tl;dr
I researched a popular crypto token with an investor lens. Spoiler: not a great investment.
Intro
You might have seen a few things that would lead you down the rabbit hole to $OHM. Maybe you’ve seen (3,3) in someone’s Twitter. Or you got a hot tip on an asset yielding over 7,000%. Or you’ve heard about a 14 year old that’s started the 56th largest cryptocurrency in the world. There’s several paths, but many crypto newcomers figure out about Olympus and $OHM soon enough.
Why is now a good time to care?
The advertised APY for staking $OHM today is over 7,000%. Normally, these levels of return are reserved to small sketchy projects. However, $OHM is the world’s 6th largest stable coin with a market cap of ~$3.5B. Additionally, OHM’s steward DAO Olympus is forging major partnerships with high profile DeFi projects like SushiSwap and Uniswap.
Thus, while 7,000% returns seem unlikely, it’s worth investigating, if only to understand the grift for the future.
What are Olympus and $OHM?
Olympus is the DAO (decentralized autonomous organization) that manages $OHM.
$OHM is a treasury-backed, algorithmic, free-floating stable asset. Let’s break that down into its parts.
Treasury-backed
$OHM is partially collateralized by a treasury of cryptocurrencies and assets. For a new $OHM to be issued, it must be backed by at least $1 of collateral in treasury value.
Algorithmic
Olympus aspires to be to $OHM what the US Federal Reserve is to US Dollars. Olympus hopes to steward a stable asset (like dollars) that denominates all business transactions in crypto. When the Fed wants to change money supply, its central bankers decide how much money to print. Olympus determines the amount of $OHM to print algorithmically. When $OHM trades at a premium to treasury value (as it does today), the protocol will mint more $OHM to increase supply and drive prices down. If $OHM were to trade at a discount to treasury value, the protocol would buy back and burn tokens to decrease the supply and increase price. Unlike the US Federal Reserve, there’s no one actively making these decisions; it’s all done algorithmically. The decision making logic has been programmed into a smart contract.
Free-Floating
Unlike other stable coins like $USDT, where price is kept around $1 USD by arbitrageurs / policies by its stewards, $OHM is expected to float freely. Thus, it shouldn’t be called a stable coin, but a stable asset. Its price is not stable, but it is superior to other cryptocurrencies in that it is partially collateralized by a treasury of assets. One might argue that $OHM is a bad stable coin, but a good cryptocurrency.
OHM’s Product
$OHM’s treasury grows primarily by exchanging $OHM for crypto assets (they call this process bonding, like issuing bonds). Customers can give Olympus $0.96 of crypto assets (ETH, DAI), and receive $1 back of $OHM.
This bonding process is unit economically unsound. Olympus’ primarily mechanism of growth is trading a dollar for 96 cents, reminiscent of the dot-com bubble, where startups believed scale could remedy bad business models. As an $OHM holder, and thus an equity owner in the Olympus treasury, bonding should not be considered a source of profit. Why own $OHM when you can buy that ETH directly, not at a 5% markup?
However, Olympus is succeeding at amassing a treasury, whereas dot-com startups quickly spent whatever money they took in. This provides value in different ways, illustrated in the next section.
Opportunities
I’m not sure Olympus itself realizes the full potential of its business.
Currently, Olympus advertises itself as a replacement for other stable coins, which are really just digitized dollars given their pegs to the US dollar and treasuries composed of US dollars. This is a highly valuable distinction. If the US enters a hyper-inflationary period, the value of Tether stable coins ($USDT) will depreciate just as much as the value of the US dollar. Holding a stable coin pegged to USD doesn’t protect from any inflation / dollar risk.
Conversely, $OHM sits on a treasury of crypto assets, which means it’s not pegged to the USD. This means Olympus could become a true non-inflationary stable asset.
“A non-inflationary stable asset” sounds a lot like the value proposition of Bitcoin, often referred to as a digital gold. The most valuable use cases of Bitcoin are also to hedge against inflation and government risk. However, Bitcoin doesn’t have any intrinsic value, whereas $OHM sits on a massive treasury. Bitcoin also isn’t as easily staked, a process which reduces price volatility. $OHM’s treasury and staking mechanisms could usurp Bitcoin as the primary ‘store-of-value’ of web3.
Who’s the team?
The team is made of pseudonymous contributors like Zeus, who is rumored to be a teenager. The DAO’s growth can be partially attributed to the team’s excellent marketing instincts. They are responsible for the crypto-ubiquitous (3,3) meme, a simplified communication of the idea that asset holders benefit if everyone continues holding (duh).
What’s the competition?
The biggest stable coin is Tether (USDT), which is pegged to a treasury of USD. Conversely, Olympus is building a treasury of crypto assets. There are other algorithmic stable coins that Olympus competes with (Ampleforth, Fei) with different modifications (e.g. pegged instead of floating). In future weeks, I’ll do another deep dive on competing algorithmic stable coins.
Risks
The eye-popping yield is what brings most people to $OHM. However, it’s misleading because the “yield” doesn’t necessarily have intrinsic value, as it is denominated in $OHM (versus USD).
Imagine 10 friends purchase a pizza split into 10 slices, one slice per person. Now imagine someone says, “Hey, we’re good boys, everyone should get 4 extra slices.” So now everyone is entitled to 5 slices. However, the pizza stays the same size, everyone now has 5 skinny slices instead of 1 big slice. This is equivalent to the yield on $OHM. Distributing extra tokens via staking should merely drive down the per token price, without much changing the value of the overall holding.
This is similar to a stock dividend, instead of a cash dividend or bank APYs. Stock dividends in public equity markets don’t change the total value of an investment; total value stays constant while per share prices decrease.
To illustrate this effect, imagine if Olympus issued 177 tokens tonight for every token outstanding to bring (treasury value : tokens outstanding) to 1:1. The DAO could theoretically pass this measure at any time. This would drive prices to $1 overnight while also creating an astronomical APY (6,500,000%), reinforcing the deceptiveness of APY as a good thing.
Deal Economics
Linked here is a model that attempts to derive the fair value of $OHM over the next six months. One can see that dilution of token supply causes the fair price per token to decrease significantly. However, the overall investment value is maintained as one receives more tokens. Similar to a stock dividend, APY for $OHM doesn’t change the fair value of one’s position.
In an efficient market, token prices should decrease proportionally to token supply increases. However, crypto is an inefficient marketplace, where prices are divorced from fair values. This creates active trading opportunities.
$OHM is a good candidate for quantitative trading, capturing value so long as yield (input 1) outpaces price decreases (input 2). The volatility of this trade is low, as the percent of $OHM supply staked (input 3) is over 90% due to perceived yields. This third input can provide leading indicators for when prices will become more volatile.
Thus, while $OHM is a poor candidate for long-term investment, $OHM can be an interesting active trade for quantitative or active investors.
