Olympus DAO is a new attempt. It aims to create reserves and stable currencies without relying on pegging to certain central bank currencies.
Original title: “The Way of DeFi | OHM: New Exploration of Money and Value “
Written by: Luke Posey, Glassnode Analyst Compiled by: Captain Hiro
DeFi (decentralized finance)’s dependence on the U.S. dollar constitutes an intricate network of risks. Is DeFi on the road of creating better and newer things, or is it destined to be a gradual improvement over traditional finance?
DeFi lives in a world of widespread innovation and decentralization. In an environment where anyone can write their opinions in smart contracts, various innovative experiments are being tested and tested. Perhaps the most critical coordination game in human history is currency—especially centrally issued currencies and the governments, organizations, power structures, and policies that govern them.
DeFi has built a system that is highly dependent on the old money game. By relying on the U.S. dollar as the reserve currency of DeFi, DeFi binds itself to the existing financial system. So far, DeFi has anchored more than $100 billion in assets.
Moreover, the growth of DeFi market value and reliance on stablecoins does not seem to slow down. In May alone, the DeFi ecosystem has accumulated more than 750 billion U.S. dollars in value to be transferred on the chain through USDT, USDC, DAI and BUSD. If these stablecoins linked to the US dollar are not used, DeFi will return to the Stone Age-there is no clear security, no more lending market (stability market is highly dependent on stablecoins), and it also loses the most popular farming/ Liquidity tools.
The important stablecoin DAI (MakerDAO’s stablecoin) on DeFi has historically been backed by multiple assets, mainly ETH. Over time, it increased its exposure to the U.S. dollar, using USDC and other centralized stablecoins as the main means to maintain the U.S. dollar exchange rate during the cryptocurrency market downturn. Please note that after entering May, MakerDAO added a large amount of USDC to its balance sheet.
Data source: Dune Analytics
As a major participant in the Bretton Woods system, the US dollar anchoring gold has long lost its convertibility with the US dollar. It has entered a new paradigm of floating exchange rate legal tender. Since DeFi relies on a stable currency anchored in the U.S. dollar, under the flexible monetary policy of the Federal Reserve, the U.S. dollar’s policy decisions and risks will be directly mapped to DeFi.
Monetary policy: Measures taken by the central bank to manage currency to achieve a series of goals, such as inflation targets, growth targets, employment targets, etc.
The risks of linking DeFi to the U.S. dollar monetary policy include:
Regulatory pressure: The use of U.S. dollar guarantees comes from those who manage the U.S. dollar, especially in the case of U.S. dollar-linked assets such as USDT and USDC. Each issuance of 1 USDT or USDC will hold 1 USD.
Inflation: After 2010, the annual average CPI is 2% (the Federal Reserve’s 2% target).
Foreign exchange risk: The risk of asset depreciation relative to the euro, RMB or other currencies that participants may use locally.
Counterparty (centralization) risk: In a world that claims to attach importance to decentralization, the strong reliance on institutions such as the Federal Reserve, and even the reliance on project parties such as Circle and Tether, and the proposition of decentralization have become clear Contrast.
Get rid of the dependence on centralized monetary policy
In order to solve these problems, a new currency appeared in DeFi. Although it may be too early for us to get rid of our dependence on stablecoins pegged to the US dollar, we can definitely start experimenting with some alternative currencies. As these alternative currencies are adopted by enough people, they can slowly cannibalize the position of stablecoins that are deeply entrenched in the DeFi world.
Some of these alternatives completely abandoned the peg to the U.S. dollar. They wrote monetary policy into smart contracts and adopted varying degrees of community governance and decentralization. These are all new experiments in monetary policy and value. In this article, we will explore the OHM of Olympus DAO, which is an experiment on currency, trust, and community governance. This is one of a series of new currency experiments. During the May/June market downturn (the market saw a 45% drop in May), its strong performance relative to the broader cryptocurrency market attracted attention.
Note: These are experiments of monetary policy and should be regarded as experiments of monetary policy-any trade/investment in OHM or similar assets bears incredible new and higher risks.
Olympus DAO (OHM)
OHM is a novel attempt by DeFi to create a reserve currency that is not tied to legal currency. Its lofty goal is to break away from the US dollar-based system.
DAO manages the monetary policy of OHM. OHM is a reserve currency that is currently backed by some assets, the most famous being DAI, FRAX, OHM-DAI SLP, OHM-FRAX LP and SUSHI rewards from OHM-DAI SLP.
As a reminder, these assets are:
DAI: A stable currency softly pegged to the US dollar, backed by a variety of assets, mainly ETH and USDC.
FRAX: A stable currency with partial guarantees and partial algorithm stability.
LP: Uniswap Liquidity Position, SLP: Sushiswap Liquidity Position.
The DAO has written a rule that only one OHM can be issued for each DAI owned by the Ministry of Finance. If the exchange rate is lower than 1 DAI, DAO will buy back and burn OHM. This does not mean that OHM is linked to DAI/USD. OHM traded at the value of DAI + market premium and showed incredible strength in the May/June DeFi price drop.
But the pure dollar value of this asset is far from telling the whole story. In the current issuance model, OHM inflation is high enough that OHM buyers who buy absolute highs in US dollars can also profit. Since its launch in April, the average APY of staking OHM has exceeded 100,000%. The annual return of OHM staker is currently about 34,000%, which is lower than the 40,000% at the beginning of this week and the 100,000% at the beginning of June and the previous months.
Data source: Dune Analytics
Why can its annual growth rate be so high? Recall our explanation of APR and APY in the previous article. A high annual interest rate (without compound interest returns) will generate a huge annual interest rate driven by conventional compound interest. OHM has a mechanism that allows stakeholders to automatically compound interest rates.
It is important that you realize that if the price of OHM rises, staker is unwilling to sell OHM, APY rises, and the selling pressure is relieved accordingly. This feedback loop creates a strong incentive to continue staking.
The token will be rebase every 8 hours, and the staker will receive a reward of ~+0.52% at the current interest rate. This is an APR of about 570%. This APR plus the compound interest of each rebase becomes the current interest rate of ~34000%.
Users buy OHM or bonds in the open market (discussed later)
Users receive sOHM by betting on OHM
sOHM is automatically compounded during each rebase, 3 times a day
Users can use their sOHM (3,3), the current 3 times a day rebase receive about 34000% + APY, or use sOHM to trade it in the loan agreement, etc.
Notice the increase of 100 OHM in the chart below. The flat line is APR. It looks flat because when the APR is 600%, 100 OHM grows to more than 1000 OHM, and when the APY is 40,000%, in a year, 3 rebases per day, the token circulation will be Increased to 39000 OHM. The staker automatically gets an annual rate of return of 39000% instead of a 600% annual rate of return, because the staker’s contract has built-in automatic compound interest.
At present, APY is undergoing high and drastic changes, which may change due to the staking amount of OHM and the governance voting of DAO.
Please note that the DAO has plans to start coming out of this period of massive coin inflation in the near future. They plan to reduce the annual rate of return in the short term, but at the same time increase the lock-in time to increase the bonus. There are more examples that illustrate the power of the DAO to manage monetary policy innovation. Such a huge annual rate of return of course led to the inflation of tokens. Although asset prices have fallen, prices have remained strong, and their market value has risen to record highs.
Please remember that for every OHM issued, at least one DAI must be in the Ministry of Finance to create a lower price limit for 1 DAI/OHM.
Enough token inflation and sufficiently low price deflation will generate profits. This is a sign that OHM is being used more and more. Not surprisingly, the number of stakers continues to rise over time.
Data source: Dune Analytics
Based on the idea that each DAI controlled by DAO can only issue one OHM, we can understand why there is such a high APY and token inflation. Therefore, we can calculate how long the issuance of OHM can last with the current APY and holding DAI. When the annual interest rate is 40,000%, OHM can continue to issue for 180 days, and the amount of OHM is equal to the amount of DAI in the Ministry of Finance before the inventory. With the increase in the size of national debt, this runway continues to remain stable or increase.
Data source: Dune Analytics
It should be reminded that although the risk-free value of DAI treasury bonds is the lower limit of the price of OHM, the transaction of OHM has a certain premium. This premium is determined by the market. Users value the continued growth of the DAO and its treasury, liquidity commitments, income expectations, and other advantages of the currency, resulting in the current high premium. Future governance votes can easily vote to grant the token holders/staker the% of the yield of national debt assets, thereby generating more incentives for premiums.
The current market value of all assets owned by the Ministry of Finance (DAI, FRAX, OHM-DAI SLP, OHM-FRAX LP, OHM, SUSHI) is more than US$30 million. This brings OHM’s $175 million market value to net asset value (NAV) ratio close to 6. This price relative to the net asset value can easily fluctuate because the current issuance and price fluctuate greatly.
Based on pure “no risk value” or the value of stable currencies such as DAI and FRAX, the Ministry of Finance currently holds 9 million US dollars. With a circulating supply of 450,000 OHM, this means that 8.15 million tokens can be issued before reaching the bottom of the price.
You may now ask how DAO obtains DAI, FRAX and liquidity? DAO builds a clever binding mechanism. Users can purchase bonds through DAI, FRAX, OHM-DAI SLP or OHM-FRAX LP to receive OHM. These bonds can be purchased at a price lower than OHM, will continue to be redeemed, and fully mature in 5 days.
In certain periods, these bonds were purchased at a discount (ROI) of up to 20%. Smart traders can build proactive strategies around these bonds and benefit both themselves and the DAO. Usually, these bonds float within a discount range of 2-8% when they are redeemed within 5 days. This is a win-win situation for the user and the agreement. When the agreement increases the liquidity of the Ministry of Finance’s DAI and FRAX and OHM-DAI and OHM-FRAX, users will receive a (potential) discount OHM.
A sample transaction is to see if the bond’s investment return rate is> staking OHM 5 days interest rate, because the bond is issued continuously for 5 days.
In addition to holding> 8 million U.S. dollars of DAI and FRAX risk-free value, the agreement also controls >90% of OHM-DAI SLP on Sushiswap and >50% of OHM-FRAX on Uniswap. On Sushiswap, SUSHI rewards + fees get 81% APY, and OHM-FRAX pools get lower APY from pure Uniswap fees.
Data source: Dune Analytics
You can imagine that in the future, DAO will continue to actively manage and allocate its balance sheet, supporting OHM with various token allocations and strategies.
An interesting part of a project like OHM is how to evaluate it. Assets such as bank stocks can use indicators such as assets under management (AUM) and price to net asset value (NAV), where the net asset value (NAV) describes the total value of the balance sheet, and the price is the total value of the stock. In this case, we can observe some phenomena, such as the # between the outstanding assets of OHM and the risk-free value (balance sheet) of the OHM Ministry of Finance. When DAO’s assets increase and continue to hold shares, a shareholder’s total shareholding can become “risk-free”, which means that the risk-free value of their OHM (OHM) exceeds their initial investment + premium.
Source: Olumpus DAO Asfi
This chart is based on some assumptions, mainly that OHM’s finances will continue to grow. The members of the DAO built this model to understand the scenario of staker growth in the growing balance sheet of the Ministry of Finance.
OlumpusDAO Asfi: Google Sheet
Current and future challenges
The price fluctuation of “stable currency”?
OHM’s price fluctuations have raised questions about its stability. Of course, this asset will not claim to be a “stable currency,” but a reserve asset. In other words, reserve assets should not fluctuate sharply. Currently, the project is in the issuance stage and does not care about price stability. Once OHM exits the issuance stage of large-scale annual returns and shifts to a carefully controlled monetary policy and simple simulation of treasury bond growth, the premium is likely to shift to tighter transactions.
Reliance on DAI and exposure to the U.S. dollar
DAI’s shift to rely heavily on USDC as collateral may lead to exposure to the U.S. dollar, which may be in contrast to DAO’s stated goals. If DAI remains the main asset on the balance sheet, DAO’s exposure to the U.S. dollar will continue to grow. Adding FRAX to the SLP and continuing to collect SUSHI rewards is a good step towards the right way to decentralize treasury assets. If DAOs seriously consider delinking from the U.S. dollar, they can come up with smart ways to continue diluting their DAI holdings over time.
Smart contract risk
DAO itself is innovative and has many related smart contract risks. In addition, as time goes by, DAO continues to increase assets and positions, and is more exposed to the risks of third-party smart contracts. With the full decentralization of the treasury, any single loss on the balance sheet due to smart contract risks should be relatively modest.
Governance risk
Any aggressive action on community governance will bring the risk of coordinated attacks. Depending on the true degree of decentralization of fund management, if enough stakers one day choose to make a decision that is beneficial to their small group, they can lead the governance vote in this direction.
OHM and the future of decoupled currencies
For now, OHM is still a risky bet. With the continuous growth of the national treasury, the complex, innovative and enthusiastic community will receive a sufficient premium in the medium term to ensure continued growth and participation3,3 (purchase + staking).
If executed correctly, all the typical value-added of DeFi may provide some unique value-added for the future of OHM+:
On Tuesday, OHM (OHM) was added to its first loan agreement. Rari Capital’s Fuse has added a dedicated OHM pool, which includes DAI, FRAX, USDC and ETH, which can be used as borrowing and collateral. Within a day, the OHM pool on Rari’s Fuse attracted more than $10 million in collateral, making it the second largest Fuse pool. Users can lend sOHM (staking on OHM) to maintain the compound interest of their betting on OHM while using it as collateral.
Data source: Rari Grafana
Sources of liquidity for all major DEXs (decentralized exchanges)
The advantage of composability-unique ways of using bonds, rewards, OHM flash loans, governance, gamification, cooperation, etc.
Autonomous monetary policy and responsibility for coding contracts
Concluding remarks
OHM is a new attempt. It aims to create reserves and stable currencies without relying on pegging to certain central bank currencies. The DAO has successfully secured a balance sheet managed by the DAO, which includes nearly US$30 million in assets, a risk-free value of US$9 million, and more than 4,000 stakers participating in the agreement. In the context of the market downturn, the Ministry of Finance continued to show strong growth, bringing the total market value to a record high.
It will be very interesting to observe where the DAO leads its growing asset pool, allocate its funds to benefit the DAO, and provide support for its reserve currency OHM. It remains to be seen whether the flexibility of this decentralized funding experiment with a large amount of internal governance can flourish in a competitive environment. After all, this is an experiment in monetary policy.
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