RAI, FLOAT and OHM want to be "stable coins" that are completely decoupled from fiat currencies. Can this dream come true? -

This article covers: the problems with stablecoins pegged to the US dollar, the market potential of non-pegged stablecoins, and the most promising non-pegged stablecoin projects that are currently or will soon be listed, including Reflexer (RAI), Float Protocol, and Olympus DAO.

Author | Screen

Ethereum is an emerging digital economy in the early stages of prosperity. It now hosts tens of thousands of applications, stores $350 billion in assets, settles $2 trillion in transactions each year, and continues to grow at an astonishing rate. It has the potential to become the cornerstone of the global economy.

If there is a problem? It is that Ethereum has become dollarized, and the US dollar is ultimately controlled by the Federal Reserve, which casts a shadow on the dream of an independent monetary system.

There is a new wave of projects that want to create stablecoins that are not pegged to fiat currencies at all. These projects are called "unpegged stablecoins" and they create a radical opportunity for the Ethereum monetary system - to achieve stability while eliminating dependence on fiat currencies.

This article covers: the problems with stablecoins pegged to the US dollar, the market potential of non-pegged stablecoins, and the most promising non-pegged stablecoin projects that are currently or will soon be listed, including Reflexer (RAI), Float Protocol, and Olympus DAO.

1. Problems with USD-pegged Stablecoins

It is normal for Ethereum to be dollarized, and many developing economies do so due to currency instability. The price of Ethereum is volatile, and will likely remain volatile for the foreseeable future (a problem also faced by Bitcoin). This volatility limits its role as a currency and restricts its ability to facilitate significant economic activity outside of speculation.

Fortunately, Ethereum’s programmability allows it to transplant the stability of the US dollar into its economy through stablecoins. This stability allows Ethereum to attract more capital and promote economic growth. Stablecoins have been a key driving force in the development of the Ethereum DeFi ecosystem.

However, dollarization comes at a cost. By introducing stablecoins into the economy, Ethereum gives up its monetary sovereignty and opens itself up to external forces, thereby introducing systemic risks.

In practice, stablecoin protocols act more like currency boards than central banks, with all monetary policy geared toward maintaining their fixed exchange rate with the dollar. Not only does this expose Ethereum’s monetary system to the Fed (which doesn’t care about the needs of the Ethereum economy), but the dollar peg also introduces regulatory risk that could shake the foundations of DeFi. If the recently proposed STABLE Act has any effect on dollar-pegged stablecoins, then all issuers of stablecoins pegged to $1 may eventually be regulated as banks, which would force them to obtain a banking license and hold reserves at the Federal Reserve. Of course, the STABLE Act is just a proposal, but it does point to the fact that issues involving the dollar will invite action from the US government.

2 Independent Ethereum currency system

In international economics, there is a concept called the "impossible triangle", which means that an economy cannot have three characteristics at the same time (in this case, the following three aspects):

• Fixed exchange rate

• Free movement of capital (no capital controls)

• Sovereign Monetary Policy

These three goals are incompatible, and an economy can only achieve two of the three goals. Stablecoins pegged to the US dollar sacrifice sovereign monetary policy to maintain a fixed exchange rate and free capital flows. Non-pegged stablecoins are another option that gives up a fixed exchange rate in exchange for sovereign monetary policy. Sovereign monetary policy is important because it makes Ethereum's monetary system independent of the fiat monetary system.

How does an independent Ethereum currency system driven by non-anchored stablecoins work in practice? This starts with Ethereum’s native asset ETH.

ETH is decent "money" and will get better over time. It is scarce, easily verifiable, fungible, divisible, portable, and, with the rollout of ETH 2.0 and EIP-1559, potentially deflationary. However, it is not a good currency, is highly volatile, and is not suitable for financial activities that benefit from price stability. In other words, ETH may be a solid store of value, but it is a poor medium of exchange and unit of account.

An independent Ethereum currency system could issue a currency against ETH and algorithmically stabilize it through incentive mechanisms, which might solve the stability problem. This is the core idea of ​​the new wave of non-anchored stablecoins. The ultimate value of non-anchored stablecoins comes from their underlying collateral (mainly ETH), similar to the US dollar under the gold standard.

Once you have independent stablecoins, you can have a truly independent banking system on Ethereum. Non-anchored stablecoins can be put into DeFi money markets and yield aggregators (effectively turning these non-anchored stablecoins into deposits). This is like the banking system in the traditional financial system, where individuals and institutions deposit their currencies in banks in exchange for deposits that the bank promises to return at any time.

The following figure is a direct comparison between the independent Ethereum currency system and the US dollar system under the gold standard:

Competitive private currency issuance is not new. There is a long history of private entities issuing currency, and until two centuries ago, paper money in almost every country was issued by private banks. While private currencies are criticized for counterfeiting and face value issues (both of which are easily solved in DeFi due to the characteristics of easy audit and programmatic enforcement of rules), they are recognized for their reliable and apolitical nature. While state-controlled central banks may choose not to honor currency redemptions due to their monopoly position, and their decisions may also be influenced by political factors, private banks are subject to market forces, which can (potentially) lead to high-quality monetary policy. The idea of ​​multiple private banks issuing currency on Ethereum not only has precedent, but even has the potential to produce the best currency.

In the following three sections, we will take a deep dive into 3 of the most promising non-pegged stablecoin solutions that are on the market or coming soon.

3Reflexer (RAI)

Source: Ameen Soleimani

In February 2020, Ameen Soleimani, co-founder of SpankChain and MolochDAO, released MetaCoin, a new governance-minimized decentralized stablecoin, in response to MakerDAO's introduction of Multi-Collateral Dai (MCD). In Ameen's view, MakerDAO's MCD upgrade abandoned ETH as the only form of collateral, introducing unacceptable counterparty risk to Dai. The solution is to create a new trust-minimized Dai that not only purely uses ETH as the only collateral, but also reduces MakerDAO's governance vulnerabilities, including token holding concentration and over-reliance on governance stability.

A few months later, this idea formed the foundation of Reflexer Labs, a company that aims to build trust-minimized stable assets based on the ideas proposed in the MetaCoin post. Soon after, it received funding from Paradigm, and the team stepped up to build the first prototype called Proto RAI "Reflex Index", which is an unaudited mainnet demo of the now launched Reflex Index RAI.

RAI is similar to Single Collateral DAI (SCD). It provides an overcollateralized debt position for users with ETH leverage. Users can open this position by depositing ETH into a SAFE (similar to Maker's vaults) and minting RAI against it. Users redeem their collateral by repaying RAI and paying the borrowing fees. If a user still has outstanding debt and their collateral ratio falls below a certain threshold, their collateral will be liquidated. RAI's token FLX is used to manage and support the system.

However, the RAI makes a few changes to the SCD model. First, instead of being pegged to the dollar, the RAI is pegged to itself. It starts out with an arbitrary target price (called the redemption price), and it influences the market price of the RAI by adjusting the target price. The way it works is that as the RAI moves away from its redemption price, it automatically adjusts the redemption price in proportion to counter the price movement to stabilize the RAI. Essentially, the system devalues ​​or revalues ​​the RAI based on the redemption rate (the rate at which the RAI depreciates or revalues) to incentivize people to borrow or repay debts.

"It works a bit like a spring: the further the market price of the RAI moves from the target price, the greater the force of interest rates, and the greater the drive to bring the RAI back to equilibrium." – Ameen Soleimani

The above mechanism also allows RAI to implement negative interest rates, something MakerDAO cannot do given its peg to the dollar. While RAI does not explicitly charge an interest rate directly to borrowers or holders, by repricing RAI it effectively achieves the same effect. By devaluing RAI, the protocol makes it less attractive to hold RAI and more attractive to mint bonds, both of which put downward pressure on RAI's market price. And because RAI is not tied to any pegged commitment, it can be devalued to affect its market price, whereas devaluing DAI would break its social contract.

RAI's autonomous redemption price adjustment mechanism is the opposite of MakerDAO, which attempts to influence the price of Dai through governance, i.e., determined by token holders. In addition, the interest rate RAI charges borrowers (not to be confused with the redemption rate mentioned above) is not RAI's primary monetary policy tool. Instead, it is simply a "spread" taken by the protocol, which it uses to incentivize external parties to maintain the protocol, as well as to establish a buffer to resolve bad debts. In the long run, RAI will set a cap on its borrowing rate to make the cost of maintaining SAFE more predictable.

PID controller and redemption rate feedback mechanism

The way RAI stabilizes itself is heavily influenced by cybernetics – the scientific discipline that deals with maintaining stability in dynamic systems. Cybernetics has applications in a wide range of areas, from engineering to life sciences, and as explained in the RAI white paper, over 95% of industrial applications and biological systems employ elements of cybernetics. Additionally, while not yet applied to monetary applications, researchers have found that many central bank monetary policy rules, such as the Taylor rule, are actually approximations of PID controllers (more on this below).

In most modern control systems, there is an algorithmic controller that is given control of the system inputs in order to automatically update based on the deviation between the system output and a set point. For example, in a car's cruise control system, the algorithmic controller may control the car's accelerator pedal in order to automatically update based on the deviation between the car's speed and the desired cruise control speed.

Source: RAI Whitepaper

The most common algorithmic controller is the PID controller, which uses three aspects to determine its output:

• A proportional term that is proportional to the deviation

• Integral term considering the deviation duration

• The differential term takes into account the rate at which the deviation increases or decreases

The redemption rate of RAI is set by a PID controller (Redemption Rate Feedback Mechanism) which learns based on how far the market price of RAI deviates from its redemption price, how long the deviation lasts, and how fast it moves. It calculates a redemption rate from these inputs and slowly starts to raise or lower the redemption price to influence the market price of RAI back to equilibrium.

To achieve stability, RAI must fine-tune its controller parameters to ensure that it stabilizes in a reasonable amount of time without overshooting or becoming unstable in the face of external shocks. This is not a simple process and requires a lot of research, data science, and simulation to create models with predictive power to inform the parameters. This is even more difficult if these models are evaluated against real-world data to test whether they work in the wild. The team has spent nearly a year fine-tuning RAI’s controller parameters to get to the point where it is launched today on the Ethereum mainnet.

Governance Roadmap

One of RAI's core guiding principles is the idea of ​​minimal governance. In order to become the trust-minimized foundation for decentralized applications, RAI believes that it should be as automated, self-sufficient, and free of external dependencies as possible. With this in mind, RAI has outlined a detailed roadmap to automate and "governance-free" RAI in the coming years. RAI ultimately hopes to reach a state where the governance layer will not control or upgrade most of RAI's core contracts, and most parameters will be set autonomously.

RAI's governance token FLX will be key to this process, gradually reducing its power over time until its primary function becomes: acting as the system's last lender in the event of bankruptcy. The team is also currently discussing adding a potential third function to FLX: as a "limited lender," adding FLX to the equity pool to deal with bad debt situations.

Token Distribution

In February, Reflexer announced the launch of RAI and hinted at a traceable token distribution in their blog post. The purpose of this traceable rewards program was to encourage people to mint RAI and bootstrap RAI/ETH liquidity on Uniswap. Within a few days, liquidity quickly exceeded $200 million, while RAI supply grew to over $100 million.

A few days later, after hinting at a retroactive token distribution, the team announced FLX and provided further details of its token distribution. The post outlined the following distribution of FLX.

The allocation aspect of RAI's community has drawn some criticism, especially compared to Float Protocol and Olympus DAO, which allocated the vast majority of tokens to their communities. It is unclear whether this will negatively impact RAI's ability to build a community; however, the current scheme does give fair launch protocols an advantage in terms of early community engagement. RAI's investor list includes some of the most active VCs, such as Paradigm, which may provide it with important advantages in building partnerships and integrating resources.

Battle-tested model

If there’s one thing we’ve learned about decentralized stablecoins over the past few years, it’s that overcollateralization works. MakerDAO has survived multiple cycles and crashes without going bankrupt, proving that the overcollateralization model works. While RAI, unlike MakerDAO, still has work to do to prove itself, its overcollateralization model (which is heavily influenced by MakerDAO) does give it greater confidence than its newer, more experimental competitors. In a way, RAI’s overcollateralization reduces the risk of it falling into a death spiral.

Furthermore, speaking of competition, RAI is the only fully functional non-pegged stablecoin protocol in operation. This allows us to observe its stability in action. While data points are limited at this time, RAI has been very stable since its volatility began. At launch, its price soared far above its redemption price due to the introduction of retroactive distribution incentives and new users' unfamiliarity with RAI's mechanics. However, as market participants became more familiar with RAI's mechanics and arbitraged RAI around its redemption price, RAI gradually became more stable.

Of course, only time will tell how RAI performs. However, RAI offers the most theoretically plausible attempt at building a truly decentralized stablecoin that balances minimal governance with economic efficiency.

4

Float Protocol

Source: Float Protocol Blog

The Float protocol was announced in February by an anonymous developer team called Abbey road. It is a dual-token, partially collateralized stablecoin protocol with float as its currency and BANK as its seigniorage token. FLOAT extracts its value from its underlying basket of collateral (which will consist only of ETH at launch) and stabilizes the price through auctions, expansion and contraction of the supply of collateral. BANK has three purposes: the first is to capture the profits created when there is excess demand for FLOAT, the second purpose is to support the price of FLOAT during contraction, and the third purpose is to manage the Float protocol.

The core of Float’s stabilization model is the Protocol Controlled Value (PCV) and the Dutch Auction.

The Float protocol maintains a fund called a "basket" to stabilize the price of FLOAT, which holds a portfolio of crypto assets (initially just ETH). The fund is owned by the protocol (FLOAT cannot be redeemed for the underlying collateral) and is established in an auction format, where arbitrageurs buy new FLOAT from the protocol in exchange for ETH. Once stored in the basket, ETH is then used to support the price of FLOAT if the price of FLOAT falls below its target price.

At launch, the value of ETH in the basket should be equal to the total value of FLOAT in circulation at its target price. Of course, the value of ETH is volatile. The ratio between the value in the basket and the total value of FLOAT at the target price is called the basket coefficient.

At each auction, the protocol aims to move the Basket Factor back to 100%, although this ratio can be reduced by governance decision over time as confidence in the protocol increases.

While there are no specific plans to make the Float Protocol’s PCV functional, the expectation is that the Float Protocol will eventually make its collateral functional (e.g. deposit it into a lending protocol).

auction

Every 24 hours, the Float protocol calculates TWAP (the market price of Float), and if it differs from the target price, it expands or contracts the supply of FLOAT through auctions. The auction interval was initially set to 24 hours to make it easier for users to adapt to the auction mechanism; over time, the interval will no longer exist and anyone who wants to initiate an auction can do so. It is planned that as float becomes more widely used and more robots are built to participate in auctions, the frequency of auctions held by the protocol will double every two weeks.

If the price is above the target price, the protocol will expand the supply of FLOAT through a Dutch auction (minting and selling new FLOAT). If the price is below the target price, the protocol will shrink the supply of FLOAT through a reverse Dutch auction (buying and burning FLOAT). The maximum length of each auction is 150 consecutive blocks.

expansion

The way to scale is that if TWAP is greater than the target price, the protocol will start offering to sell newly issued FLOAT to arbitrageurs starting from TWAP. Each block, it will reduce the offer in a decreasing manner between TWAP and the target price until all the offered FLOAT is bought or there is no more remaining demand to buy FLOAT.

In order to buy FLOAT in the auction, arbitrageurs need to pay fees in a mixture of ETH and BANK. If the Basket Factor reaches the target of 100%, the protocol will set the target price to the price of ETH and the difference between the current auction price and the target price to the price of BANK. The BANK paid for the difference is considered to be the profit of expansion and burning, reducing the supply of BANK. The ETH paid by the auctioneer will be put into the basket, and a small part of the BANK received will be allocated to the community treasury.

Basket Factor is not always 100% (in fact, considering that Basket is unstable, it is more likely to be not 100%), so the protocol uses expansion to rebalance Basket according to its proportion. It does this by adjusting the profit amount of ETH and BANK (auction price - target price). Generally, when the basket is in surplus, 100% of the profit exists in the form of BANK, and when the basket is in a loss, part of the profit exists in the form of ETH to replenish the basket.

shrink

The way contraction works is that if TWAP is below the target price, the protocol will buy FLOAT from the market (and burn it) in a reverse Dutch auction starting at TWAP. Every block, it will increase its bid by an incremental amount between TWAP and the target price until all the FLOAT the protocol is willing to buy is bought, or no one is selling FLOAT below its target price anymore.

To buy FLOAT, the protocol offers arbitrageurs a combination of ETH and BANK. If the Basket Factor hits 100%, then the protocol will pay the full amount in ETH. However, the Basket Factor may not always be 100%, so the combination of ETH and BANK paid to arbitrageurs will vary depending on their proportions. If the Basket Factor is greater than 150%, the protocol will buy FLOAT and BANK from the market and burn BAN as profit for BANK holders. If the Basket Factor is between 100% and 150%, the protocol will only buy FLOAT and pay the full amount in ETH. If the Basket Factor is less than 100%, the protocol will buy FLOAT using ETH and newly issued BANK together, based on the current Basket Factor. The BANK portion is determined by the loss percentage (so if the Basket Factor is 90%, the protocol will buy FLOAT with 90% ETH and 10% newly minted BANK).

Target Price

Like RAI, FLOAT's target price will start at an arbitrary number, initially $1.618 (the golden ratio in mathematics). Its target price will slowly adjust based on the Basket Factor. So if the value of the basket is growing relative to the value of the floating exchange rate in circulation, the target price will increase over time (and vice versa). The speed of this adjustment is determined by the demand for the floating asset, which the team defines as the market price per auction divided by the target price.

Below is a simulation provided by the team, which shows how the FLOAT target price would perform as the price of ETH rises during 2020. FLOAT's target price would increase by about 50% during 2020 as ETH rises by about 575%.

Source: Float Protocol Documentation

Compared to RAI, where the target price of RAI is inversely proportional to the demand for RAI, the target price of FLOAT is directly proportional to the demand for FLOAT. This means that while the price of FLOAT may be stable in the short term, in the long term, FLOAT's price will change more than RAI and will slowly increase in value as the value of its collateral grows. This design choice is to ensure that FLOAT protects the long-term purchasing power of users within the crypto economy as the crypto economy develops. Conversely, FLOAT's target price will slowly decrease in value as the value of its collateral decreases.

Lessons from Frax

You may have noticed that Float’s design is somewhat similar to Frax, which we introduced in the previous article in this series. I emphasize this similarity only to point out that Float may fall into a death spiral, which Frax almost experienced in January. Combined with Frax’s recent changes in the way it adjusts collateral ratios, the previous article mentioned:

"When FXS liquidity grows relative to FRAX supply, the collateralization ratio decreases. This change to the collateralization ratio calculation is in response to the activity seen over the 10-day period from January 18th to January 28th, during which the price of FXS plummeted by nearly 90% as users redeemed $50 million of FRAX against its underlying collateral and sold FXS (liquidity was not deep enough). At the time, the initial FRAX hype and liquidity incentives caused FRAX supply to rapidly inflate, peaking at $135 million, out of an initial circulating supply of ~2 million FXS. As more FXS was mined and sold, its price fell, and then as BTC fell from $40k to $30k, more FXS was sold. This began the redemption cycle for FRAX as users exited mining."

Essentially, FRAX holders are rushing to redeem their FRAX for newly issued FXS, and the liquidity of the FXS they are selling is getting worse, which drives down the price of FXS further, creating more panic. In the case of Float's collateral plummeting, it could face a similar situation where FLOAT holders are rushing to sell their FLOAT back to the protocol in exchange for newly issued BANK so that they can be among the first to sell. If BANK also becomes less liquid, or is bad to begin with, then this panic will be amplified.

This situation could be worse for Float than for Frax, given its one-way exposure to ETH. Even overcollateralized MakerDAO had to auction MKR to cover the shortfall in collateral on Black Thursday. Logically, an undercollateralized system, while more capital efficient, relies more on the lender of last resort function than any overcollateralized system (like RAI).

However, it is important to note that in the case of a death spiral, the key difference between FLOAT and pegged stablecoins is that Float does not have an anchor point. Therefore, during a long contraction, Float can devalue its currency without violating the social contract to absorb all FLOAT selling pressure for a period of time. Therefore, as long as the system can recover, it will help to improve confidence in the long run.

In V1, Float provides little incentive for speculators to participate when the price is below the anchor price, so the team plans to introduce a bond-like system in a future version.

release

Float Protocol is currently distributing BANK in a "democratic launch" - allowing whitelisted addresses to deposit up to $30,000 in three initial pools over a six-week period to mine BANK. The idea behind this is to attract active DeFi users (users who participate in governance in mainstream protocols) to mine BANK while avoiding it becoming a game for whales. In total, this first group of people received 37.5% of the total BANK supply.

The remaining tokens are distributed as follows:

• Community allocation phase 2 (non-whitelist, uncapped mining): 12.5%.

• Team Tokens: 5% (locked for 12 months after the initial minting ceremony)

• Treasury: 10% (minted at the start of Phase 2, controlled by governance)

• Liquidity incentives after launch: 5% (5% of initial float minting, 30% voted on by governance but currently reserved for various liquidity rewards and partnerships)

Once the protocol is audited and the 8-week initial distribution period is over, FLOAT will do an initial FLOAT minting ceremony, where float will be available for purchase in exchange for ETH. As a reward, Float will distribute 5% of the BANK supply to those who participate in the ceremony in proportion.

5Olympus DAO

Source: Olympus DAO Twitter

OlympusDAO, which launched in January 2021, is perhaps the most unorthodox of the three projects, attempting to create a stablecoin by managing a treasury of assets. Like Float Protocol, Olympus DAO was founded by anonymous developers and places a heavy emphasis on community, with the majority of its supply distributed to early Discord members.

Olympus DAO's single token, OHM, is both the system's stable asset and its governance token. OHM derives its value primarily from its underlying basket of collateral, which will consist solely of DAI at launch. OHM can be staked in exchange for sOHM, which allows OHM holders to accrue protocol profits as well as participate in OlympusDAO governance. When the OlympusDAO treasury distributes profits to the staking contract, the staker's sOHM balance is recalculated to match the new amount of OHM in the contract, so 1 sOHM is always equal to 1 OHM. This is a way for stakers to earn and compound returns without having to manually "harvest" and reinvest profits.

Source: Olympus DAO Gitbook

At the heart of OlympusDAO are the Protocol Controlled Value (PCV), market operations, and bonds. OlympusDAO maintains a treasury that ultimately provides a price floor for OHM. It is built through the sale of OHM and opportunities to generate yield on its existing assets (such as depositing its treasury DAI into Compound to generate yield). When OHM trades above 1 DAI, the protocol issues and sells new OHM. When OHM trades below 1 DAI, the protocol buys back and burns OHM. In each case, the protocol makes a profit because it can receive a sales fee of more than 1 DAI or a purchase fee of less than 1 DAI. OlympusDAO distributes 90% of these profits proportionally to OHM participants and 10% to the DAO.

OlympusDAO also features bonds, a secondary policy tool that allows OlympusDAO to both incentivize and accumulate a share of the OHM liquidity pool (this value is also owned by OHM stakers). Essentially, bonds provide users with an option to trade their OHM/DAI LP share with OHM at a discount to the protocol at a later date. The purpose of this operation is to incentivize and lock in liquidity by providing a yield (more on how bonds work below).

Market Operation

Market operation is the main mechanism to expand and shrink the supply of OHM. The core of the market operation is the sales contract, which will sell OHM when its trading volume is above 1 DAI, and will sell OHM when its trading volume is below 1 DAI. Users can buy or sell OHM by submitting a sales contract to Olympus DAO. Once the contract participates, it first checks whether the last epoch (every approximately 7.5 hours) has ended. If it has, the contract will apply for transaction funds from the treasury. The treasury calculates how much funds to provide for the sales contract according to the following formula.

If the OHM TWAP is greater than its intrinsic value (IV), the treasury will mint new OHM to fund the sales contract. IV is initially set to 1DAI (the asset backing OHM). The Inflation Control Variable (ICV) is a variable of DAO governance that allows the agreed selling pressure to be scaled up or down in the protocol. Higher ICV means more selling pressure and higher inflation. Lower ICV means less selling pressure and lower profitability. The discount rate determines the arbitrage used to execute orders on the protocol market, which in turn affects the profitability of the protocol. The discount rate can strongly incentivize users to trade on the protocol (they get better prices than on SushiSwap).

If the OHM TWAP is less than its IV, the Treasury funds a purchase contract with DAI. Similar to ICV, the Deflation Control Variable (DCV) is a variable for DAO governance that allows the protocol to scale protocol selling pressure up or down. A higher DCV means more buying pressure and higher deflation. A lower DCV means less buying pressure and a weaker floor.

In some cases, the protocol may not be able to provide enough OHM or DAI to fully satisfy a trader's order. In this case, the remainder of the trader's order will be filled through the SushiSwap pool of OHM.

Below is an example of a protocol sale from the OlympusDAO whitepaper.

"TWAP=$10, IV=$1, ICV=0.0001, Supply=10m, Last Price=$11, Discount=3%. A user submits a transaction to buy OHM for $10,000 DAI. The sales contract first notifies that the previous epoch has ended and requests funds from the vault. The vault calculates the sales amount for that epoch. ($10-$1)*10m*0.00001=900, and funds this amount after the contract consumes the remaining OHM and deposits the remaining DAI. At this point, the sales contract is funded and ready to execute the order. The contract first confirms that it can sell ($10>$1), and then calculates 10.67 yuan as the sales price ($11*(1-0.03)). At this price, the user's order can buy 937 OHM; however, the contract only has 900. It sells its 900 at a price of 9,603 DAI. OHM is sold to the user and the remaining 397 DAI is sent to the Sushiswap pool. The user ends up with 936 OHM at a cost of $10.68. The protocol completes its entire order and generates a profit of $8703 (9603-900)".

Bonds

Bonds are designed to incentivize and accumulate liquidity. It does this by offering LPs the option to purchase OHM at a discount in the future. Essentially, the protocol quotes an amount of OHM and a vesting period, after which users can trade their OHM/DAI LP shares with the protocol to purchase OHM at a discount. If a user accepts the offer, they send their LP shares to the OlympusDAO vault and receive a claim on the OHM. The vesting period determines how long it will take for that OHM to vest. While a user is vesting, their LP share is not locked and can be reclaimed at any time by surrendering the bond.

The bond price is determined by the value of the LP shares and the number of outstanding bonds. The more bonds waiting to vest, the lower the discount bondholders get on OHM (the less incentive there is to bond). It calculates this bond price according to the formula below.

The risk-free value (RFV) is the maximum OHM that the protocol can offer for a bond, which is derived from the assets in the liquidity pool. Since the protocol must protect the backing of OHM, the RFV is the lowest price it can accept; in the worst case, it can support every 2 OHM bonded by 1 DAI and 1 OHM. Since the protocol treats OHM and DAI as equivalents (each OHM is backed by 1 DAI), the protocol only needs to care about the sum of the assets in the pool to derive the RFV. According to the common multiplication formula x*y=k, the RFV is the minimum value of x+y, that is, when x=y, the protocol uses the square root of x*y to determine this point.

The premium is a policy tool managed by the protocol that controls the premium of a bond. A lower premium means a higher discount and a higher bond incentive. A higher premium means a lower discount and a lower bond incentive. The premium is derived from the system's debt ratio and a scaling variable that allows the protocol to control how fast the bond price grows. The premium is based on the following formula, where n is the governance set scaling variable.

The debt ratio is calculated according to the following formula.

Initially, bonds will not be accepted if the outstanding debt (OHM owed when all existing bonds vest) exceeds 25% of the supply.

Here’s an example from the white paper of how this might work in practice.

"The LP pool has 1m OHM and 10m DAI (market price $10). The premium is 2, and the bond has a term of 10,000 blocks. A user creates a bond at block 1, representing 5% of the total LP. The market value of this LP share is 1m. The bond contract calculates the risk-free value of the LP. Divides by the premium to determine its offer: 158,113 OHM The current market value of this OHM is $1.58m, representing 37% downside protection before breakeven, or a 58% return if the price stays flat. This is not only attractive to bonders, but also profitable for stakers; the bond only requires $158,113 as support, but it brings in $316,227 of what it believes. The remainder increases the IV, therefore, raising the sOHM buyback base for the next epoch".

One dynamic you may have noticed is that higher OHM prices incentivize more LPs to Bond. Because the protocol values ​​the OHM in the LP share as its intrinsic value rather than market value when calculating the Bond price, Bonders usually sells its LP to the agreement at a price lower than market value. However, this is offset by the OHM quoted to Bonder at a price lower than market value. This creates a dynamic change that the value of bonded OHM increases faster and more significantly relative to the value of the LP shares. Therefore, the higher the price of the OHM, the better the liquidity should be. This is a clever way to use OHM speculation to increase and accumulate OHM liquidity. This is a key part of the initiation strategy, through which sales do not take effect initially, limiting sales pressure.

Treasury management

As detailed above, the vault contract holds all PCVs. At the end of each period, the vault counts its PCVs by calculating the sum of its reserve assets (the initial DAI and OHM-DAI LP). As detailed in the previous section, the LP share is valued at the lowest or risk-free value to ensure that the protocol never faces price risk (the vault is essentially conservative in its valuation of the LP share). Its PCV is greater than the previous epoch, and the protocol will mint a new OHM to correct the balance between the OHM and its PCV, and the newly minted OHM allocated 90% to the pledger and 10% to the DAO (those allocations may change if the governance chooses to do so). Once the allocation is complete, the vault can close the epoch and open a new epoch by reinitializing the sales contract with new funds.

Olympus chose to launch its vault with only DAI and OHM/DAI LP shares to introduce its core concept to the market while keeping it relatively simple. It plans to add various new assets to its balance sheet later, with the first added to it being Rari Capital’s DAI pool tokens, which requires Olympus DAO to deposit its DAI into Rari Capital’s earnings aggregators to generate returns. According to the team, subsequent consolidation will likely be liquidity mining, followed by other decentralized stablecoins such as FRAX and FEI, and then ultimately BTC and ETH. The purpose of allocating volatility assets is not to bet on the assets, but to spread the vaults to the reserve assets of cryptocurrencies.

release

The way Olympus DAO is launched is a relatively unique and democratic project in recent projects. Instead of distributing tokens through airdrops or mining, the team offered early Discord members the opportunity to buy 73% of Genesis OHMs at a valuation of $200,000. Each participant ended up with a distribution of 141 OHMs, which they purchased for $4 ($564) per OHM. This provided the earliest supporters of the project with the opportunity to buy a large stake in Olympus DAO (without a large upfront investment), allowing small players to participate equally with whales. In addition, following the Discord "Snapshot", Olympus DAO launched a series of competitions that allocated the three additional quotas provided to community members who created art, memes and educational content. This is a clever way to increase community engagement and project visibility in the pre-start phase.

In addition to the initial discord release, Olympus DAO allocated the remaining 27% of the Creation Supply to the IDO on SushiSwap. In the end, just like the normal IDO, it was still snatched away by the robot. Anyway, 100% of the Creation Supply was allocated to the community.

So, if 100% of the Creation Supply is allocated to the community, then the team and investors?

Considering that Olympus DAO has only one token OHM and OHM must have 1 DAI support, it is impossible for Olympus DAO to pre-mine OHM or sell OHM at a discounted price. To bypass this limitation, while also incentivizing the team and raising the required funds from investors to fund development, the team created pOHM—mining the OHM by providing the intrinsic value of the OHM (for example, the investor will provide 1 DAI and 1 pOHM to minify 1 OHM). The value of pOHM is the price of the OHM minus the intrinsic value, and redeeming it only makes sense if the OHM is higher than the intrinsic value.

The distribution of pOHM is supply-based, which provides a KPI-based release schedule for internal allocation. The final maximum amount of options held by insiders is between 2 billion and 5 billion OHM. The community will also receive allocations of pOHM:

• Team: 330 million pOHM and 7.8% supply

• Investors: 70 million pOHM and 3% supply

• Consultant: 50 million pohm and 1% supply

• DAO: 550m pOHM, no supply limit (community can decide)

OlympusDAO has limited features, but many new features are on the way, such as bonds and market operations to be reviewed. Therefore, OHM can only be pledged at launch and will not face significant selling pressure dominated by the agreement. In addition, OHM will only be used to incentivize LP when bonds are launched.

6

A long way forward

You may be excited about non-anchored stablecoins as long-term solutions, but don't know what their adoption will look like in the short term. We need time to prove whether they will be adopted; we can think about it from these perspectives:

The first angle is that users do not know that what they want is "stability" in the general sense, but rather that they want stability to anchor the dollar. Although the hardest players in the industry tend to cryptocurrencies rather than fiat currencies, the reality is that most users value their wealth in fiat currencies. It will take some time before users start using non-anchored stablecoins in financial activities such as transactions and borrowing. Similarly, it is easy to predict that any example connecting blockchain and the real world, such as e-commerce, will not use non-anchored stablecoins soon, and even cryptocurrencies like Bitcoin are difficult to adopt. Perhaps non-anchored stablecoins can open up new space in the crypto-native economy, such as in the NFT world as an account unit (rather than a volatile ETH), but whether such demand exists is unknown. One thing is clear, that adopting non-anchored stablecoins will require changing the way blockchain users think about "stability" and "value".

Second, the more positive point is that unlike the new wave of algorithmic stablecoins (Frax, Fei, ESD), non-anchored stablecoins have no dominant players. MakerDAO and Terra have strong leads in liquidity, tracking and adoption rates, and any challenge to their dominance is a tough battle. A blank new field offers greater opportunities for non-anchored stablecoins projects, which are equivalent to developing their own path without existing competitors. In a sense, non-anchored stablecoins trade clearer market potential for a more attractive competitive landscape than the dollar-anchored algorithmic stablecoins.

In the third angle, the adoption of these non-anchored stablecoins may vary depending on the project. For example, based on the above simulation of the 2020 situation, float is good for scenarios that require short-term stability, but for situations that require long-term stability, such as term loans, it may not be that good given its price increase by 50% in 2020. Similarly, the intrinsic value of OHM is 1DAI, similar to the familiar dollar-pegged stablecoins, OHM may win more integration and trust in the short term. This is in stark contrast to RAI and FLOAT, which are brand new units of account, and people may need more time to get familiar and adapt.

In other words, adoption rates will depend not only on each team’s strategy to bring the product to market, but also on each team’s design decisions.

7

The avant-garde nature of decentralized stablecoins

Source: Revalue the Dollar

When Bitcoin was born, it made people imagine the potential of non-sovereign digital currencies. But as Bitcoin began trading, it quickly became aware that it would not be stable enough to be used as a currency in the short term. It can be expected that at some point in the future, once it becomes a large enough asset and accumulates enough liquidity, it will eventually stabilize. However, Bitcoin is an asset with a fixed supply, and like gold, it may always be volatile.

Nevertheless, to bridge the gap between present and future commitments, industry players have created stablecoins pegged to the U.S. dollar, addressed stability in volatility and promoted the adoption of many blockchain applications. Without these stablecoins, DeFi would not have been today, and they have become a key building block in the emerging crypto economy.

However, as the industry continues to grow, we need to revisit this important component that has begun to rely on it. Once upon a time, we wanted a separate currency with a decentralized financial system. But the reality is that we got the dollar on the blockchain. If the industry wants to be truly independent of the fiat currency system without sacrificing stability, it will need to find other options other than the dollar anchored stablecoins. This is not only a demand for Cypherpunk ideal, but also a practical claim to divest public blockchain applications from the regulatory risks derived from the US dollar and the impact of the Federal Reserve.

Non-anchored stablecoins now look like a distant experiment with no clear use cases. But they may also be the best bets for the industry to create non-sovereign stable cryptocurrencies. Let's embrace this kind of attempt.