January 25, 2022

Olympus DAO

Olympus DAO

Regular followers of crypto twitter will be well aware of the ubiquitous (3,3) meme but they may not know its origin, what it’s all about, and why people are so into it!

To understand the (3,3) meme, we need to get to the bottom of a relatively new crypto project called ‘Olympus DAO’ and its token OHM.

As defined in the Olympus DAO website, “Olympus is a decentralized reserve currency protocol based on the OHM token. Each OHM token is backed by a basket of assets (e.g. DAI, FRAX) in the Olympus treasury, giving it an intrinsic value that it cannot fall below.”

In short, OlympusDAO aims to address one of the major problems of the crypto ecosystem – reducing the dependency of cryptocurrency on fiat currency. Olympus was created by Zeus (pseudonym) and built by a distributed pseudo-anonymous team. It is DAO-governed and introduced on February 1, 2021. All decisions are formed by community members on the forum and made by token holders through snapshot voting. In 2021, Olympus caught the attention of many crypto users, growing to a market cap to $4B in just over 6 months. The current market cap is almost $1B.

The Problem With Stablecoins, and The OHM Solution

In DeFi, stablecoins are directly tied to a stable currency or commodity to eliminate price volatility. But, the majority of stablecoins are pegged to US dollars and hence, vulnerable to the inflationary policies of the Federal Reserve, a fact that flies in the face of DeFi’s true rallying cry

This contradiction has led to the entry of algorithmic stablecoins, designed to move away from fiat, by manipulating supply to maintain stability and manage volatility. Olympus advanced this concept using a floating-market-driven price for OHM stabilization.

What does that mean? OHM token is backed by a treasury reserve of crypto assets with DAI being the major asset, rather than USD

When the value of OHM outpaces the reserve’s floor value (trading at a premium), the protocol can mint new tokens and dilute supply to drop the price. Similarly, if the value of OHM falls, the protocol buys back and burns OHM from the supply to increase price. Despite this, the price of OHM has been ‘free-floating’, changing as per the supply/demand in the free market. The Risk Free Value (RFV) determined by the nominal value of the treasury-held assets is basically the 'true floor' for OHM, discounting unaccounted risks.

So, what makes Olympus DAO different? The protocol has certain unique features that ensure that the OHM token acts as a store of value, not pegged to the $1 mark.

  • Olympus DAO owns its liquidity instead of depending on users to provide liquidity. In addition, its DAO-governed treasury consists of unique DeFi assets such as stablecoins DAI, FRAX and also Ether, which allows Olympus DAO to create credible price floor.
  • The protocol stabilizes OHMs value by controlling the OHM supply.
  • Olympus DAO is governed by the holders of OHM tokens. There are no separate governance tokens, meaning, the currency (OHM) holders determine monetary policies.

Olympus is quite famous in the media with some Olympus signs spotted at wrestling matches. (3,3) meme has gained immense popularity and has been mentioned by Grimes, Tim Ferris and Mark Cuban.

The simplest model of Olympus has three possible actions: Stake (Buy), Bond, Sell.

Staking is the primary value accrual strategy of Olympus. What is staking? It simply means you commit (i.e. lend) your crypto assets, in this case OHM, to support the blockchain network which in turn can use them to validate transactions.

Once you buy OHM, you can stake it to earn rebase rewards, where initial stake auto-compounds at fixed time intervals (every eight hours, i.e, 3 times a day!). The current annual percentage yield (APY) is around 2,400%. It is a passive long-term investment strategy. Currently, about 84% OHM supply is staked.

When OHM is trading at a premium, the excess assets in the reserve (treasury) are used to mint new tokens. These new tokens are then distributed to the stakers, allowing Olympus to achieve such high yields. As the value of the treasury grows, so does the possibility to increase yield.

Bonding is the major innovation of Olympus DAO.  It is an active short-term investment strategy. Users can buy OHM from the protocol at a discounted price in exchange for various assets like stablecoins, ETH or liquidity tokens, with a 5 day vesting period. In V2 bonds, there are auto-staking and flexible vesting options with different vesting terms.

As explained in the example provided by Olympus: “Let’s say hypothetically you had $1,000 USD in ETH and wanted to buy a 4% OHM-ETH 5-day bond when the price of 1 $OHM token was also equal to $1,000. You would purchase the bond for $960 dollars in ETH and receive $1,000 dollars in $OHM when your vesting period was through. The positive number “discount” is the percent discount you get when you bond tokens into the protocol.”

Active users prefer bonds, if the return from bond is greater than that from staking. Bonding allows the protocol to accumulate more assets in the treasury and thus, increase liquidity. Olympus protocol owns and controls its own liquidity, allowing it to earn trading fees as a Liquidity Provider. They also get revenue from yield farming. These further increase the value of the treasury.

Now, coming to our (3,3) meme, imagine there are two OHM holders in a game - where each has multiple choices of how to proceed.

They can

  1. Stake their tokens (commit them back to the DAO, very beneficial for the protocol and value of the OHM tokens). A 3 for them (it pushes prices up) and a 3 for Olympus (increases scarcity of OHM)
  2. Bond other assets to OHM. A net positive for OHM as it increases the value of the treasury, but it does not create positive price action for the OHM token, and therefore only a 1 for the players.
  3. Sell their OHM tokens, which puts downward pressure on the price of OHM, a -1 for the player (if they are holding more OHM), as well as for the OHM protocol.

Using game theory, the possible outcomes could be surmised as below to demonstrate the positive-sum environment created by cooperation. It drives home the message that ‘working together produces optimal outcomes’.

The Future for Olympus

As the recent price chart shows, OHM price has fallen by 50% from November 2021 to January 2022 triggered by a series of liquidations, following the sale of $11 million worth of OHM tokens by an Olympus whale.

According to data from DeFillama, Olympus’s total value locked has fallen by 78% from its ATH $4.81 billion on Nov 24 to reach $1.05 billion on Jan 21.Olympus has announced a series of new projects and partnerships like Olympus Pro, V2 migration and others. Olympus Pro is a Bonds-as-a-Service protocol, helping other DAO operators to create bonds. Olympus has recently decided to move some of its liquidity to the Balancer ecosystem, to set up OHM as a liquid asset. It will provide $50 million in liquidity to Balancer, an automated portfolio manager so that users can pool their OHMs on the balancer and participate in Liquidity Bootstrapping Pools (LBPs).

As Andre Cronje points out, the market fluctuations merely prove that Olympus got its game theory right with (3,3) or (-3,-3).