Disclaimer: the data was pulled during the first half of December 2021. Data is subject to change and future readers can refer to the dune dashboards for up to date data. Long term plans include embedding the data sources into this article so that the data is shown in real time.
Olympus is a new DeFi protocol based on Ethereum, started at the beginning of the year with a presale early in March 2021. Olympus markets itself as the decentralized reserve currency, but what does that mean? A reserve currency acts as an anchor for other currencies so Olympus is claiming that OHM is a decentralized, algorithmic reserve currency that is backed by a basket of treasury assets. There have been a lot of controversial opinions regarding Olympus and whether it is truly a ponzi or if it is innovating the space and thus a worthy investment. This article does not constitute investment advice, rather the purpose is to provide data driven insights in which individuals can form independent opinions on.
Olympus has experienced massive growth across multiple chains, continuously adding new DeFi products throughout the year via additional OHM bonds, Olympus Pro, and shows no signs of slowing down as integration of Olympus V2 is rolled out in phases over the first half of 2022 which features significant upgrades to bonds and adds further on-chain governance capabilities. The index adjusted price of OHM, which normalizes the rebase reward inflation from staking, shows a nearly 10x increase in value since inception.
In this same time period Olympus treasury has gone from less than $100k to over ~$700m of treasury assets with ~$2.4b in total locked value staked in the protocol. The amount in treasury minus OHM is ~$500m , representing a 500x increase in treasury assets over this period. Note that only the amount in the treasury minus OHM will be considered going forward. With ~6.7m OHM in circulation and at a current price of ~$475, this implies a circulating market cap of ~$2.7b.
Staking OHM earns rebase rewards (automatically compounded), which come from bond sales and currently yields ~6,500% APY. This APY rate is based on an algorithmically set monetary policy based on total OHM supply. Per the monetary policy, APY is projected to decrease January 24th, 2022 to 830% APY after 10m OHM in total supply has been reached. Runway is the amount of time staking rewards can be sustained at current APY until the risk free backing per OHM reaches 1:1. The runway is expected to last for approximately 2 more years given the current monetary policy. Taking the numbers into consideration based on the reward reduction schedule, then the true APY from OHM staking is ~1100% if OHM is bought and staked for an entire year starting today.
Currently at ~77k holders up from ~14k holders three months ago in September 2021, this represents an almost 5x increase in OHM holders. sOHM still has a lot of room to grow in terms of total defi users who have not staked OHM yet. In comparison, there are ~440k wallets that hold DAI on Ethereum.
OHM stakers do not receive anything directly from the treasury and the APY figure is not dependent on revenue, only supply. If the treasury is growing faster than the rebase rate, this implies that the value backed per OHM is growing faster than OHM supply and that the rebase inflation is sustainable. Currently this is the case because treasury assets have increased by 500x whereas the inflation adjusted price for OHM has only increased by 10x in the same period since March 2021.
sOHM can also be used as collateral on Rari Capital, allowing you to stake sOHM as collateral and borrow up to 66% of collateral value in stablecoins through one of their fuse pools. Leveraging an asset as collateral is a great way for users to utilize the value of their assets without selling. This introduces leverage risk and the precise risk exposure can’t be explicitly calculated. However we can draw a reasonable upper bound of $175m because this is the total borrowed in Pools 6 and 18, the two pools that accept sOHM as collateral. Being able to collateralize an asset gives astaker the opportunity to utilize the asset without selling, but this is not possible to quantify given current data limitations - it is simply an economic incentive that can lead to less sell pressure. Since sOHM has been on Rari Capital since July 2021, OHM staked has remained above 97%. It is questionable whether we will see a massive bank run as Ohmies look to take profits at the end of the year to lock in gains for tax purposes and in general sell off to diversify portfolios. A bank run scenario will be examined later on.
The Olympus treasury grows based on the following revenue streams - bonding, trading fees, and Olympus Pro. The biggest contributors to the treasury thus far have been bonding and trading fees. On the other hand Olympus Pro is the largest potential source for diversified revenue for 2022 for the Olympus treasury.
Bonding is the primary mechanism for Olympus and is the largest contributor to treasury assets. When the user bonds a token such as ETH or DAI, they are giving up those tokens and OHM is vested at a discount over the vesting period. This allows Olympus to accumulate both non-OHM tokens and liquidity pool tokens (protocol owned liquidity). To date, bonding has brought in over $180m in risk free reserves and ~$250m in liquidity reserves into the treasury.
With the bonding mechanism, Olympus became the first protocol to own the majority of its own liquidity. The benefits are twofold - Olympus does not have to spend significant amounts of money to attract mercenary liquidity. Olympus also collects trading fees, which has amounted to ~$23m year to date.
Olympus Pro offers liquidity as a service (LaaS) to other protocols in the form of a bond marketplace in which protocols can buy back and own their own liquidity for a 3.3% fee. Released in September 2021, Olympus Pro has brought in over $600k diversified revenue from 29 partnerships across Ethereum, Avax and Fantom blockchains and has allowed protocols to bond to recapture $20m worth of their liquidity.
Considering that the total addressable market for LaaS is in the billions of dollars by simple observation of the TVL on Uniswap and Sushi Dex’s, Olympus Pro has barely scratched the surface and at an average of one partnership every three days, this service still doesn’t seem to be growing fast enough to meet all of the demand for protocol owned liquidity.
It cannot be overemphasized that the Olympus Pro revenue stream is diversified. In a treasury management environment the biggest risk with respect to DAO treasuries is not the size/ability to spend, but being able to diversify into different assets. Here Olympus has done a phenomenal job on two fronts by increasing risk free treasury diversification through bonds and increasing non-risk free treasury diversification through the Olympus Pro bonding program. As a result, Olympus treasury is the most diversified treasury in DeFi right now and Olympus Pro shows no signs of slowing down anytime soon given that it provides liquidity to a very small percent of total liquidity used by current partners.
Let’s run through a hypothetical bank run situation that could be initiated from insider dumping, large market selloffs, or the result of liquidations from Rari Fuse pools. Note that there are 8 non-contract, anonymous wallets that stake OHM in amounts ranging from 20,000 to 95,000. Simulating a bank run of 100,000 OHM at current liquidity, a 50k OHM sell (~$27.5m sell pressure) would cause a ~-14% price impact and 100k ($55m sell pressure) would be ~-25%. Conversely OHM at current price levels of ~$475 represents a 33% premium bet that this tail risk event is not going to occur. If someone started staking OHM today and a bank run scenario does not happen before the reward rate adjustment at the end of January 2022, the risk will be offset by the amount of rewards accrued.
In the event of such a bank run, if OHM price crashes further, it must be noted that a mechanism does not technically exist in which users will be able to claim treasury assets for OHM in this scenario. The protocol mechanism that burns OHM for DAI only kicks in when OHM trades below 1 DAI, which is not helpful if OHM drops from its current 440x premium to say a 5x premium. Stakers would have to wait for a governance vote and a contract to be deployed to allow this to happen. Compared to borrowing/lending protocols where the amount borrowed is backed by collateral, you can always “claim” that collateral at any time. Here the treasury assets that back OHM are not directly claimable and holders only have claims, but not rights to the treasury assets at this time.
Each OHM is currently backed by ~$100 worth of treasury assets, currently representing a 400% premium. Considering that the initial pre-sale offered 1 OHM for $5 Dai, an initial 500% premium, OHM is trading at a premium lower than the premium valuation from the initial presale event. Assuming the treasury growth factor remains constant when the rebase rate decreases in January 2022, this will give an equal inverse multiplier towards the premium over backing number if Olympus Pro continues to grow at exponential rates.
In the event of a massive bank run scenario as outlined above, the optimal premium over backing number would be closer to 300-350% of assets backing OHM. Depending on the level of tail risk concern regarding a bank run scenario, this puts an optimal entry price around ~$425 per OHM until January 2022, when the monetary policy reduces the reward rates and the APY drops to ~800%.
Olympus recently started the process of upgrading to Olympus V2, which prioritizes decentralization and immutability. In a phased rollout, stakers will eventually take full control of the protocol contracts using Compound’s Governor Bravo implementation. Compound’s Governor Bravo focuses on reducing governance risk and the upgrade offers built in upgradeability of contracts, does not require contract migrations once on Governor Bravo code, and has options to add text comments to on-chain votes. There will be one migration required to go from the current Olympus contracts to Olympus V2 though.
Bonding will also go through significant overhauls. Bonds will be allowed to be held as NFTs, which is anticipated to provide a liquid secondary market for bonds. At the same time, the linear vest period will be removed and during the bonding process, bond payouts will be illiquid, but automatically staked at time of purchase.
Future bond types will be created as isolated offerings with a set amount of OHM allocated for each offering which will close off bugs on bonds that have expired. Bonds will also offer a front-end reward, which will incentivize more third-parties to run front-ends for Olympus, reducing single-points of failure from having a single front-end.
Treasury accumulation from bonding and Olympus Pro are expected to level off until the new bonding changes go live. The timeline set for these changes is set to take place over the next two quarters and sets Olympus to continue growing treasury assets by continuing to push the DeFi innovation boundary.
Olympus has shown a track record of continuous DeFi innovation throughout the year and has ambitious plans to continue innovation with Olympus V2 and continue onboarding additional partners via Olympus Pro. Although OHM has experienced a 50% pullback from all time highs over the past month, the protocol is still up 10x since inception. Olympus crypto twitter presence has grown from 12k to 42k followers in the past 3 months, which also coincides with the same time period in which the treasury went from less than $100m to over $500m today. Now that Olympus has reached DeFi mainstream, actions are subject to scrutiny at a higher level and this trend will continue through 2022. Olympus V2 will give OlympusDAO the necessary governance tools to operate with more transparency and security around governance to meet the higher standards of the DeFi community.
Index Adjusted price - https://dune.xyz/queries/132499
Bank Run on OHM-DAI - https://dune.xyz/queries/282150