DCV - December 10, 2021
In this post, I will explain as simply as I can, what OlympusDAO is and how it works. I’ll go over the staking and bonding mechanisms and use examples to further explain the concepts. Finally, I’ll comment on whether or not this whole thing is a ponzi scheme. These concepts apply to forks of OlympusDAO as well like Wonderland, KlimaDAO, etc. but I’m using Olympus as an example. As usual, this is not financial advice.
"Olympus is a decentralized reserve currency protocol based on the OHM token". What does this mean? Let’s break it down.
"Decentralized", in this context, means there is no trusted third party, everything is handled by a blockchain, and governed by a decentralized autonomous organization or DAO.
A "reserve currency" is like a universal currency. For example, the U.S. dollar is currently the world’s reserve currency. If Mexico wants to buy oil from India, they can both transact in U.S. dollars to avoid exchanging between the different currencies they respectively use. This prevents any value lost in the exchange rates.
In the OlympusDAO context, OHM aims to be a reserve currency so it can be used across chains or apps or anywhere else without having to convert between cryptos.
Finally, a "protocol" is just a system of rules.
So, OlympusDAO is a system of rules that governs a reserve currency based on the OHM token. The whole point of developing the DAO, creating partnerships, and the OHM token is to achieve the status of a reserve currency and build wealth in the process. OHM is supposed to take us away from fiat currencies and stablecoins which is one of the use cases of cryptocurrencies.
To understand Olympus and its tokenomics, we first have to understand the rules of the system:
The end goal is for OlympusDAO to have created a large supply of OHM tokens that is worth something (i.e. backed by digital assets), is stable, and holds its purchasing power.
In the short term, there is a growth phase which is what is happening currently. Bonders, who are people that participate in bonding, give assets like DAI or Ethereum to the treasury in exchange for discounted OHM tokens. The treasury now has stuff that is worth something and it can be measured in USD. Bonding is one way Olympus accumulates assets.
Another way to accumulate assets is through liquidity pool rewards. One asset that the treasury accepts for bonding is OHM-WETH LP token. When the treasure accumulates this token, it can collect the rewards from providing liquidity. This is why the Olympus treasury has a balance of SushiSwap tokens. It’s because it is providing OHM-WETH liquidity on SushiSwap and receiving Sushi tokens as rewards.
Once the treasury has more and more stuff and as the value of that stuff goes up, the treasury assesses how much OHM can be minted based on how much stuff it has and distributes that to stakers. This increases the overall supply of OHM.
A person that gives assets like DAI or Ethereum to the treasury to receive OHM in return is called a bonder.
The bonder gets the OHM at a discount and the OHM is distributed to the bonder in 5 days at which point, they can sell it on the market immediately for a profit or stake it. The 5 days they have to wait is called the vesting term. On the OlympusDAO website, the bond discount is called the ROI.
Bonders profit if OHM price stays the same or increases after the vesting term. Bonding creates OHM to add to the total supply and allows the treasury to accumulate assets to back the OHM tokens. This is the main way Olympus funds its growth and development. Let’s go over a simple hypothetical example on how bonding can supply the backing for each OHM token. Watch this YouTube video to follow along:
Let’s assume a bond discount of 10% and time goes from epoch 0 being the first bonding transaction to epoch 9. I’ll make up some OHM prices with respect to time here. I’ll also make up bonders exchanging their assets to get some discounted OHM in return in each epoch.
At the very beginning, let’s say OHM was priced at $10 per token and the initial supply of OHM was 100 tokens. This gives a theoretical market cap of $1,000.
Now, let’s say someone wants to purchase a bond with their DAI and they are willing to spend $180 worth of DAI.
With the 10% discount, the bonder will receive 20 OHM as opposed to 18 OHM on the open market.
As a result, the treasury must mint 20 OHM to give to the bonder. Remember that 1 OHM must be backed but at least 1 DAI. Now, the total backing the treasury has is $180 worth of DAI from this one bonder and this will back a possible 180 OHM tokens.
At epoch 1, the total supply of OHM is now 120 tokens since the previous bonder received 20 from the treasury. Now, another bonder comes along and bonds with $500 worth of DAI, receiving about 46 OHM tokens in return. This increases the OHM supply to about 166 tokens and the total backing is $680 worth of DAI.
As time goes on, the price of OHM rises and as bonders provide assets to the treasury, more and more OHM is minted.
Although this is a simplified example, you can see that the total backing increases as this happens. The dollar value of the treasury assets outpaces the total supply of OHM as the price of OHM gets higher and higher. This is how the exponential growth of staking OHM can be backed. This brings us to staking.
Stakers get rewards for locking up their OHM every 8 hours and the rewards are compounding. This is called rebasing. That means every 8 hours, OHM is minted and added to the total supply.
How much OHM is minted and distributed to stakers depends on the reward rate and the current total supply of OHM.
The reward rate is set by the policy team of the Olympus protocol and theoretically, there is no upper limit to how much OHM there is.
If I stake OHM, my balance of OHM will compound over time and grow exponentially. It is important to note that the token balance compounds NOT the dollar value. Stakers hope to profit by accumulating enough OHM to offset the decrease in price of the OHM token due to inflation. This encourages more long term holding behavior. Check out this YouTube video to understand some details of staking:
The runway is the time in days the treasury is still able to payout backed OHM to stakers given the current reward yield. The reward yield is how much OHM a staker gets per rebase.
The key here is that the OHM given out to stakers must still be backed by at least $1 worth of stablecoin. Obviously, there is a limited amount of this in the treasury so the runway is not infinite. The value of this limited amount used to calculate the runway is the total risk free value of the assets in the treasury.
Just for reference, the runway is calculated by this equation which can be found in the Dune analytics query and that equation is derived from this one:
A ponzi scheme is a form of fraud that pays new investors with funds from old investors and promises quick returns.
As a staker, I’m paid in OHM which is backed by funds mostly from bonders, bonders that supplied assets to the treasury in the past. In kind of an indirect way, that sounds like a ponzi scheme.
However, the project is transparent and the rules, code, funds are open for everyone to see and review. Also, as Olympus is also providing liquidity through it’s liquid pools, it actually generates its own revenues. They also have an Olympus Pro feature that provides other projects with the bonding mechanism that they've developed.
I don’t believe it is a ponzi scheme but it is definitely a risky thing to put money in. If I were to put money in, I’m betting that the OHM token will be utilized in the future and that there is demand for the token. I’m also betting that Olympus’s treasury is maintained and growing from bonding, liquidity pool, and other revenues that have not been yet developed by the project.
None of these things may happen in the future and if they don’t, I could lose all my invested funds.
Watch the YouTube video of this post here: