Olympus DAO Explained: Decentralized Banking

2022-05-03, 09:51

1. As an algorithmic stablecoin protocol, Olympus DAO is the first protocol to be issued not pegged to the USD price but instead to purchasing power. It aims to play the role of a central bank in the cryptocurrency field, providing currencies free from inflation influences and available for a stable unit of denomination, thus laying a solid and reliable foundation for the cryptocurrency economy.

2. With the digital currency assets locked in the protocol vault as reserves, Olympus DAO gradually releases its OHM tokens.

3. Olympus DAO proposed the concept of liquid bonds which allows users who provide liquidity to OHM to purchase OHM token bonds at a discount to their own liquidity pool shares. Meanwhile, Olympus DAO obtains and puts the share of the liquidity pool into the vault as reserves, protecting the platform from a catastrophic liquidity drain and price crash.

4. OHM holders can stake to obtain more OHM rewards, or invest it in a designated liquidity pool to receive a share of the liquidity pool which is then utilized to buy OHM bonds at a discount, with the minimum price of OHM no less than 1 USD.

5. Olympus DAO applies the game theory of economics, which allows users to obtain a high annualized yield after they provide liquidity and stake tokens. At the same time, Olympus Dao establishes its own cash flow to reward the community, reducing the risk of token selling and creating a win-win situation.

Introduction

Stablecoins play a crucial role in the cryptocurrency field. First, they are a bridge connecting the traditional financial market and the cryptocurrency market. Second, they also provide quotation benchmarks for different cryptocurrencies and liquidity between each other. However, almost all stablecoins, whether they are backed by algorithms or the reserve cash and coupons in traditional finance, are pegged to legal tender (e.g. US dollars). Actually, these stablecoins have little difference between the fiat currency in the bank account, and it also indicates that the central bank, government policies, and the domestic economy will exert influence on the stablecoin.

As an algorithmic stablecoin protocol, Olympus DAO is the first protocol to be issued as not USD price pegged but instead pegged to the purchasing power. It aims to play the role of a central bank in the cryptocurrency field, providing currencies free from inflationary trends and available as a stable unit of denomination, thus laying a solid and reliable foundation for the cryptocurrency economy.

How Olympus DAO works

With the digital currency assets locked in the protocol vault as reserves, Olympus DAO gradually releases its OHM tokens. Users can exchange in the OHM/DAI liquidity pool to obtain OHM on the decentralized exchange SushiSwap, or provide OHM and DAI to the liquidity pool to get share tokens of SushiSwap liquidity pool, and purchase OHM bonds with the share tokens. In addition, OHM tokens can also be used for staking. A total of 90% of the new OHM tokens released by Olympus DAO will be distributed to users who stake OHM, and the remaining 10% will be put into the protocol vault.

The general stablecoin protocol can get back the digital currency assets locked in the vault by burning the tokens. However, Olympus DAO proposes the concept of liquidity bonds, allowing users who provide liquidity to OHM to purchase OHM token bonds at a discount to their own liquidity pool shares. Meanwhile, Olympus DAO obtains and puts the share of the liquidity pool into the vault as reserves, protecting the platform from a catastrophic liquidity drain and price crash. This forms a permanent and irreversible vault lock-up.

Olympus DAO initially created a liquidity pool with a quotation of 1 OHM = 14 DAI. As long as the price of OHM is higher than DAI, the protocol will gradually mint and issue new OHM to the market. Only when the price of OHM is lower than DAI will the locked assets in the vault be sold and OHM will be burned in an equivalent amount, until OHM has the same price as DAI. Since the price of DAI is close to USD, and Olympus DAO mints (sells) new OHM at quotes above 1 DAI and burns (repurchases) old OHM at quotes below 1 DAI, this ensures that the vault reserves will always be able to get back all the released OHM, and keep the minimum price of OHM ≥ 1 USD. Thus, a stablecoin with only a price lower limit but no price upper limit is created.

Unshakable Vault: Protocol Owned Liquidity

Olympus DAO believes that the liquidity pool assets in the decentralized exchanges are borrowed, and even the locked assets in the lending protocols are borrowed. In the event of drastic market price changes, users will redeem the liquidity in order to avoid losses or liquidation, resulting in the depletion of liquidity and more serious price fluctuations and runs. Olympus DAO proposed the concept of liquidity bonds, selling its own token OHM at a discounted price in exchange for the user's share of the liquidity pool, and the user received additional OHM tokens at price lower than the market price after the bond expires. This allows the protocol to no longer "borrow" liquidity from the market but "own" it directly, which is of great help to the normal operation of the protocol and to stabilizing token prices.

Another advantage of the protocol's directly owned liquidity is that the assets in the vault are no longer passive lock-ups, but a share of the liquidity pool that can generate income. According to the on-chain statistics, in the past year, the AMM handling fee collected by the Olympus DAO vault from the liquidity pool has reached nearly $30 million. This does not necessarily mean the user's loss, because the user can stake OHM to get 90% of the income from the vault, and selling the liquidity pool share for the discounted OHM token bond indicates that the user no longer needs to undertake the impermanent loss of liquidity mining.

(3, 3), from competition to coexistence

Cryptocurrencies have always been faced with the problem of how to maintain the liquidity of the protocol tokens and reduce price fluctuations. When the price rises, people tend to buy, and when the price falls, they panic and sell irrationally. This makes the cryptocurrency market an intriguing casino, where people would plunder other people's assets while investing their own money until the winner walks away with all the liquidity. This has not only caused losses to many people but also made people lose confidence in protocol functions and currency value. The lack of follow-up liquidity also makes it difficult for team projects to continue operating and turns it into a vicious circle.

In the light of all this, Olympus DAO proposes a mechanism and user incentives that can allow the project team to operate for a long time, and this design is called (3, 3). (3, 3) which represents that participants in the cryptocurrency market can make three choices at any time, namely selling tokens, buying bonds, and staking tokens. The first choice will cause the currency price to drop and reduce the liquidity of the protocol. And the second is equivalent to buying tokens to provide protocol liquidity, and the last choice will remove the token supply from the market, causing shortages and rising token prices. The liquidity of the protocol and the rise and fall of the currency price depend on each other's choices.

The sound operation of the protocol depends on the action of different participants. This can be simulated by the prisoner's dilemma in game theory.

Buying bonds provides liquidity, producing a +1 effect; staking provides liquidity and means holding it for a long time, producing a +3 effect; if one party sells tokens, it will offset the positive effect produced by buying bonds and staking and makes the seller gain (+1) and the holder lose (-1); if both parties sell tokens, it will endanger the stability of the agreement and cause both parties to suffer losses (-3, -3); When both parties decide to stake, it will produce the maximum positive effect and form a win-win situation (3, 3).

The design of Olympus DAO’s operating mechanism is successful. Since the launch of the protocol to the present, the staking rate of OHM has remained above 75%, and the concept of its own liquidity and bonds has been adopted by many follow-up projects. This makes Olympus DAO the protocol that has been copied the most times and has the most fork imitations after Uniswap. The large amount of locked-up liquidity pool shares in the vault also generated a considerable cash flow for the protocol itself and users who stake OHM. In the first 8 months after the protocol was established, the annualized yield of staking OHM exceeded 7,000%. The current APY of staking is close to 800%.

Conclusion

As an algorithmic stablecoin protocol, Olympus DAO has proposed multiple novel and experimental ideas. One of them is to sell its own tokens through bond discounts to exchange incentives for the protocol's own liquidity reserves; Olympus DAO also introduces the game theory of economics, allowing users to obtain high annual income after providing liquidity and staking. At the same time, it establishes its own cash flow to reward the community, thus reducing the risk of token selling and creating a win-win situation. The minting and burning mechanism of OHM keeps the price of OHM above 1 USD; the share of the liquidity pool with a large number of locked positions in the bank is equal to the value of OHM endorsed by various digital currency assets, thereby pegging to the purchasing power of multiple digital currency commodities. However, its success has also attracted many imitating projects that claim to provide a more attractive APY for them to earn dividends in the market. The issues that DAO must face on the next development path.
In the future development, Olympus DAO, as one of the many algorithmic stablecoins, must focus on the topic on how to gain the favor and consensus of users.

Issuing project tokens in the form of bonds has been proved a feasible model in the decentralized market. In the future, some of the liquidity mining on the chain may be replaced by bonds.

Author: Gate.io Researcher: Bridge L.; Translator: Cedar W.
* This article represents only the views of the researcher and does not constitute any investment suggestions.
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