Understanding OlympusDAO: The Flag Bearer of Defi2.0 Unstable Algorithmic Stablecoin

Wu said the author   |   Liu Quankai

Editor of this issue   |   Colin Wu

Liquidity is leaving the farm at an alarming rate. " Of the farmers who entered the farm on the day of its launch, 42% exited within 24 hours, about 16% left within 48 hours, and by the third day, 70% of users left the farm." This sentence comes from Nansen's chef analyst and is also written as a motto on the official website of OlympusDAO.

This sentence reveals the drawbacks of the existing DeFi ecological farms in LP liquidity mining, that is, mining, withdrawal and selling. Users cannot advance and retreat with the team as long-term holders, and the project tokens will have to face continuous pressure. When the increase in users and funds reaches a bottleneck, and the farm APY drops due to mining, withdrawal and selling, users will release their LPs and withdraw from the farm, and liquidity will also be lost. In addition, users also need to fight against impermanent loss.

Then designing a DeFi protocol that can obtain liquidity more sustainably has become the prelude to DeFi 2.0, and OlympusDAO has become a new exploration.

1    “Unstable” algorithmic stablecoin

In the cryptocurrency market, the most used assets are stablecoins such as USDT and USDC. Users purchase other underlying assets mostly through stablecoins. Most of these crypto stablecoins are pegged to the US dollar, which means that if the US dollar depreciates, the actual purchasing power of these crypto stablecoins will also decline. OlymupusDAO believes that high-quality currencies should maintain consistent purchasing power at all times.

OHM is the native token of OlympusDAO, a free-floating currency backed by a basket of assets. Initially, 1 OHM is backed by 1 DAI, and the treasury (DAO) will have at least 1 DAI to support the value of OHM, at which point 1OHM=1DAI. When 1OHM＜1DAI, the protocol will repurchase OHM from the market and destroy it, and push the price of OHM back to the value level of 1OHM=1DAI by reducing the market circulation. When 1OHM＞1DAI, the protocol will sell the OHM held in the treasury at a discount, and by increasing the circulation of OHM in the market, the price will fall back.

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

Taking the current price as an example, 1OHM = 935USDT = 935DAI. If the user spends 935DAI to buy 1OHM at this time, the protocol will receive 935DAI and mint 935OHM at the same time, of which the user will get 1OHM, and 10% of the remaining 934OHM ​​will be kept in the treasury, and the remaining 90% of OHM will enter the pledge contract, namely STAKE, to be distributed to other pledged (STAKE) users.

In this example, the user only bought 1OHM, but the protocol actually minted 935OHM. So the value generated when buying 1OHM is actually 935²DAI, which is called rebase. The rebase effect is one of the important reasons why OlympusDAO can maintain a super high APY. The user staked 1OHM, and the protocol minted 1+934OHM, most of which went to the users who were staking. The staking user can only see the balance of the staked OHM, so the protocol increases the balance of the staked OHM through rebase, and also ensures that the 1OHM staked can always be exchanged for 1OHM.

Thinking further, the price of OHM has increased from 1OHM=1DAI to 1OHM=935DAI, and the geometric effect of the rebase during this period is completely different. Therefore, the earlier the users enter the pledge, the more dividends they will enjoy, and the more geometric growth of the later users will enjoy. The fundamental reason for the later users to enter is still to enjoy the super high APY, and it is the long-term pledge of the previous users that guarantees the super high APY. The vast majority of OHM holders only need to pledge OHM to bring continuous high returns through high APY. The more pledges, the less the circulating supply in the market, and the less selling pressure makes the price more stable.

In the long run, the user's OHM balance will grow exponentially through staking compounding. Even if the price does not change at all during this period, the benefits obtained are still huge. Users buy OHM at a price higher than 1DAI, taking the risk of market premium in exchange for long-term benefits, that is, the growth of the currency standard, then the price will no longer be a necessary consideration.

  2     Protocol-controlled liquidity replaces liquidity mining

In addition to staking, users can also purchase OHM from the protocol at a discount by trading with LP Token or other single-currency 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 most important liquidity bonds are the OHM/DAI lp pool on Sushiswap.

Bonding is an important way for the OlympusDAO protocol to own and control liquidity. When users sell their LP Tokens, they will be incentivized to purchase OHM at a discount, and LP Tokens will bring depth and liquidity to the treasury, which increases the lower limit of the OHM price. The protocol captures LP Tokens, and LP Tokens provide liquidity. In fact, the protocol controls the liquidity itself. OlympusDAO has become its own market maker by owning and controlling liquidity. LP Token liquidity creates income for the protocol, and OlympusDAO will receive market maker commissions from trading pairs, achieving profitability and sustainable development of the protocol. OlympusDAO has more than 99.5% of its own liquidity in the market.

Based on the success of its own Bonding, OlympusDAO launched the Olympus Pro service, which allows other protocols to directly purchase the liquidity owned by OlympusDAO, aiming to provide other DeFi protocols with services similar to STAKE+Bonding, and optimize and customize them according to the actual needs of the protocol. The sold liquidity will be converted into income-generating assets for OlympusDAO, thereby promoting the further development of the protocol.

  3      Nash equilibrium in OlympusDAO: (3, 3)

After explaining the basic principles of the protocol, it is necessary to separate STAKE into a separate chapter. The long-term pledge of each OHM holder will have a crucial impact on this protocol.

In OlympusDAO assistance, there are three types of user behaviors and the resulting benefits:

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

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

Assume that there are two people, A and B, in the market. Based on the above three behaviors, there are nine possible outcomes:

If both A and B adopt STAKE or Bonding, which has a positive effect on the protocol, the STAKE party that affects the OHM price will get half of the profit (+1). The ideal situation is that both A and B STAKE, which can produce the best effect for A, B and the protocol itself, that is (3, 3); A and B adopt methods that are contrary to the interests of the protocol, and the profit of the Sell party will be based on the loss of the STAKE or Bonding party, that is, the Sell party that has an adverse effect on the OHM price will get half of the profit (+1), and the Stake party that has a favorable effect on the OHM price will bear half of the loss (-1); A and B both adopt Sell that is unfavorable to the protocol, and each of them bears half of the loss (-1), which is the worst choice for A, B and the protocol itself (-3, -3).

Compared with DeFi 1.0, the DeFi 2.0 protocol considers the relationship between projects and users from a longer-term perspective. (3, 3) It regards every user as a partner in the project, provides generous rewards to early users and long-term pledgers, and achieves a win-win situation. However, from the perspective of game theory, investors are like prisoners in different rooms. You never know whether the other party is trustworthy. It is still difficult to maintain cooperation when you know that both parties are in favor.