Bridging the Gap: Institutional Insights on Tokenization with Ondo Finance

Bridging the Gap: Institutional Insights on Tokenization with Ondo Finance

How do you gain a true understanding of tokenization from an institutional perspective?

The best way is by rolling up your sleeves and building in the trenches.

Very few people in the tokenization space possess deep knowledge of both the institutional and digitally native facets of the industry. Ian De Bode, Chief Strategy Officer of Ondo Finance, is one of the few who does.

Prior to joining Ondo, he spent years as a partner and the Head of Digital Assets at McKinsey, engaging, educating and supporting C-Level executives on tokenization business initiatives.

We recently sat down with him to discuss his perspective on tokenization and to explore the most significant challenges and opportunities facing the industry.

Drawing on your client experience, how does corporate America see the potential of tokenization? What would move the needle for them?

“I think it is fair to say that these days, most asset managers, custodians, exchanges and many banks are thinking through the impact of tokenization and how to get involved. For many, operational efficiency gains sound like a great place to start. Over time, however, most run into the same roadblock: operational efficiency is insufficient motivation. The operational efficiency gains from implementing tokenization are typically not a lasting angle to pursue because most institutions don't reach sufficient scale to reap material benefits from about 20 basis points of savings.

It is also potentially easier to get 20 bps of savings someplace else (depending on the asset class), instead of overhauling and reimplementing an entire business process. And in order to actually achieve meaningful savings at a scale that matters, almost an entire asset class would need to be tokenized and moved onto the blockchain, and that's just not going to happen in the foreseeable future. 

To be fair, in some use cases, the efficiency gains can be much larger than 20 bps and materially impact the bottom line for end investors. In those instances we have already seen significant adoption – for example, tokenized repos. They tend to be the exception though, and usually provide some other gains in addition to just operational efficiencies. Tokenizing repos, for example, enables intraday repo settlement, which can be a game-changer for more capital efficient liquidity management. 

In my opinion, the most straightforward way to understand how tokenization can really move the needle is by thinking about it as a top line play: an actual revenue generating model where you take traditional assets that already exist, but offer them with additional utility and in a seamless way to a new distribution channel that operates globally 24/7.

That's the unlock. 

There's enormous capital and liquidity available already in crypto markets, and it's only going to get bigger.”

What’s the rationale behind this particular thesis of yours? What particular market signals give you confidence in it?

“The dollar is the first tokenized Real World Asset, and stablecoins have already proven product-market fit. With trillions in transaction volume and millions of interacting wallet addresses, it turns out that putting a dollar on crypto rails and making it available 24/7 globally is a killer app.

No one has aggregated trillions of dollars in volume (yet) for all the other traditional capital market products, but I think it's pretty safe to assume that since there is so much global demand for a tokenized dollar that operates 24/7, there is going to be a lot of global demand for other liquid capital market products that can have utility 24/7.

What are some of the key hurdles? And what are some of the solutions?

“A key feature of blockchain is its composability. Assets could be made composable. But getting them integrated into DeFi is not something that a normal US asset manager, or any asset manager, quite frankly, is going to be able to do. They just don't have the relationships, they don't have the capabilities. 

Traditional asset managers also lack sufficient motivation. You have to remember that many of them have hundreds of billions of dollars of assets already under management. DeFi, while respectable in size, just does not move the needle for them, and it carries major reputational and regulatory risk.

The only entity, in my opinion, that can integrate these assets into DeFi and create new utility for tokenized assets is a more crypto-native platform like Ondo. 

We have built out infrastructure and legal frameworks that facilitate the easy issuance, utility and distribution of these types of traditional assets. We already have a successful track record when it comes to launching assets, services and infrastructure. 

For assets, we have launched permissioned (i.e., OUSG) and permissionless (i.e., USDY) tokenized cash-equivalents across multiple networks. We also built the Ondo Bridge to facilitate the movement of these assets across chains in a secure fashion.

We also built the decentralized repo market, Flux Finance, which is an autonomous protocol governed by the Ondo DAO. It supports permissionless liquidity (e.g., anyone can deposit USDC) and permissioned assets (e.g., OUSG) as collateral. This is the kind of technology that asset managers issuing products onchain are going to need, over time.

Take Blackrock’s BUIDL token for example. BUIDL is phenomenal. I applaud Blackrock for doing it. It further proves that there is product market fit in the concept of putting these types of liquid assets onchain. If you really want to take BUIDL to the next level, you're going to want to facilitate repos with it. That means that Blackrock needs a technology implementation like Flux.  Similarly, Blackrock will probably want to make BUIDL available on multiple chains, so they will have to figure out how to bridge it in a secure manner.

At Ondo, we already built the foundational infrastructure for Blackrock, and other asset managers putting assets onchain, to take advantage of. My job is to make sure that the services and infrastructure that we already built are further expanded in a way that is fit for purpose so that these institutions can use our infrastructure to start issuing more assets, with more utility, on crypto rails”.

How will we get there? Or put it another way, what conditions do we need to get there?

“There are a few things that we need to get to the destination.

Number 1: we need more types of assets that are available onchain. Right now, there's basically cash – and cash-like products like money market funds and treasury notes – available on chain. Anything else is a challenge. 

Getting more assets to come onchain is the motivation behind the concept we are calling Ondo Global Markets. Its most fundamental feature: creating onchain access to any publicly listed security. Ondo Global Markets will facilitate global movement of liquidity and help create a robust ecosystem of tokenized assets.

Number 2: we need better utility for these types of tokenized assets. What I mean by that is, we need off-the-shelf integrations into services that are helpful. Common financial transactions and concepts, like prime brokerage, repos and swaps, as well as ]automated portfolio rebalancing, need to be available for these tokenized assets so they can be more useful in the crypto ecosystem. 

Number 3: we need improved infrastructure that allows asset managers to issue assets easily and conduct transactions with full confidence. We need to make it super easy to actually issue these assets and deploy these services in an omnichain way, in an environment where everyone can trust the setup and the security.”

You mentioned BlackRock before. Can you talk about the impact of BlackRock’s recent launch of its first tokenized US money market fund BUIDL?

“When a company like BlackRock is starting to tokenize some of its assets with an implementation that resembles very much what we did with OUSG over a year ago, I think it shows a couple of things.

It shows product market fit for the path that Ondo is on. It shows a maturing of the minds from the truly forward leaning asset managers that tokenization on public blockchains is a real thing and that they need to invest more in it.

And it reveals real synergies between Ondo and Blackrock. Ondo can now leverage the infrastructure that Blackrock is building onchain and vice versa.” 

As Nathan Allman, CEO and Founder of Ondo Finance pointed out in Ondo's Journey: Vision, Achievements, and the Path Forward, Ondo is focused on building an institutional-grade ecosystem to bring liquidity, investor protection and asset utility all under one roof.

With BlackRock’s recent move validating our vision, we are committed, more than ever, to bringing a seamless, safe and secure user experience for both investors and asset issuers to the tokenized future.

More assets, better services, better infrastructure. 

If you want to follow along on this journey, subscribe to our blog.

Website | X/Twitter | Blog