In PCV We Trust
PCV — Protocol Controlled Value
In Olympus, PCV refers to the assets owned by the protocol (smart contract’s code). They are primarily used to:
- Back OHM tokens in circulation
- Provide a permanent source of liquidity for OHM tokens
- Generate passive income through deployment to other protocols
#OHMISBACKED, Not Pegged
OHM sets itself apart from many typical cryptocurrencies such as BTC, ETH, and Dogecoin through its multi-asset backing in the Olympus treasury. In this way, OHM behaves like a reserve currency with Olympus acting as the decentralized bank, where its monetary policies are governed by the OHM holders.
To understand this it’s important to recognize that the Olympus protocol owns its liquidity which is primarily acquired through bonds. Protocol owned liquidity, or POL, is then used to back each OHM and contribute to its risk free value(RFV).
When looking at the assets in the treasury backing each OHM we have several categories to examine:
- Reserve assets — contribute to the RFV (risk-free value) of OHM
- Non-reserve assets — doesn’t contribute to the RFV of OHM
- Liquidity assets —contribute to the RFV of OHM, but their values are heavily discounted
Reserve assets are stablecoins like DAI, FRAX, and LUSD. They are valuable because they contribute to the RFV directly, which is the conservative value used to calculate the backing of each OHM in circulation. As more reserve assets are added to the treasury, it creates a floor in which the protocol can rely on.
Non-reserve assets like wETH and xSushi do not count towards RFV due to their inherent volatility. However, they do contribute towards the market value of the treasury. During market volatility, these assets can serve as a hedge if their values appreciate, thus increasing the market value of the treasury.
Liquidity assets are LP (liquidity provider) tokens such as the OHM-DAI and OHM-FRAX pairs. These assets ensure a permanent marketplace for OHM trading. Since Olympus owns most of its own liquidity, the users are essentially guaranteed that there will always be liquidity to trade their tokens.
Source: https://dune.xyz/shadow/Olympus-(OHM)
Not only that, as Olympus accrues more liquidity, it can facilitate larger trades with minimal price impact. It is important to note that liquidity assets still contribute to the RFV, but their values are heavily discounted. This is so that the protocol can guarantee that the backing of OHM tokens is not affected when their market value falls drastically. You can read more about how the protocol calculates the RFV of liquidity assets in this Medium post.
POL — A Defining Element
POL stands for protocol-owned liquidity. It is a concept pioneered by Olympus through the introduction of bonds. In short, users trade LP tokens, reserve assets, and non-reserve assets with Olympus in exchange for discounted OHM. Over time, the protocol accumulates more and more liquidity, guaranteeing a marketplace for users to trade their tokens. You can read more about the benefits of POL from the Olympus documentation.
This is a big differentiation from many protocols today, who currently “rent” liquidity from providers by providing rewards in their native token. The permanence of liquidity is thus subject to the whim of those liquidity providers, as they own the liquidity and can withdraw it at any time. This type of protocol needs to entice liquidity providers through the constant provision of farming incentives. When the APR of these rewards no longer interests liquidity providers, they simply withdraw their liquidity and seek opportunities elsewhere.
The long-term benefits of POL and the ability to acquire POL through bonds is an Olympus staple. A staple that is catching on with other protocols like Float, Pendle, and Alchemix as they partner with Olympus through the Olympus Pro program. Olympus Pro is a platform that allows these protocols to sell their tokens at a discount in exchange for liquidity. This is similar to the bond mechanism used by Olympus. In exchange for providing the infrastructure and expertise needed for the bond program, Olympus charges these protocols a small fee, paid in the form of the tokens offered through bonds. This earns the Olympus treasury extra income and the addition of new assets also helps in diversifying the treasury. The benefit to the partner protocols is that they get to enjoy the same benefits of POL as Olympus.
bUT wOt DoEs iT MEaN?!?!
So why is it important that the protocol controls the value backing OHM?
If OHM falls below its intrinsic value of $1, the protocol can use the treasury to buy back and burn OHM, thereby pushing the price back up. This is important to protect users from a potential bank-run scenario, in which the protocol will do this indefinitely until there is no one left to sell. The stakers can thus relax while their rebase rewards auto-compound with the confidence that every OHM owned has a guaranteed price floor but no price ceiling!
By controlling its own treasury, Olympus has the discretion to divert some of the treasury funds to other protocols. Of course, this kind of decision would need to be voted upon by the community due to the decentralized nature of Olympus. For example, TAP-3 is recently proposed to deposit $100K worth of DAI to Gro Protocol to earn passive yield. Instead of having funds sitting idly in the treasury, initiatives like this provide an extra source of revenue to Olympus.
Olympus has also deposited DAI and FRAX into AAVE and Convex Finance respectively to earn yields. These assets, which were initially sitting idle in the treasury, now become yield-bearing, working assets for the treasury. You can monitor the Olympus treasury on Zapper.
It should be obvious by now why OHM has been trading at a very high premium since the protocol inception. The security offered through the buy-back mechanism, the perpetual source of revenue (e.g. LP fees, yield farms), and the ever-growing treasury RFV are just some examples that justify the value proposition of Olympus. The constant product roll-outs by the DAO members such as Olympus Pro and the recently-launched 3,3 Together prove that Olympus will not stop innovating and certainly not be complacent until it fulfills its vision of becoming the decentralized reserve currency.
If you are an OHM holder, you automatically own part of the Olympus treasury. How much is a guaranteed share of the ever-growing treasury in the midst of volatile crypto markets worth? 🤔
Only the market will tell but stakers can rely on OHM to secure their investment. It is written into the smart contract’s code.
“You can’t trust the FED but you can trust the code.” — OlympusDAO docs
In PCV we trust.
