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DeFi Evolution: DeFi 2.0 Deep Dive | Olympus Dao
17 November 13:11
[TL; DR]
- The DeFi 2.0 concept has emerged at a time when the DeFi craze has waned and development is stagnating.
- There are plenty of problems that have emerged under the current DeFi ecosystem. For example, users are not strongly attached to projects. Once project owners remove incentives, there is often a huge sell-off.
- Olympus is one of the projects that attempt to innovate in terms of protocol and solve the liquidity problem without relying on "liquidity mining".
- The whole OHM price system consists of three elements: POL, bond mechanism, and staking mechanism.
- Olympus facilitates collaboration between users and projects with innovative mechanisms.
The term DeFi was born in 2018. In contrast to traditional finance, DeFi services don’t require the intervention of intermediaries such as banks. DeFi is more inclusive and efficient. DeFi dramatically lowers the barrier for entry DeFi is also more transparent thanks to the nature of the blockchain. Since its inception, it has stood the test of time in the market and its ecosystem has grown rapidly, becoming larger and more diverse. In June 2020, Compound launched ”Liquidity Mining”. This set the stage for DeFi summer and brought DeFi products to the forefront of the crypto space.
This has led to the emergence of DeFi 2.0, which led to the creation of multiple innovative DeFi projects.
DeFi 2.0 & Olympus Dao
Liquidity is the soul of DeFi. In its 3 years of development, DeFi has gradually built a huge ecosystem including services that involve infrastructure, collateral, lending, DEX, stablecoins, insurance, oracles, and more. In this process, the creation of "liquidity mining" has been crucial. DeFi projects have been able to gain the liquidity they need to solve their slow-start issues as well as scale their network effects by providing financial incentives to users. However, plenty of problems have emerged under the current mechanism.
If the project withdraws the financial support and removes the original financial incentive, users will withdraw and sell their tokens. If the project developer continues to offer large amounts of tokens for compensation, this will also create sell pressure on the market, which is not conducive to the long-term development of any project. Therefore, if DeFi projects can provide stable and sustainable liquidity with the help of a more rational design of the underlying mechanism, the liquidity of DeFi projects will not always be as heavily impacted by the user’s actions.
Olympus was launched in March 2021 with $OHM as the native token. It is unique in that it is one of the projects that attempt to innovate in terms of a protocol that solves the liquidity problem without relying on "liquidity mining".It introduced Protocol Owned Liquidity (POL) in a creative way, which can provide stable liquidity for projects and break the long-standing reliance of DeFi projects on liquidity mining.
OHM is not a stable coin in the usual sense and its market price is not anchored to the U.S. dollar. It is backed by a basket of cryptocurrencies as collateral. In the case of the DAI as collateral, each OHM is backed by 1 DAI, not pegged to it. The supply of OHM is regulated by the protocol. When 1 OHM < 1 DAI, the protocol buys back and burns OHM, reducing the supply of OHM to push its price up. This way, OHM can always trade above 1 DAI. You could say that the OHM floor price or intrinsic value is 1 DAI.
The whole OHM price system consists of three elements: POL, a bond mechanism, and a staking mechanism. Together, they provide fantastic utility for the users.ion
One of the interesting innovations made by Olympus is its bond mechanism. Users can use LP tokens or other supported assets at the protocol level to purchase OHM at a discounted price. Olympus utilizes OHM as Liquidity Bonds and utilizes DAI and other LP Tokens as Reserve Bonds. Still, take a single DAI collateral as an example: As OHM price tends to be higher than 1 DAI, bond sales generate profit for the protocol, and the treasury uses the profit to mint more OHM, some of which is distributed to users and some used to accumulate POL.
Take the current price of OHM at $782 as an example: The reason why OHM is priced higher than DAI is that when trading in the market, 1 OHM = 1 DAI + premium. At this point, users would get a slightly lower price than the market price if they were to buy OHM with DAI. Assuming the user buys 1 OHM, the protocol will receive approximately 776 DAI. 776 OHM tokens can be minted, one of which is used to reward the user, part of which is also accumulated as POL. Some of which are also distributed to the staking contract as rewards for the staking pool. As seen in the screenshot on the website, OHM staking enjoys a high APY of up to 8,000%.
Game Theory In Olympus
We can also look at it from a game theory standpoint. Assuming that there are two traders, A and B. The image below shows the game theory for the two users. It consists of the three decisions of trader A in the first column and the three decisions of trader B in the first row. In each decision outcome, the first number refers to the earning of the decision-maker A and the second number denotes the benefit to decision-maker B, i.e. (A, B). Both staking and bonding are considered beneficial to the price of OHM, with staking directly reducing the circulating token supply and being the most beneficial to token value (+2), while bonding is the second most beneficial to token price (+1), while selling is considered detrimental to the price (-2).
Staking (+2)
Bonding (+1)
Selling (-2)
If both traders act in favor of the token price, there is an additional gain (+1) for a trader who chooses to stake. If one trader acts in favor of the token price and the other against it, the seller will gain and the other will lose. If both traders act against the token price, both will suffer a significant loss.
Conclusion
In addition to Olympus, there are other DeFi 2.0 projects that address the problems that existed in the DeFi 1.0. Constrained by their decentralized nature, DeFi lending programs maintain zero-tolerance for bad debt and often require over-collateralization from borrowers. This leads to inefficiencies in terms of funding. For example, on Compound and Aave, where the maximum pledge rate for ETH is fixed at 75%, pledging $100 worth of ETH would effectively only borrow $75 worth of other crypto assets. Also, there is always a liquidation threshold in DeFi 1.0 projects, such as on Aave, where the system will automatically sell the assets pledged once the size of the user's debt reaches 80% of the value of the asset that was pledged to avoid bad debt. In DeFi 2.0, however, projects will be designed with new non-equivalent collateral and equal collateral mechanisms to improve the funding efficiency.
Built on top of DeFi 1.0, DeFi 2.0 injects new vitality into the DeFi ecosystem through innovations in the underlying mechanics. There are always new narratives in the crypto world, and DeFi 2.0 is one of them. The heated discussion around DeFi 2.0 may fade away someday with the development of decentralized finance. By then, DeFi must come with even better mechanisms and greater incentive systems. Anyway, the success of DeFi 2.0 is worth waiting for.
Author: Ashley. H, Gate.io Researcher
*This article represents only the views of the researcher and does not constitute any investment advice.
*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.
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