Is OHM the Savior of DeFi or Another Death Spiral?

TL;DR

- OHM is a kind of algorithmic stablecoin, which realizes the value stability of OHM through the additional issuance and repurchase and the bond discount mechanism based on the protocol.

- OHM's rapid rise and successful model has attracted many followers, thus becoming a template for a large number of forks / imitation projects.

- Nowadays, for many people, OHM and other DeFi 2.0 have become "Ponzi". In the final analysis, it is still a problem of liquidity and endorsement.

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What is OHM

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OHM is the token name of the OlympusDAO protocol. It is a free floating reserve currency supported by a basket of assets, which focuses on supply growth rather than price appreciation. OlympusDAO hopes OHM can act as a currency and maintain its purchasing power regardless of market fluctuations.

OHM is theoretically an algorithmic stablecoin, but its price which is anchored to, is the assets in its asset basket. Unlike other stablecoin dual token models (stablecoin + governance token), OHM plays the role of two tokens, and realizes the value stability of OHM through additional issuance and repurchase and bond discount mechanism based on the protocol.

Compared with Tether and USDC, OHM attempts to become the first decentralized stablecoin, which has an extraordinary meaning, it means that it will become the anchor of all cryptocurrencies and maintain long-term and stable purchasing power in the case of decoupling from fiat currency.

It attempts to support each OHM token by adopting a DAI (USD stablecoin = 1 USD), which means that the value of OHM can be increased based on the intrinsic price of 1 DAI. This free floating part is completely market driven. This is not the case with Tether or USDC, because they are anchored to 1 USD.

What Is OHM Imitator

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In 2021, when the DeFi 2.0 protocol led by OlympusDAO pushed DeFi to a climax again, a large number of OlympusDAO imitators appeared in each chain. However, with the weakness of the Bitcoin trend, the price of OlympusDAO token OHM also fell from a high of approximately $1400 to approximately $60, representing a decrease of nearly 96%.

Imitation is the highest form of expression of approval or flattery. In the crypto field, imitation is manifested as the fork or imitation of a project's code base, that is, an imitator. OHM's rapid rise and successful model has attracted many followers, and its system has become a template for many forked / imitation projects. Its smart system of sharing protocol liquidity with a strong community and its DAO organization have inspired many to launch their imitation projects.

OHM's "innovation"

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Olympus' revolutionary feature is the introduction of the concept of "liquidity owned by protocol", which means that each staked OHM can obtain compound interest in the form of additional OHM through the treasury owned and protected by its community.

The treasury can sell OHM's bonds at a discount to introduce liquidity and create profits for the community. If the trading price of OHM is higher than its intrinsic value, the Treasury will sell new OHM bonds at a discount price in exchange for DAI, increase reserves, and distribute most of the return to the stakers. If the trading price of OHM is lower than its intrinsic value, the treasury will use its liquid capital to buy OHM, reduce the supply of OHM, and theoretically increase the price of OHM.

There is an interesting game theory behind whether participants will hold OHM, bonds or sell their OHM.

Stake: it is the most beneficial action for all Olympus participants, because it helps to increase the value of OHM. It creates positive purchasing pressure through the initial purchase of tokens, and its scarcity increases because the supply is locked up.

Bond: it is net positive, although not as much as staking, because it provides assets for Olympus treasury, although it may not be purchased directly to increase the value of OHM.

Sell: OHM believes that the sale is net negative because it puts downward pressure on OHM's price, which may encourage other participants to sell their tokens.

Nash Equilibrium and Death Spiral

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There are two main reasons why OHM can achieve ultra-high yield. The first factor is compound interest. OHM's staking pool does not require investors to withdraw the return and stake again. OHM will re-invest every 8 hours. The second factor is its special economic model. As mentioned earlier, when OHM's price is higher than $1, OHM will enter the inflation mode, and a part of the inflated OHM will be used as the return source of the staking pool.

In this game process, because of OHM's "complete" economic model and ultra-high yield, regardless of the counterparty's strategy choice, the trader can always choose a certain strategy. If any participant's strategy is optimal when the strategies of all other participants are determined, then the combination is defined as Nash Equilibrium.

Olympus realizes Nash Equilibrium through (3,3) pool. To put it simply, because OHM has an ultra-high yield after participating in staking, and as long as everyone stakes, there will be less liquid OHM in the market, so the price of OHM will rise, the protocol will continue to inflate after the rise, and the yield will rise. Therefore, the holders of OHM in the market will choose to stake rather than sell. So when OHM was launched, its price rose all the way, and its highest price exceeded $1300.

But the most important thing is that the Nash Equilibrium has not only the equilibrium point (3, 3), but also the equilibrium point (-3, -3), which is often called the "death spiral" in crypto space.

Just think about it. If the price of OHM can keep rising, then everything is fine. But if the continuous decline of OHM price leads to the weakening of the ability of additional issuance under the protocol, the reduction of OHM staked return, the staked volume of OHM will also decline, and the increase of OHM supply in the market will further lead to the decline of the price.

This process will happen quickly, and the initial trigger point or the range of price decline does not need to be very large, which may lead to a death spiral, because people who participate in the drum and flower game do not know the truth of the Ponzi scheme, but everyone is confident that they will not be the last one. There are smart people everywhere, and smart people always run very fast, causing a series of chain reactions eventually.

The price of OHM reached a peak of approximately $1350 in October 2021. In the weeks after its peak, the price of OHM has halved continuously. As of July 26, 2022, the price of OHM is approximately $65.

Nowadays, for many people, OHM and other DeFi 2.0 have become "Ponzi". In the final analysis, it is still a problem of liquidity and endorsement.

OHM wanted to be a decentralized stablecoin for savings at first, but unlike all kinds of stablecoins that are anchored to fiat currencies, OHM is not anchored to other assets, but realizes price stability by establishing huge savings. But in fact, we can see that the crypto market has never paid for OHM's features. No matter what the team tried, it failed to find an application scenario for OHM that could be popularized on a large scale. Because OHM is not characterized by liquidity, OHM has become a speculative game for holders, that is, once the holders earn enough, they will unlock the supply and withdraw.

On the other hand, OHM's method of establishing savings is also very different from that of algorithm stablecoin. OHM has no redemption mechanism. When users mint OHM through Bond, there is no way to redeem their assets with OHM. In other words, the savings absorbed by protocol are not used for direct endorsement of OHM, and the project only promises to repurchase when the price of OHM falls through "protocol endorsement", so as to undertake the risks for the holders. But we all know that this so-called "protocol endorsement" has never happened.

Conclusion

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OlympusDAO, a novel economic model, received a lot of attention from the market in the early stage of project development. Profit seekers and projects holding various innovation flags regard it as the savior of DeFi 2.0. Generally speaking, OHM is indeed an extremely ambitious financial experiment, not only in the field of algorithm stablecoins and cryptocurrencies, but also wants to be the only gatekeeper in the crypto world and the real world.

It uses economic game theory to ensure that the funds in the treasury are always more than the funds that need to be paid. It really sounds a little mysterious. After all, when the black swan comes, there is no essential difference between using game theory to bind human nature and using Mantis as a cart.

Presently, the price of Olympus token has fallen from the peak of $1400 to $65, and the trading volume is also generally declining. Therefore, whether OHM can "save" DeFi again in the future has fallen into a death spiral. We'll just have to wait and see!

Author: Gate.io Observer: Byron B. Translator: Joy Z.

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