Understanding OlympusDAO: Defi 2.0’s flag-bearer, the unstable algorithmic stablecoin

Authur:Liu Quan Karl

Translator DeGate

Liquidity is leaving the farm at an alarming rate. “42% of users who enter the farm on the day it launches would exit within 24 hours, around 16% of the users would leave within 48 hours, and by the third day, 70% of the users would leave the farm.” This quote is from Nansen’s chief analyst and is also written as a motto on the official OlympusDAO website.

This quote tells the disadvantages of existing DeFi ecological farms for LP liquidity mining, that is, mining and selling, users can not advance and advance together as long-term holders and teams, project tokens would have to face continuous pressure. When user and capital growth hits a bottleneck and the farm APY drops due to mining and selling, users would be relieved of their LPs and liquidity would be lost. In addition, users would have to contend with erratic losses.

The design of a DeFi protocol for more sustainable access to liquidity became the prelude to DeFi 2.0, and OlympusDAO became the new exploration.

1 The “unstable” algorithmic stablecoin

In the cryptocurrency market, the most used assets are stablecoins such as USDT and USDC, and most of the purchases of other underlying assets are made by users through stablecoins. Most of these crypto-stablecoins are pegged to the US dollar, which means that if the dollar depreciates, the real purchasing power of these crypto-stablecoins would also decrease. OlymupusDAO. On the other hand, believes that a quality cryptocurrency should maintain a consistent purchasing power at all times.

OHM is the native pass-through of OlympusDAO, a free-floating currency backed by a basket of assets. Initially, 1 OHM is backed by 1 DAI and the treasury (DAO) would have at least 1 DAI to back the value of the OHM, at which point 1 OHM = 1 DAI. when 1 OHM < 1 DAI, the protocol would repurchase the OHM from the market and destroy it, pushing the price of the OHM back up to the value of 1 OHM = 1 DAI by reducing the amount in circulation in the market. When 1OHM > 1DAI, the protocol would sell the OHM held in the treasury at a discount, pushing the price back down by increasing the amount of OHM circulating in the market.

It should be noted that 1DAI and 1OHM are not 1:1 linked. In addition to 1DAI, the market premium determines the price of OHM, i.e. 1OHM price = 1DAI + market premium. And it does not matter if the 1OHM price deviates from the 1DAI it does not matter what the 1OHM price is (explained below).

Using the current price as an example, 1OHM = 935 USDT = 935 DAI. If the user spends 935 DAI to buy 1OHM at this point, the protocol would receive 935 DAI and cast 935 OHM at the same time, of which the user would receive 1OHM, 10% of the remaining 934 OHM would be kept in the treasury and the remaining 90% of OHM would go into the pledge contract, i.e. STAKE, which is used to distribute to other pledged (STAKE) users.

In this example, the user only buys 1OHM, but the protocol minted 935OHM, so the value of fission when buying 1OHM is 93⁵²DAI, which is called Rebase. The rebase effect is one of the key reasons why OlympusDAO maintains a very high APY. The user pledges 1OHM and the protocol minted 1+934OHM, the vast majority of which goes to the user who is pledging. The pledging user only sees the pledged OHM balance, so the protocol increases the pledged OHM balance by changing the base and also ensures that the pledged 1OHM is always be converted into 1OHM.

Further down the line, the price of OHM varies from 1OHM = 1DAI to 1OHM = 935DAI and the geometric effect of the variable base over this period is quite different. The earlier the users enter the pledge then the more they would enjoy the dividends would be the geometric growth of the later users. However, what the latter users enter is still to enjoy ultra-high APY, and it is the long-term pledge of the former users that can ensure ultra-high APY. The vast majority of OHM holders simply pledge their OHM to generate a consistently high return from the high APY. More pledges mean less liquid supply in the market and less selling pressure making the price more stable.

In the long run, compounding interest through pledges would allow users to grow their OHM balances exponentially. Even if the price does not move at all during this period, the gains made are still significant. The user buys OHM at a price above 1 DAI, taking the risk of a market premium in exchange for the long-term benefit of the growth of the coin’s principal, then the price would no longer be a necessary consideration.

2 The protocol controls liquidity replaces liquidity mining

In addition to pledging, users can also buy OHM from protocols at a discount by trading with LP Token or other single coin assets such as DAI, wETH, etc. This process is called Bonding. The former is called liquidity bonds and the latter is called reserve bonds. The primary liquidity bonds are the OHM/DAI LP pools on Sushiswap.

Bonding is an important way for OlympusDAO protocol to own and control liquidity. When a user sells their LP Token, the user is incentivized to buy OHM at a discount, while the LP Token would bring capital pool depth and liquidity to the Treasury, and the depth raises the floor of OHM price. The protocol captures the LP Token, the LP Token provides the liquidity and in effect, the protocol controls the liquidity itself. By owning and controlling the liquidity, OlympusDAO becomes its market maker. LP Token liquidity generates revenue for the protocol and OlympusDAO would receive market maker commissions from the pairs, making the protocol profitable and sustainable. olympusDAO has over 99.5% of its liquidity in the market.

Based on the success of its Bonding, OlympusDAO launched Olympus Pro service, allowing other protocols to directly purchase the liquidity owned by OlympusDAO, aiming to provide services similar to STAKE+Bonding for other DeFi protocols. The liquidity sold would in turn be transformed into a revenue-generating asset for OlympusDAO, thus facilitating the further development of the protocol.

3 Nash equilibrium in OlympusDAO: (3, 3)

After explaining the fundamentals of the protocol, it is necessary to make a separate section on STAKE, where the long-term pledge of each OHM holder would have a crucial impact on the protocol.

In OlympusDAO assistance, there are three behaviors of users and their benefits:

STAKE (+2) Bonding (+1) Sell (-2)

Both STAKE and Bonding have a positive effect on the protocol, Sell has no benefit; both Stake and Sell have a direct effect on the OHM price, Bonding does not.

Assuming there are two individuals, A and B, in the market, there are nine outcomes based on the three behaviors described above:

A and B both take STAKE or Bonding, which has a positive effect on the protocol, and the STAKE side, which affects the price of OHM, would receive half the benefit (+1). Ideally, both A and B would STAKE, which would have the best effect on both A and B and the protocol itself i.e. (3, 3); A and B adopt the method of opposing the interests of the agreement respectively, and the gain of the Sell party will be based on the loss of the STAKE party or the Bonding party, that is, the Sell party which harms the OHM price will get half of the gain (+1), while the STAKE party which has A favorable effect on the OHM price will bear half of the loss (-1). If both A and B adopt Sell that is unfavorable to the agreement, they will each bear half of the loss (-1), which is the worst choice for both A and B and the protocol itself (-3, -3).

Compared with DeFi 1.0, DeFi 2.0 protocol considers the relationship between the project and the user from a longer-term perspective, (3, 3) treating each user as a partner in the project and offering generous rewards to early adopters and long-term pledgers, resulting in a win-win situation. But from a game theory perspective, investors are like prisoners in different rooms; you never know if the other party is trustworthy, and it is still difficult to maintain a partnership when you know it is mutually beneficial.

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Colin Wu, Chinese journalist, won 2013 China News Award