Among the experiments in decentralized finance (DeFi), one project stands out, Olympus DAO (OHM). In 6 months of existence, this protocol has managed to climb into the top 100 of the most capitalized cryptocurrencies. His ambition? Become an essential store of value for DeFi players. Illusion or revolution, let’s discover together how it works.
Reminder on the Stablecoin Paradigm
If, in essence, decentralized finance (DeFi) wants to be independent and parallel to the real economy, to date, it is far from it. As of October 2021, there is nearly $128 billion worth of greenback-backed stablecoins in circulation, and they remain the top choice for DeFi users to reduce their exposure to market volatility.
However, even if this inflow of liquidity helps the ecosystem to develop today, is this situation viable over time? Ultimately, is it in the interest of so-called decentralized protocols to keep these dollar-backed stablecoins at the heart of their exchanges? Is it possible to imagine a commonly accepted stablecoin or benchmark asset-backed or secured by something other than fiat currencies?
This is the challenge that the Olympus DAO team has set itself: to create an asset that is virtually impervious to variations in the financial markets.
Before diving into the heart of the operation of the protocol, a warning: the experimentation carried out by Olympus is, by definition, very risky. This project is still young, and despite its impressive growth within the ecosystem, it will have to confirm that its emission mechanism is viable over time. Several forks have already taken over the principles of Olympus; remember to do your research to understand the mechanisms and risks of this type of project.
How Olympus DAO and OHM Work
This decentralized autonomous organization (DAO) has developed, thanks to its OHM governance token, an algorithmic store of value decorrelated to the price of the dollar and guaranteed by a basket of assets (initially composed of DAI, then FRAX, LUSD and ETH).
Unlike classic stablecoins, OHM is not backed but collateralized. The protocol secures the issuance of these tokens through a basket of different decentralized assets locked in its smart contracts.
Like a central bank that issues its currency based on the reserves of value in the vault (such as securities, bonds or commodities), Olympus mints OHMs according to the number and value of the crypto-assets in its reserves, the protocol managed by a DAO provides that each OHM issued must be collateralized at least by 1 dollar reserve.
This process guarantees a theoretical floor price for each token in circulation. The real price of the token is defined as floating. Concretely, the OHM is traded at a higher or premium price compared to its collateralisation.
If the long-term objective of the protocol is for its OHM token to reach a relatively stable value, the latter must first go through a growth phase and increase its liquidity to ensure its mission as a store of value. In order to increase its cash flow, Olympus, therefore, offers two advantageous processes to its users: bonds (or bonds) and staking.
Olympus DAO (OHM) Logo, by Cryptoast
The leap mechanism developed by Olympus is as follows.
An investor can exchange DAI, FRAX, LUSD or ETH tokens for OHM at a discounted price. By locking in its liquidity for 5 days, the protocol ensures that the investor will benefit from a discount compared to the actual market price.
The tokens contributed will be placed in part in the reserve of the protocol at a ratio of 1:1, and the profits or surplus (in OHM and not in dollars) are returned to the stakers. In other words, if 1 million OHM are issued, the protocol must (at least) always have in its coffers a basket of assets with a value equivalent to 1 million dollars, or as presented by the protocol of 1 million RFV (Risk-Free Value).
The protocol also offers LP Bonds: if the intrinsic value of the OHM is 1 dollar, it is possible to give a value to an equivalent OHM-DAI or OHM-FRAX pair. Thus, an investor has the opportunity to exchange an LP token for OHM at a discounted price.
This exchange allows the protocol to become the owner of its own liquidity pools. To date, Olympus owns over 99% of the OHM-DAI and OHM-FRAX pools available on SushiSwap.
Thanks to this mechanism, the protocol is able to control incoming and outgoing capital flows but also capture all transaction costs related to these pools and therefore increase its income.
As chosen by nearly 90% of OHM holders, it is possible to block your tokens and benefit from an interest rate of several thousand percent. By staking OHMs, Olympus will give you sOHMs (1 OHM = 1 sOHM). Interest payments are made every 8 hours and are automatically added to your wallet.
Here is an example to explain how staking rewards work:
- The current price of OHM is 700 DAI on the market, and that of the bond is 680 DAI;
- An investor decides to buy a bond to benefit from a discount. He, therefore, deposits 680 DAI, which will be locked and will allow him to acquire 1 OHM after 5 days;
- The protocol directly retrieves these DAIs and, respecting its collateralisation law, emits 680 OHM in return. As expected, 1 OHM will be fed back linearly to the bonder. The remaining 679 will be distributed over a period to stakers (90%, in the form of sOHM), and a part will be kept by the DAO to ensure its operations (10%).
The amount and speed of redistribution of OHMs to stakers will depend on the rewards policy chosen by the protocol. It is important to note that this is subject to a vote in which each of the OHM holders (OHMies) is invited to participate.
When the project was launched in March 2021, staking rewards were estimated at between 10,000 and 100,000% per year. These yields tend to fall as cash and the number of OHMs in circulation appreciate.
These two mechanisms (bonding and staking) have allowed the protocol to climb into the top 100 cryptocurrencies in terms of capitalization, with the OHM having quickly reached a capitalization of several billion dollars. As of this writing, OHM’s revenue from bonding is estimated at $10 million per day. Owning more than 90% of its liquidity pools, Olympus collects daily transaction fees amounting to more than 100,000 dollars.
However, the evolution of the Risk-Free Value (RFV) remains the most significant indicator. The RFV is the amount allocated by the protocol to guarantee the OHM price. Since its inception, the protocol provided that each OHM issued would be collateralized 1 to 1. Over 3 million OHMs have been issued, while the reserve stands at over $100 million. In other words, the actual floor price of the OHM is, in practice, 33 times higher than that provided for by the policy of the DAO and is only increasing.
The Real Price of OHM
Some interested parties may ask why buy OHM at the market price when the latter is only guaranteed by 1 dollar?
The actual price of OHM depends on the laws of market supply and demand. By paying a premium price, investors are betting on the protocol’s ability to generate revenue. By buying and staking their OHM, they capture part of the available supply.
If the valuation of the project tends to increase, it is a safe bet that more investors will decide to stake their OHM, which will tend to pull the price up and move away from its guaranteed value.
Finally, it is also in the interest of the protocol that the OHM is traded at a premium price. A price higher than the intrinsic value allows the protocol to offer bonds at a reduced price compared to the market price while respecting its collateralisation rule.
What will be the Real value of the OHM in the Future?
This will again depend on buying and selling pressures. To date, OHM is still very volatile, and as long as the growth process is in place, it is very difficult to predict a stable market price.
However, OHM’s floor price may change. If the economic conditions are met, the DAO could proceed to a vote to increase its floor price. The OHM could, therefore, in the future be guaranteed not by 1 dollar of RFV but by 5, 10 or 100 dollars.
(3.3): From Game Theory to Community Practice
Olympus now has over 30,000 OHMies. Launched by a group of anonymous people, Olympus DAO owes its success not only to its financial engineering but also to its community, a significant parameter for the development of a DeFi protocol governed by its users.
Since its launch, the founder of Olympus0 has engaged through the Discord group to explain the functioning of this new protocol. In particular, it presents the following matrix from which the meme (3.3) will later come, taken up by many OHM holders on Twitter to express their affiliation with the project. The symbol (3,3) refers to an explanation by the founder of the benefits of staking, both for the protocol and its users.
Olympus DAO Game Theory
Concretely, the game theory presented by Olympus is as follows. When two actors participate in the protocol, 3 operations are possible:
Buy at market price and stake OHM (+2): This will tend to reduce the circulating supply and pull the price up.
Buy at a reduced price by taking a leap (+1): This will tend to reduce the circulating supply without exerting buying pressure.
Sell OHMs (-2): This will tend to increase the circulating supply and pull the price down.
Stake and Bond trades are considered beneficial to the protocol, while selling results in negative proceeds. If two players decide to act in favour of the protocol, the player who moves the price will be awarded an additional point. If the players’ actions are contrary, the player with a negative effect receives an additional point while the other will have a point deducted. If both players decide to sell, they will each be deducted one point.
Ultimately, here are the different possible outcomes of these situations:
- Both players stake, the result is optimal for the players and the protocol (3 +3 = 6);
- One player stakes, and the other leaps; the result is positive. One withdraws part of the OHM in circulation while the other inflates the treasury (3+1=4);
- If one of the players sells while the other stakes or leaps, this will have a negative effect on the action of his opponent and result in a zero product (1-1= 0);
- If both players sell, the result will be negative (-3-3 =-6).
The Olympus Team
For reasons of confidentiality and respect for privacy, the founding members of the protocol have chosen not to disclose their identities.
A nod to the founder of Bitcoin, Satoshi Nakamoto, anonymity is also an effective way to draw attention to the product or service offered rather than to a particular individual. However, we know that the Olympus DAO is made up of nearly sixty individuals divided into 3 groups.
The Coordinators are responsible for the proper development of the DAO, the respect of deadlines and the smooth running of operations.
Strategists are heads of departments. They each represent a key division of the DAO and are responsible for compliance with the specifications set by the coordinators and voted on by the governance.
The Olympians are operational. Supervised by the strategists, they are the ones who carry out the work. Example: the creation of a new program proposed by the Policy team, negotiation of partnerships, launch of a new indicator on the site or community management on Discord.
If you are interested in the history of the founding members of this protocol, interviews are recorded in podcast each week and are available for free on Spotify and Apple Podcast.
Already in partnership with Rari Capital, Frax Finance, and Abracadabra, Olympus also offers another solution: Olympus Pro. On the strength of its experience and after having audited its services twice, the founding team offered other protocols the benefit of a bonding service.
Several major DeFi players such as Stake DAO, Pendle, Alchemix or even Float already offer their governance token at a discount in exchange for an LP (generally composed of the governance token of the platform concerned and ETH). In exchange for this service, Olympus collects 3.3% of bonding transaction fees.
Screenshot of Olympus Pro leaps
This process is an interesting alternative to classic liquidity mining allowing users to buy the token of their choice at a reduced price, but also to the protocol concerned with gradually becoming the owner of its own liquidity pools. This principle, called Protocol Owned Liquidity (POL), offers Olympus partners a new tool to combat certain limits of decentralized finance, such as impermanent loss, slippage or the pressure of sales exerted by large portfolios.
Olympus’ ambition to create a store of value independent of the price of fiat currencies is a tall order. While other protocols have attempted to address this issue in the past, the structure and operation of this DAO are unprecedented.
However, its development is only in its infancy. To continue its rise and impose itself on the DeFi market, Olympus will have to prove that its mechanism of bonds is applicable and profitable to other protocols. This service could be a viable alternative to the costly liquidity mining program for DeFi players. The future will tell us if this new mechanism turns out to be scalable and adapted to the needs of the ecosystem.
How to buy OHM?
Unlike other protocols, Olympus does not want to be listed on a centralized exchange such as Kraken, Binance or Crypto.com. To date, there are 2 ways to get OHM:
By going through a DEX like Uniswap or SushiSwap and exchanging crypto assets for OHM at market price.
By contracting a bond directly on the Olympus website: in exchange for an asset that makes up the reserve basket of Olympus (DAI, ETH, LUSD, FRAX) or against an LP. You will receive OHM linearly over a period of 5 days.
Depending on the type of bonds you have contracted, but also the price variation during the lock period, you will receive the Olympus governance token at a more or less reduced price compared to the market price.
Olympus DAO Ratings and Reviews
The ability of a protocol to attract liquidity is one of the major issues in the DeFi universe. The value proposition presented by Olympus questions the validity of the bootstrapping systems currently used by the various stakeholders in this ecosystem.
Additionally, by becoming the majority owner of its own cash pools, Olympus was able to build new revenue streams, inflating the value of the assets that make up its cash.
These additional revenues, if used wisely, will generate additional returns by providing liquidity in other marketplaces.
Despite everything, Olympus remains to this day considered by part of the ecosystem as a scam, among many others, offering disproportionate and unrealizable returns in the long term.
The development of this protocol will therefore depend on its ability to prove its resilience in the face of price variations and to cultivate interesting synergies with other market players to establish itself as a key player in DeFi. Case to follow.