DAOs — Olympus and its Many Forks
Olympus DAO is an algorithmic currency protocol that aims to solve one problem — our lack of an independently valued digital currency. Most folks that hate on the crypto space constantly like to point out that crypto currencies such as Bitcoin aren’t useful when it comes to executing small and fast transactions in the real world, to which of course I typically reply “Layer two solutions such as lightning network for BTC are where speedy transactions are performed, fool”. Yet, there is truth there. Bitcoin has become less of a currency and more of an asset in recent years, and its deflationary nature means it works very successfully as a replacement for gold, in the opinion of many. The problem is that we need a practical currency, and this currency should be both stable and consistent, something we have not yet seen in this world. How can this issue be addressed?
Cue the stablecoin fans! Stablecoins are an attempt at addressing the stability and consistency issues rampant throughout the crypto space (hence the creative name). By definition, a stablecoin is a cryptocurrency where the price is designed to be pegged to either fiat money, exchange-trade commodities (such as precious metals or industrial metals), or another cryptocurrency. Recently, there have been more and more stablecoins that try to emulate a dollar peg without a collateral backing of 1:1. Stablecoins such as Tether have been really scaring people lately. The reports of Tether printing all willy nilly like our good friend Jerome Powell and his magic money machine, backed by nothing but thin air, means we risk a giant collapse.
Olympus DAO has a very interesting solution. The Olympus DAO protocol is built in a way that each token minted, or each OHM as they are called, is backed by real assets in the treasury. Each OHM is backed by one DAI, which is an algorithmic stablecoin that is decentralized and transparent unlike Tether (USDT), in the Olympus treasury. If 1 OHM is trading below the price of 1 DAI, the Olympus protocol buys back the OHM and burns it. When 1 OHM is trading above the price of 1 DAI, the protocol mints and sells new OHM.
“The fact that the protocol holds DAI for each token allows us to say with certainty that OHM will not trade below its intrinsic value in the long term. This allows investments to be made with defined risk (1 DAI is your guaranteed long-term price floor), because the protocol can and will buy indefinitely below 1 DAI until no one is left to sell, even if it means supply is reduced to 0. In fact, an event like that would be immensely profitable to those who didn’t sell; they’d end up with a chunk of every token burned.” — Zeus, one of the creators of Olympus
In all honesty, I was a broke musician up until not too long ago so my knowledge of finances is sorely lacking, and to understand the internals of the Olympus protocol, I had to really stretch my brain cells. BONDS. I had heard this word before, of course, but it held no meaning in my mind.
“In finance, a bond is an instrument of indebtedness of the bond issuer to the holders.” — Wikipedia
For the Olympus DAO protocol, bonding is one of the most important components, and it’s designed to incentivize its users to lock liquidity into the treasury by offering a nice risk/reward profile. In this protocol, bonding is the process of trading either stablecoins, such as DAI and FRAX or liquidity pool tokens representing portions of the OHM-ETH and OHM-FRAX decentralized exchange pools, for OHM. The way this bond process is designed means that the protocol controls around 95% of its own liquidity on decentralized exchanges, unlike its failed predecessors. This gives the users the confidence that they won’t fall victim to yet another classic rug pull. The user wishing to bond is shown a quote of the amount of OHM they will receive, and there is a vesting period of 5 days to prevent any bad actors (lookin’ at you, whales). The user then receives the OHM at a discounted price, lower than the current market price. The Olympus documentation is extensive, and you can find a great video tutorial on how bonding works on this page. Once a user redeems their bond, and the vesting period has passed, the user is ready to either sell or stake their OHM. You can see in the image below just how beneficial bonding is for the Olympus treasury.
These guys really love memes.
The beauty of the Olympus protocol is that it’s designed in such a way that anyone who holds OHM will be highly incentivized to stake their OHM, thus becoming an “Ohmie”. Adorable. Somehow, cute puns and memes are equally as important as the tech itself when it comes to decentralization projects. I am absolutely not complaining, but the meme/bro culture doesn’t exactly exude maturity, something that might seem important for developing the main digital reserve currency for the entire world, or maybe I am just a grumpy old millennial. I digress. If a user wants to stake their OHM, they can go to the Olympus website and select “stake” to send their OHM to the staking contract, thereby receiving sOHM at a 1:1 ratio. The sOHM tokens are only a representation of your staked OHM, they cannot be used for anything else other than holding. Unstaking is also as simple as a click of a button.
Rebasing is when the protocol sends OHM to the staking contract without asking for sOHM in return, which increases the ratio of OHM staked to sOHM outstanding. The rebase corrects this difference, and distributes the profits equitably to the all the users with staked OHM. So in essence, if you hold OHM and are not staking it, you are missing out on all the benefits of the Olympus protocol. Get staking, Ohmies!
The Olympus Game Theory (3,3) is what makes this protocol so strong. A user can perform one of three actions: stake, bond, or sell. As you can see from the following example, two users staking yields the most desirable result for everyone. Wether users are acting altruistically or selfishly, they will both want to be staking.
One concept I learned from reading about Olympus was the monumental difference between APR and APY. APR, AKA Annual Percentage Rate, is calculated by multiplying the periodic rate by the number of periods in a year. This means APR does not take compound interest into account. Annual Percentage Yield, or APY, is calculated by adding +1 to the periodic rate, multiplied by the number of periods — 1. The reason this needs to be talked about is that I think it’s what scares people the most about Olympus. The APY as of January 12th 2022 is over 3000%, and has gone well over 7000% in the recent past, which just seems too good to be true, and you know what they say about that.
“Almost everything you will find in DeFi uses APR, or simple interest, and not APY. It is a pervasive mislabeling that has created a lot of confusion as people learn about Olympus. Any yield that pays a consistent amount is simple interest. If you have to harvest it, it is simple interest. With OHM you get compound interest; we give an actual APY.” — Zeus
You can read more about Olympus DAO’s APY here.
So what is the end goal of Olympus DAO? Can this high of an APY be sustainable? The truth is, the high APY is just a temporary step, a way to get more and more Ohmies to build up the treasury with more diverse assets. This is the bootstrapping phase. Next comes the stabilization phase. DeFi needs a decentralized unit of value, free of plutocracy, controlled by a decentralized bank where the policies are voted on by the people, with their interests in mind. To be stable in DeFi means to be stable to all assets, including the USD. Olympus is well on its way to becoming our stable digital currency.
“On a mechanism level, I’ve always seen this as kind of like sailing. You don’t want to sail directly into the wind, you want to harness natural phenomena — you want to use it” — Zeus
Wonderland DAO
Most other DAOs on the market right now are a fork of Olympus, which itself has been audited, so please DYOR before assuming forks of Olympus are all safe, there have certainly been rug pulls (like AnubisDAO for example). The next DAO I want to mention has not been audited, but still maintains confidence because of one man: Daniele Sestagalli. His creation: Wonderland DAO.
Using the brilliance of Olympus DAO, Daniele is taking the project one step further. The Wonderland DAO has all the same bonding and staking mechanisms as Olympus, and has somehow already built up a treasury twice the size of its parent. Daniele is quite active on Twitter, where he tends to announce his intentions for Wonderland, some of which sound very promising.
The gamification of Wonderland makes this very different from Olympus. Daniele has mentioned that TIME, the currency of Wonderland, could become the currency of the gaming industry.
Olympus runs on the Ethereum network which is just insane with gas fees right now, whereas Wonderland finds itself on Avalanche which is less tested / trusted, but is cheaper to use by far. Another very interesting difference between Olympus and Wonderland is that Wonderland stocked up on a whole ton of OHM. This means that TIME is backed by OHM as well as other assets in its treasury. These OHM tokens in Wonderland’s treasury are also staked, auto compounding on the OlympusDAO project. This is beautiful because this could lead to exponential growth and means that the success of one project boosts the success of the other, but it certainly also adds some extra risqué-ness.
So are these DAOs Ponzi Schemes? Let’s take a look at the common red flags:
- High returns with little or no risk. — DAOs are super risky, so this does not apply.
- Overly consistent returns. — Also not true, the APY goes up and down.
- Unregistered investments. — This one is true, but welcome to decentralization, my friend!
- Unlicensed sellers. — Also true, see above.
- Secretive, complex strategies. — Not true at all, the code is open source and the team from Olympus even hosts webinars pretty regularly to explain what they have created and what the future holds.
- Issues with paperwork. — The DAOs are very well documented, but I can’t say I know which country they are registered in… or if they are — so yes this one is possibly also true.
- Difficulty receiving payments. — This one is not at all true. You receive your payments from both Olympus and Wonderland every 8 hours.
Olympus DAO has 677 forks as of January 18th 2022, so as you can imagine, this article could go on until DAOs are no longer relevant, (and you can actually see which forks are most popular by clicking here), but I have some honourable mention of other DAOs that you might want to check out— Asgard DAO, Hector DAO, Invictus DAO, and one other DAO that is actually not a fork of Olympus. The Curve DAO is a decentralized exchange for stablecoins, which has become synonymous with the DeFi boom, and offers more stability for liquidity providers than other protocols, and it is worth checking out.
I can’t say the same for other DAOs, but one thing about Olympus DAO that makes me feel more secure about investing is the brilliance of the protocol. Even if the price of OHM goes to zero, the protocol has enough assets in the treasury to buy back all the OHM in existence and burn it. Right now, the treasury has over a year worth of runway, so you might not have to pour one out for the Ohmies quite as soon as you might think. I can’t wait to see where the Olympus DAO project goes and I think I’ll go stake some OHM myself right now….
This is not financial advice. #StakesAreHigh
