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Someone once told me, “If you want to trade in the crypto market, don’t trade for profit, trade for vision” Of course when he said this (earlier this year), I was looking at my portfolio that had more red than a clown car. So naturally, his words only succeeded to irritate me. However, in retrospect, this one sentence transformed the way I started to look at crypto tokens. Before investing in any outperforming token, I made a point to understand its why, how, and what.
Why does this token exist?
How does this token operate?
What are the use cases for this token?
Once anyone gets definitive answers to these 3 questions, they have enough information to decide if they should stick with the token or not.
A few days ago, I stumbled across a “stablecoin” offering over 7000% Annual Yield Percentage. The cynic in me instantly wanted to discard it as a Ponzi scheme. But the pragmatic person wanted to learn more.
So I did.
The first thing I learned was that Olympus DAO is not the framework for a stablecoin. (sigh)
Now, I will leave the judgment of categorizing Olympus DAO as a true stroke of brilliance or just a well-thought-out Ponzi scheme to you. In this article, I will just give you a deep dive into its Why, How, and What.
When someone is building a technology solution, three primary network architectures are typically considered: centralized, distributed, and decentralized. Granted, there is no binary distinction between centralization and decentralization, cryptocurrencies found prominence primarily because of operating on a spectrum closer to the latter.
However, due to the high volatility of the crypto marketplace (as apparent with my red portfolio earlier this year), stablecoins found instant prominence.
Stablecoin is a class of cryptocurrencies that attempt to offer price stability and are backed by a reserve asset like USD. It’s an attempt to offer the best of both worlds—the instant processing and security or privacy of payments of cryptocurrencies, and the volatility-free stable valuations of fiat currencies.
On paper, this seems like an elegant solution, however, the founder of Olympus DAO, Zeus (pseudonym) forces us to think critically. He thinks that the trend is contradictory to the crypto revolution’s main goals — to compete and eventually replace fiat currencies.
“There’s a strange irony to the fact that the most utilized cryptocurrency is really just a digitized dollar,” Zeus said this July. “While functional stablecoins may achieve a stable USD value, that does not mean they’re stable in purchasing power. Their real value changes just like dollars in a bank account.”
So he proposed and eventually developed a viable workaround; Olympus DAO. A simple but ambitious plan to become a Decentralized Reserve Currency. Now that the stage is set, let’s get to THE HOW.
So I’ll begin with a technical description of Olympus DAO and then break it down from there.
Olympus is a protocol that is responsible for the issuance and management of a fully backed, algorithmic, free-floating stable asset, OHM.
Now here is the promised breakdown.
OHM is an algorithmic reserve currency that is backed by other decentralized assets. Similar to the idea of the gold standard, OHM provides free-floating value its users can always fall back on, simply because of the fractional treasury reserves OHM draws its intrinsic value from.
Woah now there’s a treasury?
Yes, and that makes all the difference.
OHM is fully collateralized, as it is backed by a treasury of crypto-assets that sit under the purview of the Olympus DAO.
But the question arises. If OHM is backed by crypto assets in its treasury that in itself is volatile, doesn’t that mean OHM will also be volatile? Thereby undermining its very purpose of providing stability.
If you’re thinking this then that means you’re with me so far and that’s great news, because here comes the absolute belter.
OHM tokens can’t be minted or burned by anyone except the protocol. The protocol only does so in response to price. When OHM trades at a premium, as it does now, the protocol will mint OHM and sell it into the open market to increase supply and drive down the price. The DAO will also intervene should OHM trade at a discount, as if its value falls below $1, the protocol will buy back and burn tokens to decrease the supply, and increase the price.
At present, the aforementioned treasury is managed by a team of 20 who have been conducting biweekly meetings since March 2021, according to pseudonymous decentralized autonomous organization (DAO) contributor Wartull. Now I know the DAO purists would roll their eyes reading this statement. After all, the genesis of DAO was to eliminate human intervention. To them, I would say, fair point!
I warned you, I’m just a messenger here.
Now let’s rewind for a second. OHM is backed by crypto assets like DAI. With an algorithmic approach coupled with manual intervention, OHM manages to operate with a Risk Free Value (RFV). Everything we mentioned is possible because OHM is backed by DAI. Backed, not pegged.
A simple differentiator of being backed and pegged in this context is simply:
Pegged = 1, Backed >=1
Given the infancy of this protocol, Olympus DAO’s current objective is to grow the supply of OHM. This happens only with extreme volatility in the initial days. Sounds counterintuitive, but according to the developers of Olympus DAO, in the long game, this pedagogy will reap compounding rewards.
There are two key mechanisms used by the protocol to carry out its monetary policy objectives: Staking and Bonding.
Staking is the process through which the protocol issues new OHM. Staking OHM involves committing your tokens to support Olympus DAO. It allows users to lock in their share of the total token supply, and avoid facing dilution.
In essence when you stake your OHM, even if the market price of OHM drops below your initial purchase price, given a long enough staking period, the increase in your staked OHM balance should eventually outpace the fall in price.
Fun fact: Currently, over 93% of the OHM supply is staked. Talk about owning your liquidity.
Olympus DAO defines Bonding as a secondary value accrual strategy of Olympus. It is the process of selling an asset to Olympus in exchange for discounted OHM. Users have an incentive to bond when the return they would earn from it is greater than that from staking. Bond discounts are more or less unpredictable given the nature of price discovery of the secondary bond market. Hence bonding can be looked at as an active short-term strategy.
Staking and Bonding effectively allow Olympus to accumulate its own liquidity. By owning the vast majority of its liquidity (Olympus currently holds 99.5%), Olympus protects the value of the reserve-backing OHM tokens and keeps the protocol liquid.
But now the question arises, if everyone decides not to Stake and Bond but sell their OHM tokens, wouldn’t the entire ecosystem collapse?
Yes, it would!
(Just like a traditional bank would dissolve if all the account holders decide to withdraw all their money on a single day)
However, Olympus DAO employs a jacked-up version of traditional Game Theory for creating an ecosystem of collective gain. I’ll just quote Olympus DAO’s own high-level explanation.
“Staking and bonding are considered beneficial to the protocol, while selling is considered detrimental. Staking and selling will also cause a price move, while bonding does not (we consider buying OHM from the market as a prerequisite of staking, thus causing a price move). If both actions are beneficial, the actor who moves price also gets half of the benefit (+1). If both actions are contradictory, the bad actor who moves price gets half of the benefit (+1), while the good actor who moves price gets half of the downside (-1). If both actions are detrimental, which implies both actors are selling, they both get half of the downside (-1).
Thus, given two actors, all scenarios of what they could do and the effect on the protocol are shown here:”
The use cases for a Decentralized Reserve Currency are endless. One can even argue that OHM is closer to a floating currency than even the dollar. In their own words, OlympusDAO is building a global, community-owned, and decentralized economy so they can introduce stability and transparency back into financial markets and create financial inclusion for all.
The aim is quite utopian. Its current execution is obviously impeccable. But is that enough for us to consider this protocol a defining point of Defi 2.0? I’m not sure. There are a few blatant edge cases as highlighted throughout this article but the protocol is still in its infancy with significant room for modifications and adjustments. For example, a rising concern in the early days was “what if the stablecoins backing Olympus DAO lose its own peg” If the DAI loses value, doesn't the entire Olympus DAO as a collective lose all its value? Well, the continual diversification of assets contributing to Olympus’s treasury makes this concern moot.
As for the lingering question of whether or not Olympus DAO is a Ponzi scheme; my opinion is that it is as much of a Ponzi scheme as the Dollars in your bank account.