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OHM OlympusDAO (3,3) | New Reserve Currency To Replace Bitcoin?

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TLDR below. This is not financial advice.

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General Conclusion

$OHM is a decentralised reserve currency that can be used as an alternative to traditional fiat. It uses the Reserve + Algo mechanism. It uses four stability mechanisms: treasury, LP tokens, bonds and staking.

How We Classify Stablecoins

In a few newsletters ago, we discussed that the four main stablecoin mechanisms are Reserves, Dual Token, Algo stablecoins, and Mixed. A stablecoin peg is not limited to just U.S dollars — a stablecoin is stable relative to whatever it is pegged to. The collateral amount helps us to classify if it is full pegged, partial pegged, over pegged, or not pegged at all. We have different reserves and in these we have different types of things like fiat, commodities, combination, index, etc.

About $OHM

$OHM is a decentralised reserve currency so can be used as an alternative to traditional fiat while exhibiting similar characteristics. Right now it is regarded as more of an asset but the goal is to transition it to a currency, which is something that you do not hold to speculate on the price.

$OHM uses reserve and algorithmic mechanisms. The stablecoin is not pegged to anything. It is partially collateralised and uses on-chain collateral.

Reserve + Algo

The reserve system uses $DAI and algorithms so the price changes based on the amount of circulating supply of $OHM. It depends on how many tokens are being locked up and how many tokens are being used for exchange and transactions.

Partial Reserve With $DAI

$OHM uses on-chain collaterals which is $DAI and it uses partial reserve. This means that for every $OHM token circulating a part of it is backed by $DAI. Previously it was one DAI but today it is 16 $DAI. This means that for every OHM token that is trading there are 16 $DAI backing that value, which is the price floor for the token. The tokens cannot fall below that amount otherwise arbitrage people will sell $OHM to get $DAI back in the protocol.

How Is $OHM Created

Three steps are involved:

  1. You need to get the $OHM which you can either buy from the protocol itself or get it in the open market so through SushiSwap or other DEXs.

  2. You can either bond your $OHM or stake it. Bonding means that you put it there and can remove it in a short period of time, whereas with staking you have to keep it there for a longer period of time. In both cases, you are earning $OHM.

  3. The last method is to sell which is how you exit the protocol.

Stability Mechanism

Treasury

Treasury is what houses the assets. It has this mint requirement which is that $OHM cannot be minted unless there is at least one $DAI to back it. The way that backing is accessed is via the bond market. Bonds are like a derivative market of $OHM. When people buy bonds the price of a bond will go up and when they redeem their bonds the price of the bond will go down. Market participants decide based on their actions where those trade. These serve to bring in new assets, so when you buy a bond you are buying from the treasury directly. The capital goes into the treasury and it pays you out and serves to bring new backing for the $OHM that is given to you. It also brings in some level of profit which is used to mint new $OHM which gets distributed to stakers. Thus, market participants are incentivised to come into staking and bring supply off the market and keep it off the market.

OlympusDAO also accumulates shares of the liquidity pool. They want to have a robust trading pool and trading environment so the treasury buys $LP shares from market participants and then locks them off the market. They accumulate and hold pretty much the entire pool and that kind of ensures that no matter what happens there will be a pool for people to trade in, and that does a lot for your confidence and belief in long-term viability.

$LP

Other than using your $OHM for bonding and staking, you can deposit them together with $DAI into a DAI-OHM pool on SushiSwap. People will add liquidity and then sell that liquidity to the treasury. The treasury stakes some of it but for the most part it just sits there accruing some fees and mostly just providing liquidity to the market. It is not like a stake dynamic where they can take it back — it is actually owned by the treasury.

Bond

You can buy $OHM from the protocol and bond it. It is a secondary market to enable trade with the protocol itself, so you can buy and sell these bond tokens. This is active management.

Staking

You can stake $OHM which is for a longer period of time. Staking is passive management because you’re just getting OHM and then putting it there to remove the supply from the market and to earn some $OHM.

Staking VS Bonding

Bonds are generally more profitable if you play them correctly because they are more of a direct value accrual. The difference is that bonds are an active strategy and they are much less consistent. You do not know when you are going to get what discount, or if you will. Staking is more of a passive strategy where you experience the growth of the network. In the case of staking, the rewards primarily serve to hedge the staker against dilution. If there were no rewards then you would only have the bonds increasing supply, and stakers would be losing market share. That would make holding $OHM undesirable. Stakers closely track the growth of the network at large and so can experience the growth of the network despite the fact that supply is increasing.

What Is [3,3]?

There are three behaviours that you can display in the system: staking, bonding, and selling. When we understand what kind of behaviours there are in the system then we can incentivise or disincentivise any of them.

Staking and bonding are good because there are people buying the tokens, using the tokens, and keeping the tokens. Selling is not so good because it increases the tokens circulating and this can decrease the price. Hence we want to incentivise the staking and bonding because then there are people using and demanding the tokens and we want to disincentivise selling because then people are not demanding the tokens.

In this system, we can give people points and rank them based on plus and minus points. Staking is the best because this takes supply out for a longer period of time and is a passive income for people, so this is +3 points. Bonding is also good because people take some tokens out and actively trade and do different kinds of arbitrage in the secondary market. This is not as good as staking, but it is still good, so this is +1 point. The last one is selling and you do not want people to sell because it means that people are demanding less of it, so this is -1 point. If you map it out in a game theory kind of way then the best behaviour you want is 3-3 because it means that everyone is staking.

Utility Of $OHM

$OHM carries a similar utility to that of bitcoin holders, which is mostly to remove supply from the market or develop an internal circular economy around the token itself. The end goal is to minimise the need to on-ramp or off-ramp as much as possible and build up an independent economy where you can hold $OHM and use it for whatever you want to without actually having to off-ramp into another currency.

Explaining The Premium In $OHM And $BTC Prices

The intrinsic value is capital-based. The intrinsic value of a transactional network is generally fee-based and then you have a speculative premium on top of that which enables the increase in the intrinsic value of the network. If we use mining then the higher that premium is the higher the fees paid. This means that there is more capacity for more miners which can increase the intrinsic value of the network. This is a recursive cycle to the upside but it starts with the fact that there is a speculative premium placed on top of intrinsic value.

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TLDR:

Basically, users are contributing to OlympusDAO by adding liquidity. In return, users get rewards in $OHM at a much cheaper price for a specific period of time. That way, both the user and the protocol can benefit.

OlympusDAO offers LP many different strategies around $OHM which they can leverage for bigger profits than on the spot market.