducing Redemption Size: Lowering the redemption size can make tokenized treasuries accessible to a broader range of users, attracting smaller investors and increasing overall participation.
Incentivizing Development: Encouraging developers to build on top of the ONDO Treasury tokens can foster innovation and create new use cases, driving further adoption and ecosystem growth.
Capturing Treasury Demand: With the potential for an increase in on-chain demand for treasuries, Ondo is well-positioned to capitalize on this trend, benefiting from increased adoption and usage of its tokenized treasury products.
By focusing on these areas, Ondo Finance can continue to expand its user base, enhance its platform, and justify its market valuation.
Conclusion
Ondo Finance showcases both impressive growth and overvaluation. While the current market cap appears inflated compared to similar protocols like MakerDAO and Frax, Ondo's leadership in the tokenized treasury space offers substantial growth potential. To realize this potential, Ondo must focus on integrating into various DeFi ecosystems, reducing redemption sizes to attract smaller investors, incentivizing development on its platform, and capturing the growing demand for on-chain treasuries.
If the ONDO token was valued based on the TVL to market cap ratio similar to MakerDAO, it would have a market cap of about $200M. If ONDO took a 20% fee on treasury yields, it would be valued at $130M, using MakerDAO’s current revenue to market cap ratio. Should ONDO Finance take a 20% fee on treasury yields and hold $130B of treasuries with a 10 P/E, they would be worth $13B, which is their current market cap. However, this would require the business to grow by 260x to fit into a valuation with a low P/E.
Although there is potential for a large influx of demand, Ondo needs to significantly expand its business to justify its current valuation. By addressing these areas and executing effectively, Ondo can expand its user base, enhance its offerings, and ultimately justify its market valuation, solidifying its position as a leader in this rapidly evolving sector.
Sources
https://flipsidecrypto.xyz/pine/2024-06-05-01-23-pm-_owwVT
https://coinmarketcap.com/
https://docs.ondo.finance/
https://defillama.com/
I'm pretty surprised how much growth is priced in especially given how competitive the onchain treasury market is right now AND the KYC restrictions on ownership.