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Run in Finance: let DeFi earnings risk controllable | project is introduced

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The DeFi problem is solved by traditional solution

In early 2020, DeFi contracts had a total lock-up of less than $1 billion, compared with a staggering $90 billion at its peak in 2021. The composability of DeFi allows assets to travel between different protocols without resistance, generating incredible return on assets.

In traditional finance, 20 per cent annualised returns are incredible, but in DeFi, 100 per cent annualised returns are commonplace. Where did the profits come from?

There are two main sources of on-chain revenue: interest on loans and transaction fees.

For loan interest, users can deposit assets in a loan agreement such as Compound or Aave, and the borrower pays interest to the asset provider. For transaction fees, users can provide liquidity to trading pairs on decentralized exchanges such as Uniswap or SushiSwap, and traders pay a percentage of the transaction fees to the liquidity provider when they trade.

However, while the benefits offered by DeFi are considerable, the risks are also high. This is especially true because of the high volatility of crypto asset prices and the Risk of Commingled winds in lending agreements. These risks are unacceptable to users who are used to traditional financial risk view and to risk-averse investors. Therefore, DeFi's revenue risks need to be controllable.

Allocate investors with different risk preferences in a tiered mode

Ondo Finance has designed two different investment options for investors with different risk preferences: fixed income and floating income. Like the waterfall structure in traditional finance, all proceeds will be distributed first to fixed income investors, and then the rest of the proceeds will go to floating income investors.

Ondo Finance subdivides liquidity providers. We take DAI/ETH trading pairs as an example. In this trading pair, fixed income investors only need to deposit DAI to provide liquidity, while floating income providers are responsible for providing ETH, a price fluctuating asset. Strategists set minimum returns on the fixed-income side. Investors are required to subscribe for a specified period of time to deposit their assets in designated vault contracts, and at the end of the subscription period, strategists will place the vault assets on decentralized exchanges to provide liquidity. At the maturity date of the investment, the strategist will withdraw the liquidity and pay the fixed income investor the principal and income first. The remaining excess return will all belong to the floating income investor.

Different asset trading pairs and the split of liquidity providers can maximize the satisfaction of different investors' risk preferences and return needs.

Ondo Finance is about to launch subscription products

Above, we can see the four products Ondo Finance will open for subscription on July 31. The investment cycle of these four products is one month, they are ETH/ALCX, USDC/ETH, USDT/ETH and DAI/ETH respectively. The latter three products are very similar to our previous example. For fixed income investors, they only need to deposit stablecoin, while floating income investors need to deposit ETH. However, ETH/ALCX trading pairs are different. Fixed income investors need to deposit ETH with lower risk and price fluctuation, while floating income investors need to deposit ALCX with higher risk. Compared with the other three products, this product has a higher risk, so we can see that the estimated floating return of ALCX can reach 509%, and the return of fixed income ETH can also reach 50%.

At the time of writing, the total lock-up of Ondo Finance's first phase has reached nearly $3 million.

Initially, the agreement will limit the investment in each product to a hard top in order to reduce the losses investors will suffer if the agreement is attacked. Initially, the three stablecoin /ETH trading pairs had a hard top investment of $1 million each and a hard top investment of $2 million for ETH/ALCX. In the future, the hard top will slowly rise and eventually the hard top limit will be removed.

Similarly, Ondo's investment products will be sustainable in the future with no investment cycle. At the product category end, different strategists will design more diverse strategies for more assets.

The present and future of Ondo Finance

According to PitchBook, Ondo Finance has successfully secured support from Pantera Capital, but details are not yet public.

From the perspective of contract security, Ondo Finance has sent two third-party auditors, Peckshield and CertiK, to conduct an audit and is awaiting the final results of Quantstamp.

Ondo Finance has not yet agreed to a native token and has no plans to release one.