[FIP-00] Genesis Governance Proposal


We are delighted to put forth the following proposal to kickstart the Flux Finance markets by supporting USDC, DAI, and OUSG (Ondo United States Government Bond Fund). OUSG is a tokenized fund from Ondo Finance that invests in short-term US Treasuries. At greater than 4% APR and rising, short-term US treasuries provide a higher yield with less risk than can be found arguably anywhere in DeFi. We believe that OUSG can serve as the foundation for a scalable, low-risk, and differentiated on-chain lending marketplace. If our proposal passes, investors would be able to lend and borrow stablecoins over-collateralized against US Treasuries exposure.

Background on Flux

Flux Finance is a decentralized lending protocol built by Ondo Finance. The protocol is a fork of Compound V2 with additional functionality to support both permissionless (e.g. USDC) and permissioned (e.g. OUSG) tokens. Permissions are enforced on a per-asset basis. Similar to Compound, Flux enables overcollateralized lending and borrowing in a peer-to-pool (p2pool) model.

Flux was designed with the idea of honoring the transfer restrictions of accepted assets, so it can onboard tokens with transfer restrictions, like OUSG, without subverting those restrictions (such as by not making freely transferrable cTokens derived from tokens with transfer restrictions).

Background on USDC

USDC is a centralized asset-backed stablecoin issued by Circle. It has a market capitalization of over $40 billion. Circle invests the USD contributed in exchange for USDC predominantly in US Treasuries, including through the new Circle Reserve Fund, a money market fund managed by BlackRock.

Background on DAI

DAI is an algorithmic asset-backed stablecoin issued by MakerDAO. DAI is the largest algorithmic stablecoin with a circulating supply and market capitalization of over $5 billion.

Background on OUSG

OUSG is a tokenized security issued by Ondo I LP that seeks to deliver the return of short-term US Treasuries.


  • Liquid
    • OUSG invests exclusively in the iShares Short Treasury Bond ETF (SHV) (outside of small USD and USDC positions), a nearly $20 billion ETF from BlackRock holding short-term US Treasury bonds. SHV trades with several hundred million dollars of daily liquidity. OUSG is also highly liquid, servicing subscriptions and redemptions in stablecoins daily.
  • Stable
    • SHV has 99th percentile weekly moves since its inception in 2007 of ~0.16%, representing a stable and highly liquid collateral base to build a lending protocol on top of.
  • Attractive yield
    • SHV has a more than 4.6% portfolio yield, and this is expected to continue to rise, supporting stablecoin borrow and lend rates that are higher than those generally available in DeFi today.

All figures from iShares: https://www.ishares.com/us/products/239466/ishares-short-treasury-bond-etf

Supported Assets and Risk Parameters

We recommend launching by supporting USDC and DAI as assets that can be both lent and pledged as collateral, and OUSG as an asset that can be pledged as collateral but not lent. We recommend the following market parameters for these assets:


  • Interest rate curve:
    • 0% utilization → 0% APY
    • 80% 90% utilization (kink) → Overnight Benchmark Funding Rate (OBFR) - 50 bps
    • 100% utilization → 2.5 * (OBFR - 50 bps) OBFR + 300bps
  • Collateral Factor (LTV): 83% (DAI), 85% (USDC)
  • Borrow Cap: No cap
  • ProtocolSeizeShare: 2.8% 1.75% (Compound V2 uses 2.8%)
    • This is how much of seized collateral during a liquidation is added to reserves.

The Flux Finance codebase also introduces some oracle modifications to increase safety.

We propose that the Ondo DAO appoint Neptune Foundation to act as the de facto OBFR oracle at launch with limited multi-sig rights to update the nominal “borrow rate at kink” if and when OBFR moves by more than 5 bps. We suggest that the Ondo DAO look at automating the OBFR oracle such as with Chainlink.


  • Interest Rate Curve: Not a borrowable asset, so N/A
  • Collateral Factor (LTV): 90% 92%
  • Borrow Cap: Not a borrowable asset, so not applicable
  • ProtocolSeizeShare: Not a borrowable asset, so N/A (0%)

Given the extremely low volatility of US Treasuries, we feel that a 90% 92% max LTV is very conservative for OUSG. Since its inception in 2007, the largest-ever weekly price movement of OUSG’s underlying ETF, SHV, was <0.5%. Its average weekly price movement is ~0.03%.


  • Reserve Factor: 0%
  • Liquidation Incentive: 5% (Compound V2 uses 8%)

Whitelist Application with Ondo I LP

We are proposing that the DAO request a whitelist of the Flux Finance smart contract when it is deployed, which would enable investors who are already appropriately permissioned to hold OUSG to temporarily lock their tokens using Flux contracts. If approved, investors in OUSG would be able to call Flux Finance smart contracts to pledge OUSG as collateral, to liquidate OUSG from other borrowers, and to recall OUSG from their own accounts. In keeping with the design of Flux, the deposit receipt for OUSG, fOUSG, would only be transferrable between the same addresses that are eligible to hold OUSG.

Future Assets

We suggest the DAO look to on-board other stablecoins as quickly as can be safely done. The DAO should also explore what other security tokens or even permissionless assets borrowers may want to post as collateral.



What is the timeline on implementation?



The smart contracts are currently undergoing a Code4rena audit. Once the audit is completed and the team has a chance to address any findings, we’ll deploy the contracts and submit a binding on-chain vote.


Love the idea of using tokened treasury funds as collateral.

How do you envision liquidation working given that these are permissioned tokens?


Why would the LTV be set at 90%? Why wouldn’t it be higher (like 95-98%)? There’s no chance of liquidation imo as these don’t really ever go down in value, so why not let people be as liquid as they want?


If a liquidation involves a permissioned asset (either as collateral or debt), then the liquidator must be whitelisted (KYC’d) to hold that asset. Anyone that is eligible to hold OUSG can KYC and become whitelisted, and we expect that most active liquidators will be eligible. Everything else works like Compound V2.


We’re proposing a more conservative initial value but once the protocol is live the DAO can vote to increase the LTV.

[OUSG can decrease in value (e.g. if interest rates go up), but since the ETF holds short-term bonds only, the prices decreases should be very small (highest ever weekly price movement was <0.5%).]

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Congrats to launch announcement of Flux Finance! I think it is super great idea that launching lending market which is capable of lending/borrowing permissioned tokens along with providing permissioned treasury bonds themselves.

By the way, is there any plans or exact timelines to add Ondo’s other two security tokens (OSTB and OHYB)? If so, Will Ondo DAO need to pass the voting process as well as other governance proposals?

And just a shit question…
Is there any ways to participate in governance process? In other words, is there any ways to buy or get some governance tokens at now? I looked for ONDO token contract but it seems to be unavailable for transfer.


This is extra genius as this allows the transfer of yield of the permissioned OUSG tokens to USDC suppliers of Flux Finance (This is because due to the safe nature of the underlying, anyone with common sense will max lever until SHV yield < borrowing cost).

Basically the cUSD coming out of this is a pseudo SHV.

Just PLEASE don’t fuck up the audits. EVERY single comp fork has gotten exploited.


By the way, is there any plans or exact timelines to add Ondo’s other two security tokens (OSTB and OHYB)? If so, Will Ondo DAO need to pass the voting process as well as other governance proposals?

The DAO can create new markets including OSTB and OHYB through a governance proposal. That said, those assets are more volatile than OUSG so we’ll keeping it simple for now. We also plan to propose non-Ondo assets (e.g. other stables).

Is there any ways to participate in governance process? In other words, is there any ways to buy or get some governance tokens at now? I looked for ONDO token contract but it seems to be unavailable for transfer.

The token is non-transferrable but can still be used for governance by those that have it (e.g. CoinList buyers). There isn’t a way to acquire more tokens at the moment but please stay tuned. Also, current owners can delegate their votes to others btw!


The contracts are getting audited right now on Code4rena:


What is the link to the voting site for this and future proposals please or is that not yet live? Super-excited about this btw


Tokened treasury funds as collateral is a really great idea, i like it!


The on-chain vote will go live on Tally after the C4 audit concludes:


I’m waiting for you on the moon :sunglasses: :rocket: :rocket: :rocket:

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Really interesting idea. What are the benefits of investing via the tokenized version as opposed to just buying the underlying ETF?
And are you setting up liquidity pools for redemption or how does the redemption process work exactly?


Assuming a YTM of 4.3% (after fees) and OBFR being close to that on average, it seems that the max leveraged position to the borrower would lead to 8.80%. This is good but far from great due to the funding risk.

I would suggest to put the collateral factor at 92% so people can safely leverage up to 90%. Indeed the underlying fluctuation is very limited. It would require an unexpected jump in interest rates of 7% to trigger liquidation. Unlikely.

It is my understanding that most of the volume in borrowing will be done by sophisticated actors. I would argue that the 100% utilization interest rate would be better at OBFR +100bps. Borrowers will quickly unwind when the trade is no longer beneficial especially as the transaction fees are 0% (assuming SHV YTM was somewhat stable).

I would also set the kink to 90%. At the current setup, while OSDG would earn 4.30%, lender would only get around 3%. With 90% it moves to 3.4%

Both the proposal (kink at 90% and max interest rate at OBFR+100bps) are increasing the liquidity risk for lender. But it would also increase their return. This is a new protocol and lender will require some risk premium, the liquidity risk will be, in my view, less a concern.


Thank you for your suggestions @SebVentures. Based on your suggestions, the team decided to update the proposal as follows to increase returns while incentivizing repayments when liquidity is too low:

  • OUSG LTV: 90% → 92%
  • USDC/DAI IR model kink: 80% → 90%
  • USDC/DAI rate at 100% utilization: 2.5 * (OBFR - 50bps) → OBFR + 300bps

Bullish. Love the tokenized treasury lending model.


Hey @SebVentures,

Trying to catch up on everything in this thread. How does moving the kink up to 90% utilization improve lender returns? My first order assumption is that it should decrease USDC/DAI lender yield since the borrow is cheaper.

Ultimately market will dictate the terminal rate - I’m not sure funding risk changes too much by adjusting the rate kink to 90%, and doing so would add capacity to leveraged OUSG strats. USDC lenders on compound are making sub 2% in arguably riskier pools.

Onboarding OUSG market cap is clearly the goal here so fattening the yields for holders is good.

@FluxFinance - I’m assuming the IR curve proposed is for borrower rates. Could you clarify if the proposed curve also applies to lender rates? And if so, is the protocol configurable to earn a spread here?

Finally, on liquidation - IIRC Compound pays 5% of collateral as reward to the liquidator, I think this would be significantly overpaying given the quality of collateral, and expected position size. The best implementation I’ve seen is the Euler dutch auction, but if that’s too much tech lift the reward % parameter should be brought way in imo (1% maybe?).

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