[Ondo] [DRAFT] [STIP - Round 2]

[nathan.allman]

SECTION 1: APPLICANT INFORMATION

Provide personal or organizational details, including applicant name, contact information, and any associated organization. This information ensures proper identification and communication throughout the grant process.

Applicant Name: Nathan Allman

Project Name: Ondo Finance

Project Description: Ondo Finance provides institutional-grade, blockchain-enabled investment products and services. Ondo is the market leader in tokenized securities with over $200 million assets. Ondo’s current live products include OUSG, the first tokenized US Treasuries product (for accredited investors), and USDY, the first freely transferable US Treasuries product (for retail and institutions alike). We also developed Flux Finance, the first lending protocol supporting tokenized securities as collateral.

Team Members and Qualifications:

We currently have 20 team members. The team consists of the following: Management (3), Product (1), Design (1), Engineering (7), Operations (3), Marketing/Community (2), Legal & Compliance (3), with plans to continue expanding the team. We have provided brief bios of management and engineering leadership below.

Nathan Allman | Founder and Chief Executive Officer

Nathan previously worked at Goldman Sachs on the Digital Assets team. He also has a background in private credit investing at Prospect Capital Management. Nathan has an A.B. from Brown University.

Justin Schmidt | President and Chief Operating Officer

Justin previously ran the Digital Assets trading desk at Goldman Sachs and helped launch the broader Digital Assets team. Justin also previously worked as a quantitative equities portfolio manager within the WorldQuant arm of Millennium Partners. Justin has an B.S. and M.Eng. from MIT.

Brendan Florez | Managing Director of Client Relations and Strategic Operations

Prior to joining Ondo, Brendan held prior roles as Senior Relationship Manager at Bridgewater Associates, Founder and CEO of Base Capital, and President & COO of Polyera. He has a degree in Electrical Engineering from Princeton University.

Ali Azam | VP Of Engineering, Smart Contracts Lead / Github Username: ali2251

Before joining Ondo Finance as VP of Engineering, Ali served as the Tech Lead for Boson Protocol. Earlier in his career, he collaborated with Tracr (a De Beers subsidiary) to establish a supply chain blockchain framework utilizing zero-knowledge proofs. For the past 7 years, he has been instructing on smart contracts in a London-based workshop. Ali holds a degree in Computer Science with an AI specialization from King’s College London.

Cameron Clifton | Backend Engineering Lead / Github Username: cameronclifton

Prior to working at Ondo Finance as Backend Engineering Lead, Cameron worked as an software engineer at SpaceX on the Starlink constellation and at a digital asset trading firm named Lonk. He has a Bachelor’s degree in Computer Engineering and a Master’s degree in Computer Science from Lehigh University.

Carter Lathrop | Web Engineering Lead / Github Username: clathrop

Prior to working at Ondo Finance as Web Engineering Lead, Carter was the CoFounder & CTO of Paperstreet VC, a platform for investor relations and portfolio management. He is an alumni of the 2019 Techstars Blockchain Accelerator where he brought to market one of the first legally compliant primary token issuance platforms. Previous to that he worked as an engineering lead for Salesforce. He holds a Bachelor’s degree in Computer Engineering from Lehigh University.

Project Links:

• Ondo Finance Website
• Ondo Finance Twitter
• Ondo Finance Documentation
• Steakhouse Dune Dashboard
• DeFiLlama

Contact Information

TG: @nallman

Twitter: @nathanlallman

Email: nathan.allman@ondo.finance

Do You Acknowledge That Your Team Will Be Subject to a KYC Requirement?: Yes

SECTION 2: GRANT INFORMATION

Detail the requested grant size, provide an overview of the budget breakdown, specify the funding and contract addresses, and describe any matching funds if relevant.

Requested Grant Size: 1,500,000 ARB

Grant Matching: Ondo does not yet have a liquid token and therefore cannot provide matching.

Grant Breakdown: The grant will be given 100% to the Arbitrum community. Specifically, we intend to use the ARB to incentivize DEX LPs containing USDY.

Funding Address: TBD; see “Funding Address Characteristics”.

Funding Address Characteristics: The funding addresses will be automated incentive distribution contracts, which must be deployed.

Contract Address: TBD; see “Funding Address Characteristics”.

SECTION 3: GRANT OBJECTIVES AND EXECUTION

Clearly outline the primary objectives of the project and the Key Performance Indicators (KPIs) used to measure success. This helps reviewers understand what the project aims to achieve and how progress will be assessed.

Objectives: The purpose of the grant is to attract new users and capital to Arbitrum, and to prevent outflows by providing a yield-bearing substitute to conventional stablecoins. Concretely, we aim to use the grant to incentivize DEX LPs in USDY in order to make it possible for users on Arbitrum to buy and sell USDY with minimal price impact. We expect this will draw a large volume of stablecoin capital from other chains to Arbitrum in order to acquire USDY.

Key Performance Indicators (KPIs):

• TVL of USDY on Arbitrum
• Price impact of buying/selling USDY at various quantities on DEXes on Arbitrum
• Number and quality of protocols integrating USDY
• Number of wallets holding USDY
• Quantity of capital movement from stablecoins on other chains to USDY on Arbitrum

How will receiving a grant enable you to foster growth or innovation within the Arbitrum ecosystem?:

For most applications in DeFi, USDY is a superior alternative to conventional stablecoins since it pays a yield. USDY can be integrated broadly into the Arbitrum ecosystem to offer protocols a competitive edge over protocols in ecosystems without liquid access to USDY. USDY just launched and is very early in its distribution, so seeding DEX liquidity in USDY now offers Arbitrum a chance to gain an early lead.

Here are a few potential integrations for USDY:

• Use as collateral in perps protocols, such as GMX: In TradFi, collateral for derivatives is often US Treasuries, rather than 0% yielding assets like conventional stablecoins. GMX and other perps protocols on Arbitrum can increase their competitive edge by adopting yield-bearing collateral.
• Use as the “cash leg” in AMMs: One of the downsides of AMMs is their requirement to lock up large amounts of capital in liquidity pools. This downside is mitigated by utilizing yield-bearing collateral.
• Use as collateral in lending protocols: Users wishing to borrow crypto on DeFi lending protocols can do so in a more capital efficient manner by posting USDY collateral. We have already passed a snapshot to add in fUSDC, an asset over-collateralized entirely by Ondo’s $OUSG (tokenized treasuries product), as collateral on Aave, and we are working on the technical integration. We also developed a lending protocol, Flux, which is exploring moving to Arbitrum.

Additionally, right now users can only acquire USDY directly from Ondo by going through KYC on our platform. Arbitrum would become one of very few venues expected to have material USDY liquidity in the near future with a grant of the proposed size. This would likely lead to many stablecoin holders going to Arbitrum in order to acquire USDY.

As a brief technical note, there are two versions of USDY: one that is rebasing, with a mint/redeem price that stays at $1, and one that is accumulating, with a mint/redeem price that goes up by a small increment each day. Users will be able to swap between rebasing and accumulating versions via a simple contract call, very similar to swapping between ETH and stETH. We anticipate that most protocols will integrate the accumulating version given technical constraints, while most users holding USDY for savings purposes or using it as a means of payment will use the rebasing version given its accounting simplicity.

Justification for the size of the grant: OUSG and USDY already have a TVL of >$200m combined with no incentives provided to date. Given the role of OUSG and USDY in cash management and their extremely low risk profile, we believe even a small % boost should be sufficient, therefore we believe the use of ARB is extremely capital efficient towards a goal of increasing TVL for Arbitrum. For example, $1m in incentives provided over 6 months would provide a 1% APR boost on $200m of capital (Ondo’s current TVL), which we think is more than enough to draw existing Ondo investors on mainnet as well as attract new ones.

Execution Strategy: We will target a 1-1.5% boost on the USDY LPs. Pending deployment of Flux on Arbitrum, one pool type that we would like to incentivize is fUSDC/USDY. fUSDC is a tokenized loan on Flux Finance, a lending protocol supporting only tokenized US Treasuries as collateral. We believe an incentivized fUSDC/USDY LP would have many advantages over a simple USDC/USDY LP since both fUSDC and USDY earn close to the rate of US Treasuries while USDC does not earn a yield. Yet, DEX aggregators can still allow for one-click swapping from USDC into USDY and back by using the fUSDC/USDY pool since they can route through Flux for native minting and burning of fUSDC in exchange for USDC. We would also like to incentivize a USDY/wstETH pool in collaboration with Lido. We plan to engage with the community to finalize the selection and distribution of USDY LP rewards.

Grant Timeline: Grants will be used within 6 months.

Do you accept the funding of your grant streamed linearly for the duration of your grant proposal, and that the multisig holds the power to halt your stream? Yes

SECTION 4: PROTOCOL DETAILS

Provide details about the Arbitrum protocol requirements relevant to the grant. This information ensures that the applicant is aligned with the technical specifications and commitments of the grant.

Is the Protocol Native to Arbitrum?: USDY is not yet deployed on Arbitrum, however we would deploy USDY natively on Arbitrum (rather than simply wrap it in a decentralized bridge token). We would integrate Arbitrum into our native asset bridge powered by Axelar.

On what other networks is the protocol deployed?: Ethereum and Polygon PoS

What date did you deploy on Arbitrum?: N/A

Protocol Performance: Ondo is the market leader in tokenized securities with approximately 50% market share. There is increasingly broad recognition from leading institutions like BCG, McKinsey, and BofA that the TAM for tokenization overlaps heavily with the TAM for traditional asset management. BCG estimates $16 trillion in tokenized assets by 2030. By cementing Ondo’s position as the leader in asset tokenization with a focus on compliance, security, and client service, we are well-situated to capture a material percentage of that flow.

Ondo’s products are also the first and largest tokenized securities accepted as collateral at a DeFi lending protocol, Flux Finance, which Ondo developed and is closely partnered with. Flux intends to make a grant application as well and there are a wide variety of synergies between Ondo, Flux, and Arbitrum.

Source: Steakhouse Finance, Dune

Note: the above table excludes a recent $30m investment into USDY. True TVL is shown by DeFiLlama below (>$200m).

Protocol Roadmap: Our initial focus is on tokenized treasuries, money market funds, and other high quality, low risk securities in the “cash equivalents” space. Our tokenized cash equivalents bring the same 24/7 global transferability and compatibility with smart contracts and DeFi that stablecoins offer while paying their holders a yield and offering superior investor protections. The combination of high “real world” interest rates, low on-chain yields, a large quantity of capital in stablecoins, and regulatory and structural risks in stablecoins makes this a compelling immediate opportunity.

We have a suite of offerings in the cash equivalents space. Our first offering launched earlier this year was OUSG, a form of tokenized US Treasuries launched in February 2023 that now has over $165 million in assets. We more recently announced USDY, a tokenized note secured by US Treasuries and bank deposits that is accessible to any non-US individual or institutional investor and that has a similar degree of accessibility as conventional stablecoins. USDY is expected to be available to investors on secondary markets shortly.

Our short-term roadmap is focused on distribution and protocol integrations for these assets, particularly by integrating USDY within DeFi as discussed above.

Audit History: We have received many smart contract audits from firms such as Trail of Bits, Nethermind, ABDK, Quantstamp, and Code4rena. Our audits can be found on our website at: Smart Contract Audits | Ondo Finance Docs

SECTION 5: Data and Reporting

Provide details on how your team is equipped to provide data and reporting on grant distribution.

Is your team prepared to create Dune Dashboards for your incentive program?: Yes

Does your team agree to provide bi-weekly program updates on the Arbitrum Forum thread? Yes, Ondo has a well-equipped engineering and data team to do so.

Does your team acknowledge that failure to comply with any of the above requests can result in the halting of the program’s funding stream?: Yes

[Joli]

TLDR;

We have several questions around the legal risks associated to Arbitrum issuing a grant to Ondo, arising from legal limitations to the natural paths of building USDY liquidity on Arbitrum. We believe this questions should be studied in depth as they can potentially involve practices that the SEC has stated as “concerning specific abusive practices”, and could introduce risk to USDY holders, the Arbitrum Foundation and potentially crypto in general if SEC enforcement actions were to materialize.
Further legal clarification from Ondo would be appreciated.

Context

Ondo’s USDY is issued under Reg S, which specifies that buyers are to hold assets for a restriction period of 40-days to comply with registration exception.
This presents a problem since crypto users in general, and Arbitrum users in particular, expect to immediately transfer these tokens. The restriction period also presents a large problem for market making/ arbitraging.

To solve such issues, Ondo could pursue two avenues, both of which present legal issues.

Avenue #1 - Finding a distributor willing to hold USDY for the restricted period

The first way to make USDY immediately transferable for users it to find a distributor willing to hold the securities during the 40-day restricted period.

In the case of USDY, Ondo has partnered with Mantle, who purchased ~$30M in USDY (Transaction Details - Mantle) and held it for such 40-day restricted period.

Once that period ended, Mantle and Ondo are collaborating to make such USDY accessible to users, including USDY DEX venue liquidity provision (AGNI) and USDY wrappers like mUSD (Commonwealth); which collectively now represent ~$10M of the total ~$30M purchased.

The SEC has already commented on this behavior as a “concerning specific abusive practice”, quote:

"There have been a variety of schemes involving parking
securities with offshore affiliates of the issuer or a
distributor. In these transactions, Regulation S is claimed as
the basis to sell securities to offshore shell entities formed by
the issuer or a distributor (or, in some cases, persons closely
associated with the issuer or distributor) to purchase the
securities. The entities hold the securities for the restricted
period; at the end of that period, proceeds from the U.S. sale
make their way, directly or indirectly, to the issuer or
distributor. These transactions do not qualify for either the
Regulation S safe harbor or the Rule 901 general statement since
they are nothing more than sham offshore transactions structured
to evade the Securities Act registration requirements."

SOURCE: https://www.sec.gov/files/rules/interp/33-7190.txt

If Arbitrum where to issue a grant to Ondo for USDY, it is possible that a portion of it will be bridged from Mantle. A legal and risk assessment on the implications of applying incentives to these assets should be explored.

Avenue #2 - Non-transfer of economic risk to purchaser

Ondo’s USDY native liquidity proposal could also be filled by KYC’d users who purchase USDY and hold through the restricted period.

Although not explicitly stated in the proposal, our best understanding of how Ondo expects net new liquidity in Arbitrum is via net new KYC’d buyers (vs bridging liquidity from Mantle). We also understand that a portion of the Arbitrum grant would be used to incentivize USDY holders in such a restricted period, providing additional rewards to users who might, without such incentive, not buy and hold USDY.

This practice was identified by the SEC as a “parking scheme”:
"As noted, the Commission has become aware of a number of
instances where the total mix of factors raises the concerns
described above. These factors, any one of which may serve to
indicate that the economic or investment risk never shifted to
the offshore purchaser, and that the securities – as a matter of
substance as opposed to form – never left the United States or
remained offshore for less than the restricted period, have
included the use of:
(iii) fees paid to the purchaser of the securities to hold the securities for the restricted period, whether paid directly or as more frequently seems to be
done through significant discounts to the U.S. market price for the issuer’s stock, where the fees or discounts are such to indicate that the transaction was intended to create a parking scheme or other scheme where the securities were merely being held offshore to evade the registration requirements."

SOURCE: https://www.sec.gov/files/rules/interp/33-7190.txt

Conclusion

In our view, where Ondo not engage in the behaviors flagged by the SEC, it is our view that market making of USDY would not be feasible, as purchases would take 40 days and redemptions cost 20bps (~14 days of yield), resulting on uneconomic market making and unclear path for liquidity to make it into Arbitrum.

It would be helpful to understand from Ondo how the team expects new USDY liquidity to make it to Arbitrum.

By nature of Arbitrum being credibly neutral, the deployment of USDY would not seem to be a risk to Arbitrum. However, providing a grant to incentivize USDY can pose risks to Arbitrum users and Arbitrum Foundation alike, that need to be better understood. Given how explicit the SEC has been on these practices, moving forward with this program requires deeper risk and legal analysis.

We would request Ondo to reply with a detailed legal and risk analysis and how the team expects new USDY liquidity to make it into Arbitrum, to ensure that the Arbitrum community is not exposed to legal liabilities and can do it’s own risk analysis.

[boke]

I strongly feel that Arbitrum should hold any grant release to Ondo until they first clear the allegations surrounding their never released (scam?) token.

FYI: https://twitter.com/Foxi_xyz/status/1735561303073431652