Summary
Shortly after launching Ondo's core vaults we realized that these products could do more than make already existent LPs accessible to a broader set of investors. We realized that we could create brand new LPs by bringing together different sets of investors who wanted to contribute single assets. More broadly, certain financial products (e.g., certain types of LPs) could most efficiently be created by coupling the origination of those products with their recomposition and distribution to different sets of investors.
Specifically, we found that our vaults were a solution for DAOs who want to establish decentralized exchange liquidity in their native tokens, but who do not have or want to risk the base assets (e.g., ETH, USDC) required for them to invest the LPs directly. Remember, DAOs want more assets in LPs partly denominated in their native tokens because LPs ultimately represent portfolios of liquidity on the proverbial order books of decentralized exchanges, available to trade against by market participants. (For a discussion of why DAOs want exchange liquidity and how they have historically achieved it, such as with pool 2 liquidity mining, see our post “The Limits of Liquidity Mining”.)
In our liquidity-as-a-service (“LaaS”) offering, we started to create vaults for DAOs who would put their native tokens into one tranche and source the base asset from investors in the other tranche. We partnered with the Fei DAO to provide the FEI stablecoin (pegged to the USD) as a base asset in this program. We announced in November 2021 a sold-out launch cohort for LaaS alongside Fei with $100m in committed liquidity. We have since expanded LaaS to include stablecoin issuers Frax (FRAX) and Reflexer (RAI) as providers of base assets.
Whereas the original vaults serve to connect different sets of investors together, vaults in LaaS connect investors with those who need capital for the utility it provides their businesses – namely, DAOs. LaaS therefore represents the birth of Ondo as an investment bank for DAOs.
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LaaS has some of the following benefits for a DAO issuing "TKN":
Create a liquidity pool in TKN to facilitate movement into dollar-denominated liquidity
Integrate the Fei, Frax, and/or Reflexer and Ondo communities
Increase overall liquidity in TKN without needing to provide liquidity mining rewards
Earn yield on TKN if net LP yield (including SUSHI rewards if applicable) exceeds the fee charged to the fixed tranche (5% APR)
Pioneer single-sided liquidity provision provided by a DAO
No forced selling from liquidity mining
With greater TVL in TKN, there will be less downward price impact from selling from existing liquidity mining programs
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