The Battle for Liquidity: Analyzing Olympus, Wonderland, and Redacted

If you haven't already read our intro to Olympus DAO, and are unfamiliar, check it out here.

Over the last half-year Olympus DAO and its forks have gone full circle, from unknown, to vogue, to mature & semi-forgotten. Now, at scale, it’s possible to look at the ‘black-hole’ and see exactly what investing in these massive decentralized treasuries bought us. Each iteration and fork of Olympus introduced a new concept- gamification in $ROME, active fund management in $TIME, and lofty, climate-focused goals in $KLIMA. At their core, the projects all share a central goal: to exchange their native token for other assets, which, in-size, serve to create value for token holders and the protocol. However, to incentivize this activity, they also have to continuously mint new assets, the ever-feared ‘dilution’.

In this research report, I aim to compare the protocol-generated value for stakers against their respective payouts from the treasury. Through doing this, we can create a centralized metric to compare Olympus forks. To accomplish this I looked at revenue and costs for three of the major Olympus-related projects: Wonderland.Money ($TIME), Olympus DAO ($OHM), and Redacted Cartel ($BTRFLY).

Results, discussed later, show impressive initial return on investment from Redacted- which actually returned the highest value for Daily Revenue/Daily APY Payouts. Similarly, Olympus continues to accelerate LP and Olympus pro revenue, while decelerating APY payouts and bonding focus- both of which have been hugely important for its long-term health. Finally, while Wonderland appears to be readying itself for change, it has lagged behind its peers in terms of adjustments to prevent stakeholder dilution. But, if they execute effectively on their plans to lower emissions, they could potentially lead the table.

Why do this? 

Contrary to much of what is written online, Bonding is not ‘profit’ for the protocol. Each time a bond is purchased, the treasury must mint a slightly higher number of tokens to pay for the assets that they receive. Over time, this puts downward pressure on token price. This activity is only accentuated by recent findings on Olympus Pro, which confirmed what was already semi-known- a significant portion of bond sales are being sniped by bots. In the case of PoolTogether, they reported an astonishing 56% of transactions being driven by bots, who almost always sold post-vest.

Intuitively, this makes sense. Programming a bot to buy a bond the second the discount becomes profitable, including gas, is free money. V2 bonds should help with this when they roll out on the 1/8, but ultimately bonds are never going to be driven entirely by holders. So, while bonding to cover APY costs and bootstrap is necessary & shouldn’t be set aside, it shouldn’t be the primary revenue driver for a late-stage project (which none of these are, yet).

Similarly, APY is clearly a cost for the protocol. Although tokens go to stakers, who are theoretically invested in the long-term success of the protocol, there has clearly been huge amounts of trading action focused around chasing the highest APY forks. As time passes, token supply increases, and demand wanes one (or more) of two things happens:

1) To meet growing APY payout needs, the protocol must increase ROI on bonds. In doing so, they are effectively selling their token to largely mercenary capital at increasingly large discounts to market, with those tokens likely heading to market post-vesting. This puts large sell pressure on token price. Decreasing token price increases pressure, and runway decreases as the treasury needs to delve into capital reserves to meet payouts. This causes the token to trade below backing as backing is only relevant so long as runway is stable to increasing. When the runway is decreasing, token price and backing will trend to zero. 

2) The protocol lowers APY, which helps sustain runway and backing, and decreases the amount necessary to take in from bonding daily. This allows the protocol to keep bond discounts low, and decreases sell-pressure. 

Theoretically, a protocol could sustain itself through protocol owned assets and reasonably priced bonds in the medium term, but APYs eventually must compress or token price will be dragged down. This attitude has become increasingly more common in the industry, with Olympus recently voting to reduce their payout range to 700-1000%, and Dani talking about lowering APY on $TIME. 

Over time, then, bond revenue will decrease in importance for sustaining APY, and instead serve primarily to allow the protocol to purchase OTC community-owned assets. Simultaneously, the importance of protocol-driven value will grow. There’s no reason to donate hard earned money to someone else for them to create no value. Therefore, protocols that are creating the most treasury yield for investors will, long term, be the most successful.

Methodology: 

The reason for choosing these three projects- Olympus, Wonderland, and Redacted- for analysis is twofold. First, these three projects are arguably the most currently discussed & popular versions of the model. Secondly, other protocols that could have been considered ($ROME, $HEC, $KLIMA, etc…) did not have sufficient data available on their dashboards, and on-chain data visualizers, like Dune, are unavailable for these chains. 

To begin comparison of the protocols, I first broke down APY into the amount that the treasury would be paying out at various token supply levels. By doing this, we can estimate exactly how much of each asset the treasury will be paying out in the future at a given APY and float. 

This is the baseline for cost calculations later in the analysis. Comparing token payouts against bonding & treasury yield creates a baseline ratio to use in a like-for-like comparison. Protocol maturity does have an effect here, but despite Redacted’s youth it is already generating significant returns through its holdings in gOHM, CVX, and CRV. Most importantly, a protocol paying 10x higher APR should be generating revenue at 10x the rate; in reality this is not necessarily the case. 

To compare the protocols against one another I first collected a 30d average of daily bonding data. For this, I excluded the recent period where Olympus has had bonds turned off for migration. Wonderland also does not publish this information anywhere, so I assumed a value equal to Olympus, and slightly higher than Redacted. 

From here, I then broke down each source of treasury revenue. Below, you can see each of the assets I included as ‘Non-Bond Revenue’. I allocated a portion of Redacted’s CVX/CRV revenue from bribes to Olympus, as per their agreement.

From there, I used the APY data, bond revenue, and Treasury revenue to create metrics as a baseline for analysis. Monitoring these over time gives a simplified view of how efficiently the protocol is using assets to generate ‘real’ yield for investors. If APY is too high, revenue from bonding and treasury will be offset by token price depreciation. 

The three metrics created for comparison are: 

Each of these metrics tells a slightly different story about protocol health and value. The first, R/APY, measures broad revenue- Bonding and Treasury- against the total value of assets that the treasury is paying out daily (and not getting compensated for). The higher this value, the more the protocol is ‘covering costs’. Ideally, a protocol would eventually reach full maturity and be greater than 100%, meaning that daily assets taken in are greater than the total value of their spend.

The second, B/APY,  is largely the same, but excludes treasury yield. The higher the percentage is as a fraction of the first, the higher the percentage of daily revenue coming from bonding. Ideally, a protocol would receive less of their revenue from bonding than they do from non-bond revenue, as over-bonding is fundamentally negative for price.

The final, NB/APY, is likely the most important for measuring long term protocol success. This is the revenue that a protocol is generating solely from their held assets. The more effectively the ROIC, the more promising continued bonding is for investors & the more confident they should be that their capital is being put to good use. 

Results and Context:

The results here are somewhat surprising. The most mature protocol with the lowest APY, Olympus, is generally returning the second highest values in each category. Redacted actually leads every category, with TIME lagging behind. 

It’s worth noting just how much TIME’s APY and high float are hurting it at this point. Unlike Olympus, which is undergoing its third major reduction, Wonderland has yet to do the same. After factoring in it’s price, it’s R/APY is around ⅓ of Redacted and 40% of Olympus. 

Similarly, Redacted may be getting a slight benefit, despite its high APY, from its youth. With an Index of just 1.47x initial stake, it has yet to fully realize the exponential growth in supply. This causes lower near-term costs, to be realized later on. Despite this, they are generating impressive returns on capital & seem well positioned to continue to benefit from additional invested capital. 

To put the results fully in context, bribes from CVX & CRV should only continue to accelerate as the battle for liquidity among whales and DAOs rages on. Olympus Pro, too, has ramped significantly in the past month & plans to go fully permissionless- meaning it could quickly become a $200k+/day opportunity for OHM.

If Wonderland executes on their plans to lower emissions, they could quickly assume a top role. At the moment, high APY is likely hurting investors significantly more than it is helping them. Either bonding has had to continuously rise to keep up with growth, which puts pressure on price, or bonding has been falling relative to APY (pressure on backing). It's also worth noting that Sifu's treasury management trades were not fully included in the valuation, as it's difficult to evaluate on a daily basis, but which adds some additional revenue.

This report is for informational purposes only and is not investment or trading advice. The views and opinions expressed in this report are exclusively those of the author, and do not necessarily reflect the views or positions of The TIE Inc. The Author may be holding the cryptocurrencies or using the strategies mentioned in this report. You are fully responsible for any decisions you make; the TIE Inc. is not liable for any loss or damage caused by reliance on information provided. For investment advice, please consult a registered investment advisor.