Overview
Olympus is a new Decentralized Finance protocol running on Ethereum. It’s goal is to create a free-floating global reserve currency backed by a basket of assets. The native token, OHM, will always be backed by at least 1 DAI (a USD stablecoin). OHM aims to one day be a stable currency relative to a basket of goods which is a significant departure from the current stablecoins which are stable relative to a fiat currency. This "basket of goods" comes from the assets owned by the Olympus DAO in it's treasury which set a floor price on the value of each OHM token. Note that OHM is backed, not pegged - the price of OHM ≥ 1, not == 1. This means the price of OHM can rise arbitrarily but cannot fall to 0 assuming there are no fatal flaws in the conception of the protocol or the implementation of it. Pegged currencies maintain their value according to an external benchmark, like the US dollar, which means they inherit all of the problems of that external benchmark. Backed currencies do not rely on an external benchmark but have an internal treasury which guarantees the value of the currency.
Olympus is generally considered DeFi 2.0. DeFi 1.0 includes projects like Uniswap and Curve which came to prominence in the summer of 2020. DeFi 2.0 is a new generation of DeFi protocols with, as of yet, no clear differentiation from DeFi 1.0 - the market is still figuring how what DeFi 2.0 is and how it will work. More innovations are on their way and the money legos keep being built at an astounding pace.
Liquidity
Liquidity Renting
Liquidity Renting is a phenomenon of DeFi 1.0 where new projects would offer unsustainable yields to users who would provide liquidity in an Automated Market Maker (AMM), like Uniswap or Sushiswap. These yields might start in the low thousands or high hundreds (eg: 500% - 1200% APY) and drop over time (typically over a few months). When the APYs for a given project are high, users would provide liquidity. As APYs drop over time, users would withdraw their assets from the liquidity pool to chase high APYs in other projects. This cycle would continue as users jump from project to project chasing high APYs. Projects that lose liquidity can end up in a death spiral since each unit of lost liquidity can reflexively cause loss of more liquidity and quickly end up with 0 liquidity.
Protocol Owned Liquidity
One of Olympus’ main innovations is the idea of Protocol Owned Liquidity (POL). POL solves the problem of Liquidity Renting, described above.
AMMs work by pooling assets in pairs, called pools, which enable the trading of paired assets. For example, an AMM might make an ETH-USDC pool which enables trading ETH for USDC and vice versa. When a user adds assets to a pool, they're given LP tokens. These LP tokens entitle the user to a percentage of the pool. For example, suppose the ETH-USDC has 2 ETH and 20 USDC in it with 2 LP tokens. If a user comes and adds another 1 ETH and 10 USDC they'll be given 1 LP token - the user is responsible for 1/3rd of the pool assets and is thus entitled to 1/3rd of the LP tokens. The user can later redeem their LP tokens for their share of the pool, regardless of how much it's grown or shrunk.
To solve the problem of liquidity renting, Olympus DAO offers to purchase LP tokens for OHM pools, which currently live on Uniswap and Sushiswap. For example, a user might provide liquidity to the OHM-USDC pool and be given 0.75 LP tokens. The user can then go sell these LP tokens to the Olympus DAO in a process called bonding. When a user sells LP tokens to the DAO, those tokens are now locked up in the DAOs treasury and this is how Olympus comes to own it's own liquidity.
Bonding
Protocol Owned Liquidity works through a mechanism called bonding. Bonding is an action a user of the Olympus DAO can take. The act of bonding involves selling an asset to the DAO to buy OHM at a discount. Here you can see the discounts the DAO offers for various assets:
In this example we can see that the DAO is purchasing OHM-WETH LP tokens at a 4.47% discount - this means the DAO will sell OHM at a 4.47% discount in order to acquire OHM-WETH LP tokens.
We can also see negative discounts, for example on FRAX. This means the DAO is willing to sell OHM at a premium (a 23.64% premium in the case of FRAX), instead of a discount, to acquire that asset. The algorithm describing how bond rates change is explained below. It would not make sense for a user to purchase this FRAX bond because there's premium. Eventually, the FRAX premium will turn into a FRAX discount.
We also see that some bonds are sold out which means the DAO policy team has determined the DAO does not want more of those assets.
Bond rates are controlled algorithmically. Every time a bond is purchased, the discount for that bond decreases (and can go negative). When a bond isn't purchased at a specific discount for a certain period of time, the discount will increase. This process repeats until someone is willing to purchase the bond which then drives the discount down. Thus, bond discounts are controlled by market participation with the DAO. In the above screenshot, the FRAX premium likely occurred because at some point in the past there was a FRAX discount and a user purchased that bond at such a high volume that the bond discount turned into a bond premium.
Vesting
Bonds purchased from the DAO are automatically staked but locked for 5 days. The lockup schedule is politically determined and can be altered through the DAO's governance process. The lockup schedule is used as a stabilization mechanism where longer schedules reduce dilution and lower bond demand.
Treasury
Another major innovation of Olympus is its treasury. The act of bonding increases the value of the treasury - when a user performs a bond, the bonded token is put in the treasury and is never sold except under extreme scenarios.
This treasury is used to back the price of OHM. If something catastrophic were to happen to Olympus (assuming the treasury survives the catastrophe), OHM holders can vote to disband the treasury and proportionally distribute it to OHM holders. This has happened once before in a fork of Olympus.
If the price of OHM falls below 1 DAI, the DAO will algorithmically sell treasury assets to buy and burn OHM until the price >= 1 DAI. The DAO does this because it guarantees that each OHM is backed by at least 1 DAI.
The assets of treasury currently have ~$878 million of market value which corresponds to ~$181 million of risk free value (explained below). Not all assets in the treasury have a risk free value equal to their market value. The risk free value of non-stablecoin assets is calculated according to these equations.
Risk Free Value
At the time of writing, the value of the Risk Free Value of OHM treasury is ~$181 million while the total number of OHM in circulation is 4792205. This means that each OHM is backed by 181000000/4792205=$37.76. This is called the Risk Free Value (RFV) of OHM.
Rational market participants would purchase OHM if:
- the price was to fall below it's RFV and
- if the market believes that the DAO can successfully disband and distribute it's treasury.
This is rational because these participants would be guaranteeing themselves profit - even if all goes wrong, their purchase of OHM below the RFV would result in distributions at RFV which is profitable. The act of purchasing OHM below it's RFV means the price of OHM will be driven back above the RFV.
Staking
For as long as each OHM is backed by more than 1 DAI of treasury assets, the protocol will provide rewards to users for staking their OHM. These staking rewards are both algorithmically and politically controlled. Within the protocol there exists a variable called rewardRate which is politically controlled. The APY of a given rebase period is algorithmically controlled based the following formula OHM_total_supply * rewardRate / OHM_total_staked. The fewer OHM that’s staked, relative to the total circulating supply, the higher the reward yield and thus the higher the APY - reward yield measures yield for every rebase period while APY is algebraically derived from the reward yield and rebase period.
Below we can see a proposal for updating the rewardRate based on the number of circulating OHM taken from OIP-18:
Runway
All staking rewards are inflationary. Staking rewards mint new OHM every 8 hours according to the formulas described above and distribute these rewards to OHM stakers. These inflationary rewards can be maintained as long as OHM has a price > 1 DAI. At the time of writing, even if all bonding stops (thus stopping the growth of the treasury), the current APY can be maintained for 385 days. Phrased another way, OHM can be diluted for 385 days at which point the number of circulating OHM will equal the risk free value of the treasury (which should mean that each OHM is backed by exactly 1 DAI). This is called the runway of the protocol - how long staking rewards can be maintained without any new bonding.
Dilution
There are only 2 ways for new OHM to come into existence: bonding and staking. Users who stake their OHM "lock in" their percentage ownership of the market capitalization of the token. This lock in happens because the vast majority of new OHM comes into existence through staking. However, users who stake their OHM can be diluted slightly through bonding.
Recall that OHM purchased through bonding is automatically staked and locked for 5 days. Since bonders get OHM at a discount and their purchase is automatically staked they get a slight advantage in market capitalization capture. However, Olympus has reached a level of maturity where dilution through bonding is "not much of a problem" anymore.
Olympus Pro
Olympus has seen lots of success since the launch and has also launched Olympus Pro which is a Bonds-as-a-Service tool. Other projects can use Olympus Pro to launch their own POL and bonding service. Pro has been adopted by 20+ protocols like $BANK, $FOX, and $ALCX.
Olympus Pro charges 3.3% in the native token of the project implementing Pro. For example, a user might bond some FOX-ETH UNI LP tokens to get the payout asset of FOX at a discount. When a user bonds x FOX-ETH UNI tokens for y FOX tokens, y*0.033 FOX tokens (3.3% of the payout amount) are paid to the Olympus treasury - through inflation or a treasury. For example, Shapeshift (the project behind FOX) may have set aside some FOX at inception to be used by the Shapeshift DAO for project development like paying developers, marketing, or paying for Olympus Pro bonds.
Governance
pOHM
Olympus did a private funding round at the inception of the project to kick start it's treasury. Without this private funding round, starting the treasury would be very capital intensive and capital inefficient for the founders. The private funding round gave opportunity for investors with deep pockets to provide early treasury funding in exchange for pOHM. pOHM is "precursor derivative of OHM; it gives the holder the option to mint OHM by burning pOHM and providing the intrinsic value of OHM. For example, an investor would provide 1 DAI and 1 pOHM to mint 1 OHM." This means it doesn't make sense to redeem pOHM for OHM if the price of OHM is less than 1 DAI (and in fact the price of OHM must be higher to account for gas fees which must be incurred during the redemption process). pOHM also vests according to the supply of OHM in the market which means there isn't "upfront payoff or an arbitrary date at which tokens have vested." pOHM is distributed according to the following graphic.
Voting
Olympus Improvement Proposals can be discussed and proposed at the Olympus Forum and official voting can be done at Snapshot.
Utility
Monetary Premium
OHM has a minimum price of 1 DAI and has a risk free value of ~$36 yet it trades at $829, this is the monetary premium of OHM. This happens because the demand for OHM outstrips it’s supply. This extra demand exists because the protocol ensures that those who stake OHM keep a near constant percentage of the market capitalization of the project as it grows. Purchasing OHM when the market capitalization is small will have outsized returns when the market capitalization grows.
As the supply of OHM increases (through staking and bonding), we can expect the monetary premium to decrease because the staking rewards will decrease. However, future use cases for OHM might increase demand for OHM more than lower staking rewards decrease demand. If this is the case, the monetary premium may continue to exist into the future.
Use Cases
There is, as of now, one well documented uses cases for OHM: SquidDAO. SquidDAO is an NFT project where the NFTs they sell can only bought with OHM.
Other than SquidDAO OHM is only used for staking and doesn't have demand outside of staking rewards. There could be interesting opportunity in allowing users of Olympus Pro to pay fees in OHM but that would mean OHM is used to back itself which is very probably a suboptimal treasury diversification strategy.
Some users may hold OHM instead of stablecoins because they have more confidence is the backing of OHM through the treasury than the pegging of other currencies through algorithms or centralized entities. This will happen more often as the treasury grows and the price of OHM stabilizes.
Another possible use case for OHM is as part of a treasury diversification strategy for other DAOs. Treasury diversification is becoming an increasingly important topic in the world of DAOs and it's possible some DAOs have started accumulating OHM as part of the diversification and capital preservation strategy.
Bear Case
All projects built on Ethereum suffer from smart contract risk. There was a recent bug which allowed a user to receive 1697 OHM instead of 59 OHM when performing a bond. All funds were safe and the community suffered a bit of unexpected inflation - far from catastrophe but a bug nonetheless. The protocol has undergone two audits in April and May of 2021 but that does not make it immune to bugs.
Olympus gives voting power proportional to the number of OHM a wallet holds. This can degenerate into plutocracy. Unfortunately, I think this is a general critique of all DAO governance structures and will be until decentralized identity is solved so that we can implement 1-person-1-vote and not 1-token-1-vote.
The future utility of the OHM token is still unclear. Why will people adopt OHM and use it? Some possibly interesting use cases might be for NFT purchases or as an in game currency. Other possibly interesting use cases might come through Olympus Pro or other platforms built by Olympus. Other DAOs may use OHM as part of their treasury diversification strategy. Right now I see no reason for market participants to acquire OHM other than for the purpose of staking it to get yield.
Bull Case
- Olympus is an innovative project and has spun off many copycats like Klima DAO and Wonderland.
- The DAO generates $1,000,000+ of RFV revenue daily.
- Olympus Pro demonstrates that the team can build new revenue sources for the treasury and partner with other DAOs.
- The DAO owns 99%+ of the OHM-FRAX and OHM-DAI liquidity which shows the protocol works as intended.
- The treasury has over a year of runway.
- Olympus is launching v2, going multichain and breaking into NFTs.
- SquidDAO has launched successfully and might inspire others to price digital assets in OHM.
Game Theory of Olympus
A popular meme in the cryptoverse these days is (3, 3) which comes from the following table.
This is best explained by the FAQs but the general idea is similar to that of a prisoners dilemma. In the prisoners dilemma, both parties have the best outcome when they cooperate and do not admit anything. Similarly, any pair of users participating in Olympus benefit the most when they both cooperate and stake OHM. Bonding is also considered beneficial to the protocol while selling is considered detrimental.
This game theoretic evaluation of Olympus is explained in more technical and philosophical terms in their paper on Economic Productivity which describes a new theory of economics for the digital age. In this paper the authors generalize supply versus demand into a higher order dichotomy of internal coordination and price coordination. Supply versus demand fall under price coordination while internal coordination can be thought of as a generalization of entrepreneurship versus the market. Entrepreneurship can change the desires of market participants by changing common sense and social norms. The authors go on to explain that in the digital economy, economic goods are focal point goods. Focal point goods can be thought of as Schelling points which allow coordination without direct communication. Bitcoin is a focal point which allows market participants to coordinate which directly communicating with each other.
The table above outlines the nature of the focal point of Olympus. It describes a natural and game theoretically optimal (is it optimal?) behavior for all participants in the ecosystem.
Olympus offers a similarly reflexive economic model as bitcoin by offering a Schelling point for market participants. One interesting difference between BTC and OHM is that OHM has a treasury which backs it's price while BTC has no similar attribute. Price coordination prevents the price of BTC from falling too far (market participants will start buying the asset if the price drops) while OHM offers a novel mechanism for a floor value (known as the Risk Free Value). Another very important difference is that the use cases for BTC are well understood by market participants which drives more demand for it as a product (for example, as an inflation hedge or for international remittances). The uses cases for OHM are still being discovered and it's possible demand beyond staking rewards never arises.
Final Remark
I personally believe that the market will find novel uses for the innovations by Olympus and that demand for OHM, like SquidDAO, will arise in the future. I think the revenue generated by the protocol through bonding, LP fees and Olympus Pro are all signs of a bright future.