The current state of DeFi is a deep irony.
Although born out of the desire to de-dollarize, DeFi relies heavily on stablecoins linked to the U.S. dollar, with USDT, USDC and DAI in circulation at 97 billion U.S. dollars. Although these assets are more stable than Bitcoin or Ethereum, they reintroduce the dependencies and risks of the fiat system we are trying to leave, such as inflation and centralized, irresponsible monetary policy.
One project trying to solve this problem is Olympus DAO. The agreement was launched in March 2021 and aims to design a stable asset pegged to the U.S. dollar.
This is a project you may have heard of, because it has a very high APY, and (3,3) profiles are all over twitter. Why is the price of a “stablecoin” like OHM so high? This seems a bit strange.
How does Olympus work? Are the benefits sustainable? What is (3,3) anyway? This is why this article will explain and emphasize why Olympus has quickly become one of DeFi’s most interesting protocols.
1. What are Olympus and OHM?
Olympus is an agreement responsible for the issuance and management of fully mortgaged, algorithmic, free-floating stable assets OHM.
1. Fully mortgaged
OHM is fully mortgaged because it is backed by an crypto asset vault located within the scope of Olympus DAO, which is called Protocol Control Value (PCV).
The DAO has decided that every OHM issued must be backed by $1 in collateral, although this can be changed by a governance vote. Initially, this consisted only of DAI, and each library issued by OHM had 1 DAI as its support. However, the agreement has expanded the fund library to include other assets such as FRAX, another algorithmic stablecoin, as well as OHM-DAI LP tokens from SushiSwap and OHM-FRAX LP tokens from Uniswap.
There are also active governance proposals to add ETH and BTC to the national treasury. This means that every OHM is now supported by 2 times these mixed assets, not just DAI.
Source: Dune Analytics
As we can see, the current value of publicly offered treasury assets is more than 70 million U.S. dollars, and its composition is approximately 71.8% DAI, 27.8% FRAX and 0.4% SUSHI. SushiSwap’s governance tokens are accumulated from income agricultural rewards.
Although Olympus has been compared to a private bank issuing its own bills, another interesting similarity is the Federal Reserve. As we all know, in the legal system, the Federal Reserve holds a variety of different assets, such as U.S. Treasury bonds, gold, U.S. dollars, and foreign currencies, which are used to help implement monetary policy.
Olympus manages a similar balance sheet, but the currencies it manages and issues are fully backed by these assets, and the U.S. dollar is of course not.
2. Algorithm control
Although Olympus allows the market to largely determine the price of OHM, it does use the assets in the vault to help keep the price as close to a dollar as possible.
When OHM trades at a premium, as it is now, the agreement will mint OHM and sell it to the open market to increase supply and drive down prices. If OHM trades at a discounted price, DAO will also intervene as if its value is less than $1, and the agreement will buy back and destroy tokens to reduce supply and increase prices.
3. Free floating
Although Olympus conducts open market operations, the price of OHM is largely allowed to “float.” This means that the value of OHM is not pegged to another asset (such as the U.S. dollar), but is determined by the free market. Because of this, the dollar-denominated price may and has been fluctuating, just like any other non-linked asset, it is affected by the relationship between supply and demand.
Nonetheless, OHM is considered to have a “reserve price” or “no risk value (RFV)” whose value is equivalent to the number of assets supporting each token. The current RFV of the protocol library is equivalent to a stablecoin, and in order to consider the risk, it is also equivalent to the discount value of the LP token.
At present, the RFV of the Olympus vault is 21.1 million US dollars, of which DAI is 14.4 million US dollars (68.2%) and FRAX is 6.6 million US dollars (31.8%).
As we can see, this means that the transaction price of 771,985 OHM in circulation is more than 22 times its RFV.
This means that currently, OHM’s trading price is higher than its RFV. This may be due to several different factors, such as the demand for OHM pledges, and the expected future distribution of proceeds from treasury assets deployed in DeFi to OHM holders.
In addition, since the issuance of new OHM only requires collateral worth $1, the premium also represents the amount of OHM that can be minted in the future. For example, based on the RVF and circulating supply indicators listed above, the agreement can increase the current supply of OHM by 21 times. Of course, this may change, but it means that as the value of the treasury grows, the ability to issue more OHM will increase accordingly.
2. Monetary policy tools
Now that we understand the characteristics of OHM, let us delve into how it formulates monetary policy.
Since the agreement is still in its infancy, Olympus DAO’s current goal is to increase the supply of OHM. Although it was designed to ultimately have stable value and may seem counterintuitive, the agreement did not immediately commit to achieving this goal. This means that volatility can and should be expected. Of course, it also needs to be noted that whether the agreement can effectively stabilize the price of OHM remains to be seen.
The agreement uses two key mechanisms to achieve its monetary policy goals: pledge and debenture.
Pledge is the process of the agreement to release a new OHM.
OHM holders want to pledge their tokens for several reasons. First, like other systems, it allows them to lock in their share of the total token supply and avoid dilution. In addition, the high return priced in OHM can help offset the price risk caused by token fluctuations.
Currently, more than 93% of OHM supplies are pledged.
Like any other asset, OHM can be purchased on a decentralized exchange, such as Uniswap or SushiSwap. Once pledged, the holder will receive a new distribution in the form of sOHM and 90% of the income generated by the assets in the treasury. OHM rewards are paid every eight hours, and the staker’s sOHM balance will be recalculated based on the new tokens.
This also means that the reward is compounded three times a day, which helps explain why Olympus’s rate of return is so high.
Although the pledged APY is currently quoted at 15,760%, APR is “only” 507%, which is more in line with some of the returns we have seen in DeFi. Although this rate of return seems unsustainable, Glassnode’s analysis in June this year calculated that, considering the size of the treasury at the time and the number of OHM pledges, OHM will be able to pay 40,000% of APY within 180 days.
How is this going?
Due to the premiums we discussed earlier, Olympus was able to maintain these gains. Since each OHM only needs 1 dollar support, and each token currently in circulation has more support, the protocol can use these excess assets to issue more tokens. This also means that as the value of the treasury grows, so does the ability to cast OHM and continue to pay high yields to mortgagers.
Debenture is the process of selling assets to Olympus in exchange for discounted OHM, and this process vests within five days. When users get more rewards than pledged rewards, they will have the motivation to bond. Although the agreement initially only provided bonds for OHM-DAI and OHM-FRAX LP tokens, it has been expanded to include pure stablecoins.
Debenture provides several key functions for Olympus. First, it is the funnel of the agreement, which can accumulate more assets and increase its treasury. By doing so, it can increase its RFV, thereby increasing the amount of OHM that can be issued and maintaining high yields for pledgers.
In addition to contributing to growth, securitization also plays a key role, as it also helps to ensure the liquidity of OHM indefinitely. As we all know, the capital in DeFi is a mercenary, and it is constantly shifting to seek the highest return. As a result, many agreements have a harmful relationship with their liquidity providers and are often forced to “pay” them to insist on using token incentives, decapitalizing themselves in the process.
Through the LP bondization, Olympus can completely change this dynamic. That’s because it enables the protocol to own and control its own liquidity. The LP tokens held by Olympus are called protocol-owned liquidity (POL). This means that the agreement is not an incentive or hope that third-party providers will continue to provide liquidity. To quote Thanos, it can do it on its own.
This also means that if DAO continues to hold LP tokens, there will be a continuous and growing bottom line of liquidity that can be used forever.
So far, debenture has been an effective mechanism to implement this strategy because the agreement currently has 98.5% liquidity of Uniswap V2 OHM-FRAX pair and 99.5% liquidity of OHM-DAI pair on SushiSwap.
It also allows Olympus as a protocol to obtain the rewards of providing liquidity. For example, as we mentioned earlier, the protocol itself has already acquired a large amount of SUSHI tokens (OHM-DAI pairs are incentivized on SushiSwap) because they have almost all the liquidity in the pool.
In addition, DAOs are able to earn standard transaction fees attached to LPs, which also increases Treasury bond assets and enables them to increase the supply of OHM.
3. Expand adoption
Although the system is just getting started and extremely complex, Olympus has achieved incredible growth in less than five months after its launch. OHM’s current market capitalization is US$464 million, which will make it the 10th largest stablecoin and the fifth among decentralized currencies.
In addition, the agreement began to cooperate with other DeFi projects. The agreement not only established partnerships with FRAX and SushiSwap, but also recently helped launch a fund pool on Rari Capital’s Fuse, an agreement to create an independent currency market.
The fund pool accepts deposits of sOHM, DAI, FRAX, USDC, and ETH, allowing OHM holders to increase capital efficiency and release asset value by borrowing revenue-generating tokens. This has quickly become a popular place for OHM holders to deposit funds, as it currently holds more than $49 million in funds, accounting for more than 40% of Fuse’s total TVL.
Other major catalysts of OHM will be adopted soon. For example, there have been discussions and votes recently on the Aave Governance Forum, which currently 100% supports the listing of sOHM and allows it to be used as collateral in the agreement.
1. Ohmies: Grassroots Federal Reserve?
Of course, if we do not discuss the Olympus DAO community, the “Ohmies”, we will be negligent.
Ohmies has become one of the most enthusiastic communities for cryptocurrencies in 2021, as there are now more than 8,200 OHM holders and 11,000 Olympus Discord members. On a more intangible level, “Ohmie culture” began to spread in a wider range of cryptocurrencies, with (3,3) becoming one of the most popular Twitter suffixes, as well as .eth and of course??.
In addition to distributing 50,000 OHM of the “initial Discord product” to the early members of the Olympus Discord server and excellent community building, the agreement has some interesting features that may help its continued enthusiastic support.
2. Game theory
There is an interesting game theory behind whether participants will hold OHM, bonds, or sell their OHM.
The number pairs in the figure above are a way for the community to explain this, and how beneficial or harmful each behavior of the participants in the system is to themselves and the agreement.
Staking is considered to be the most beneficial action for all Olympus participants. This is because it helps increase the value of OHM, because it generates positive buying pressure through the initial purchase of tokens, and because the supply is locked in and its scarcity increases.
The bond is also considered to be net positive, although not as much as pledged, because it provides assets to the Olympus treasury, although it will not be purchased directly to increase the value of OHM.
The sale of OHM is considered to be net negative because it puts downward pressure on the price of OHM, and the price drop may encourage other participants to sell their tokens. With this in mind, we can understand why (3,3) has become a variety of slogans, because it is a way of conveying the right and benefits of pledges and encouraging other participants to do so.
3. Governance of token holders
Another interesting feature of Olympus may contribute to Ohmies’ enthusiasm because it is directly managed by OHM holders.
This distinguishes it from other stablecoin protocols, such as DAI, FEI, and RAI, and of course, there are centralized stablecoins, such as USDC or USDT, whose monetary policies are determined by the second-level governance token holders or the top management, respectively.
This means that the holder of the actual currency is the one who determines the monetary policy, not the owner of the secondary governance token. This is a compelling development because it encourages the active participation of a wider range of stakeholders. In addition, it adjusts the incentives for all participants in the system and encourages monetary policy decisions to be made from the perspective that is most conducive to the value and stability of OHM.
Finally, it also minimizes the risk of governance token holders changing the agreement, which may help increase the value of governance tokens at the expense of currencies within their jurisdiction.
For example, although unlikely, there is a situation where MKR holders will vote to increase the DAI stability fee during the bear market (i.e., the income is redistributed to them through token destruction). This will happen when it may not be in the best interests of other stakeholders in the system, because the high interest rates during the economic downturn will help prevent the use and adoption of DAI, and will essentially hold DAI as a transfer of wealth To MKR holders.
Because the OHM holder and the manager of the Olympus DAO are the same person, this agency problem no longer exists, because any change in the OHM monetary policy will cause the same benefits or damage to all participants in the system.
4. A fascinating currency experiment
Olympus DAO is a fascinating project.
The agreement is trying to solve an ambitious problem through its unique design and incentive mechanism. It has also achieved great success in attracting fast-growing and enthusiastic communities.
Although it is not clear whether it will succeed in realizing its vision in the end, it is clear that Olympus is a project worthy of attention.