Ondo Finance, an Ethereum-based asset manager, is broadening its market with the help of Polygon Labs in a bid to drive greater adoption of tokenized financial products within DeFi.
By expanding to Polygon, Ondo is looking to make its first move beyond the Ethereum mainnet since it became the first company to tokenize U.S. Treasuries in February. When the Ethereum base layer reaches capacity, it drives up the cost of transactions, and Ondo says this latest move will bring those costs down.
Justin Schmidt, president and chief operating officer of Ondo Finance, said that the arrangement with Polygon would facilitate more access on-chain to institutional assets. In an interview with Decrypt, Schmidt added that the change comes at a ripe moment when more returns are possible in the DeFi ecosystem than sticking with other assets like stablecoins.
Tokenized Securities on Ethereum, Polygon, Gnosis Hit $225M Market Cap
The tokenization trend is gaining momentum. A Dune dashboard shows that the niche now boasts a market capitalization of more than $220 million across the six projects measured. Tokenization refers to issuing financial securities, like stocks and bonds, on the blockchain. Firms like Matrixport, Backed Finance, Ondo, and Franklin Templeton have all created ERC-20 tokens, representing government bonds or exchange-traded funds (ETFs)stock. Last month, for example, Franklin Templeton tapped Polygon...
"I think what's happened over the past three years is just the macro environment has shifted in the world, and you actually can earn a pretty material interest rate now on something like Treasuries," Schmidt told Decrypt.
For more than a year, the Federal Reserve and other central banks have been lifting interest rates to tamp down on inflation. This has also raised the yields for Treasuries, with yields on short-term bonds like the 2-year note rising from just 1.9% yield when the rate hikes started in March of last year to almost 5% today.
A tokenized asset is a blockchain-based signature of ownership with the underlying properties like yield remaining the same as the real-world equivalent. In contrast, a stablecoin is an entirely digital token that draws its value from its peg to a fiat currency or commodity to keep its volatility in check.
Today, Ondo has the largest market share of tokenized assets on Ethereum, with nearly $158 million in market capitalization, according to Dune Analytics. In the wider market for tokenized assets, there are other big players like Franklin Templeton, which has just over $294 million in market cap on the Stellar network, according to the RWA.xyz analytics dashboard.
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Ondo’s move to expand its tokenized financial offerings comes at a time when TradFi behemoths are eying entryways into cryptocurrency, specifically Bitcoin.
On June 15, BlackRock, the world’s largest asset manager, filed to register a Bitcoin spot market exchange traded fund. It was followed by other applications, including from big names like Fidelity, Valkyrie, and Invesco among others. Larry Fink, BlackRock’s CEO, recently went so far as to liken Bitcoin to “digitalizing gold,” a sharp reversal from his previously critical views.
Ondo, which invests in BlackRock-managed Treasury ETFs, appears to be going in the opposite direction of this crowd. With a Bitcoin ETF, the companies are taking a new technology like Bitcoin and putting it into a more traditional wrapper familiar that's to the industry. In Ondo’s case, the process is inverted, taking a traditional asset and putting it into the newer tokenized form.
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BlackRock CEO Larry Fink, who once called Bitcoin an “index of money laundering,” today said the oldest and biggest cryptocurrency was “digitalizing gold.” The billionaire’s comments in a Fox Business interview Wednesday came weeks after the world’s largest asset manager applied to the U.S. Securities and Exchange Commission for a spot Bitcoin ETF. BlackRock—which manages $9.5 trillion in assets—helped spur a Bitcoin run with its application, leading institutional investors to pour money into t...
TradFi moving into crypto at the same time as they increasingly adopt its underlying technology for tokenization may be part of an emerging trend in finance. Colin Butler, Polygon Labs' global head of institutional capital, expressed his view that there is a "tidal wave" of institutions adopting tokenization, and the proof of that will be seen in the near future.
"In the next three to six months, I think it's gonna be very, very telling, because a lot of these firms are going to come out and say they've been working on this," said Butler.
Editor's Note: This story was updated to clarify that Ondo has the largest tokenized asset fund on Ethereum.
