Olympus DAO: DeFi’s Answer to Mercenary Liquidity

Olympus DAO’s plan is simple, but ambitious: Become the Decentralized Reserve Currency. 

What does that mean? If Bitcoin is gold, think of Olympus as currency. Its aim is to be extremely liquid, used as a base pair in pooling & swapping, but simultaneously remain stable. Stablecoins address this to a degree; they’re a reliable counterparty & are not volatile, but are subject to a host of other centralized risks, and also aren’t accretive to own. Olympus solves this by creating OHM, a token that is backed, not pegged like stablecoins. 

The Olympus treasury holds a basket of assets, the value of which is spread across the token float in the market. As of today, 11/30, the treasury sits at a whopping $923mn USD in value. At current float, that assumes over $170 of value backing each OHM on the market.

The Olympus treasury accumulates assets through bonding. The overall goal of bonds is to build the strength (capitalization) of the Olympus treasury.The DAO sets target amounts of assets to be accumulated over time, then bonds OHM at a discount to the secondary market price in exchange for those assets. On paper this is a win-win: Olympus collects assets in exchange for minting OHM (rather than gains getting passed through on the secondary market), assets get spread equally across all holders, and people who seek to purchase Olympus can do so at a discount. 

Bonding is a more creative mechanism than it seems. While it can be used simply, to allow a protocol to purchase simple assets, the main breakthrough of Olympus has been the use of bonding to permanently take in Liquidity Positions (LP). 

Liquidity is a necessity for a protocol's existence. Trading on a DEX allows for price discovery of tokens, and valuation of token issuers. Without liquidity, trading depth is impossible, so establishing token liquidity is of the utmost importance for new protocols. To incentivize this, they offer substantial rates in ‘farming’ fees. Liquidity providers come, attracted by high rates, and are willing to take on the risks of liquidity provision in exchange for yield.

However, the common phrase ‘Total Value Locked (TVL), is quite a misnomer. Liquidity deposited in yield farms can generally be withdrawn at any time, and for that reason should be considered ‘mercenary’. The vast majority of farmers are chasing only the highest yield, not the best project; should rewards ever fall, their departures are sure to follow.

Nansen's eye-turning results in a study of DEX-based liquidity pools showed the severity of the issue:

"A whopping 42% of yield farmers that enter a farm on the day it launches exit within 24 hours... by the third day, 70% of these users... have withdrawn from the contract."

Clearly, the majority of yield farmers are only entering positions based on maximizing their returns. To incentivize such profit-motivated actors, protocols must regularly allocate large percentages of their token emissions toward payment of liquidity providers. This hostage situation continues indefinitely, like mob payments, as long as the protocol exists.

Bonding, and by extension Olympus (more on that later), offer a salvation. After bootstrapping liquidity on Decentralized Exchanges by offering rewards for yield farmers, Olympus has now repurchased the vast majority of this liquidity. Unlike "TVL", any LP that Olympus purchases goes into the treasury, never to come out. For this reason, it's commonly referred to as Protocol Owned Liquidity (POL). To sum it up, rather than continue to pay indefinitely for liquidity, Olympus draws on the demand for their token to pay a larger, one-time cost in the form of newly minted Olympus.

This short term cost turns a former long-term liability into a positive balance sheet item. Olympus not only no longer has to pay for their liquidity to be mined, but the treasury, as the LP owner, receives the fees generated through trading. These have quickly grown to be meaningful, already totaling almost $22mn.

Interestingly, these fees also help offset the pain of high volatility days. On October 14th, OHM had daily highs of $1335, before crashing to below $750 at one point on the 15th. However, despite the monstrous move downward, the long-term health of the protocol was not only unaffected, it was potentially improved. Due to the action, the protocol pocketed a whopping $1.6mn in daily fees - represented by the tallest bar in the chart above.

Over the last 6 months, Olympus has exploded with their new methodology. In the current crypto landscape, 99/100 protocols own 0% of their own liquidity and have no assets backing their coins, other than the coins themselves. This is closer to a floating currency - think the current dollar. On the other hand, Olympus seeks to put in a ‘gold-standard’ with their treasury, which will back assets and provide investors with security. 

You can think about each bond purchase directly from Olympus as helping provide a floor for the price of OHM. Normally, on the secondary market, if one were to buy OHM the gain or loss on the token would be passed through to the counterparty. When one bonds from Olympus, the assets are added to the treasury, and everyone wins from growth. 'Bottom-line' growth, net of costs (addressed later), can be seen through increases in the Treasury Backing per OHM (equal to Treasury / Float).

Backing isn't directly claimable, but given Olympus generates revenue with its balance sheet it's a way to see how that balance sheet is changing over time relative to the token growth. A major concern for investors is Olympus's APY, but as long as backing is rising, that dilution is being adequately offset. If we assume that the multiple that we place on Olympus will hold somewhat fixed in the semi-near term, the ‘EPS’ that OHM can drive is constantly increasing as Backing gains momentum.

So, someone looking to purchase OHM can do so through the treasury. Purchasers receive a discount to Olympus’s secondary market price (advantageous for them), and Olympus receives two things: 1) They permanently now own this liquidity, and will receive trading fees from it over time, allowing them to amortize this cost; and, 2) They take in new assets for the cost of minting a new OHM, which is negligible. Olympus is able to take on tremendous amounts of capital at extremely low acquisition cost.

That may seem odd at first, but think about it like this: In a normal scenario, gain from a secondary market trade passes through to the counterparty. Others who own the token only gain value as a result of their tokens appreciating nominally. So, assets are worth more, but only fractionally. An an investor, this is good, but it can be done better. When assets are purchased through bonds, the same effect happens - the market demand for OHM is increasing relative to existing supply. But, unlike a secondary market trade, the benefit of that flows through to the treasury & across all holders of OHM uniformly, weighted by the amount of Olympus that you own. This occurs because each OHM currently floated is backed by the $170 (and growing, this is on 12/1) mentioned above, but incremental purchases through bonding are basically backed by the Market Price (less a small discount). Currently, that means that new bonds are being ‘backed’ by about $820 in assets. 

Any time someone wants to buy or sell OHM, they have to pay the treasury. If you want to buy Olympus, and do it through the treasury, the money flows through directly to it. If you want to trade Olympus on the secondary market, they facilitate that trade as a market maker, and then receive the fees for the trade. No matter what, Olympus wins.

At this point, the bonding system is pretty well tested, and a number of others want access to what Olympus has created. The next step for the protocol is offering BaaS - Bonds as a Service. Olympus Pro seeks to create a platform where new & existing Crypto Protocols can install the Olympus bonding system into their platform to capture the same benefits. Olympus is offering this service for 3.3% of bonding revenue - a worthwhile trade when compared to the mercenarial alternative of paying Liquidity fees forever. 

The initial rollout of the program has been extremely successful, with 23 partner protocols and counting, across multiple chains. These protocols have utilized the platform to exchange their tokens directly for almost $20mn in liquidity. While Olympus's payout from this is still negligible- $0.66mn, it's an interest concept that could pay substantial dividends as their partners scale. The next steps include adding additional cross chain functionality, which should be easy with the rollout to Olympus v2, as well as adding automated onboarding for Olympus Pro. This will allow the BaaS arm to be infinitely scaled. 

Because Olympus receives 3.3% of bond sales, this can be thought of as an upside option to the value of Olympus. If the protocol that is selling bonds through Olympus succeeds, OHM will own a tremendous amount of a highly successful protocol. Over time this should automatically get weighted, as more successful protocols will be able to draw in much more money through bonding than those that are not. This will also have the practical effect of a) diversifying Olympus’s exposure across a variety of projects, so risk is not localized, and, b) turning OHM into an index proxy for DeFi projects broadly.

What good is sitting on all the money in the treasury, if it’s not being used for anything? One of the most consistently underrated parts of the Olympus plan is the ability of the treasury to bring in passive revenue. That’s already been discussed somewhat in prior sections; Olympus owns liquidity, and they’ll continue to earn revenue from the fees in those pools so long as they are being traded in.

However, there’s other large portions of the treasury that exist in stablecoins: FRAX, LUSD, and DAI. Both FRAX and DAI are actively being allocated to Convex Fincance and Aave, respectively. OIP-13, for Aave, and OIP-14, for Frax, lay out the base work, although the allocations have been increased as the treasury has grown. Through these investments, Olympus is able to turn stable dollars on their balance sheet into very low risk passive income, as well as receive governance tokens in large quantities.

It's almost impossible to write about Olympus at this point without addressing forks. In its short existence, Olympus has become one of the most forked ecosystems in DeFi.

The basic bonding mechanism is an effective way for Treasuries to quickly amass capital, and copycats arrived on nearly every chain. The most popular of these, by far, is $TIME. Wonderland.Money, as it's formally known, is an Olympus fork based on the Avalanche chain. Unlike Olympus, which works through expansion of its assets, Wonderland works in conjunction with two other ecosystems: Abracadbra.Money & Popsicle.Finance. Through a combination of the three platforms, investors are able to earn LP yield, borrow the $MIM cross-chain stablecoin against a variety of assets, and earn a multitude of rewards. Another popular fork, Klima DAO (notably backed by Mark Cuban), uses carbon credits, rather than cryptocurrency, for its bonds.

The Olympus mechanism isn't just popular for financial forks. Rome DAO, a new Olympus forks is attempting to combine buzz-words and create gamified, play-to-earn world that pits ROME stakers as members as a house battling against Etruscan forces. Needless to say, bonding has evolved beyond just a value acquisition principal, and has quickly become the de-facto method to bootstrap a new protocol.

Amusingly, there's actually now an Olympus fork, ConcaveFi, that seeks to offer aggregated exposure to all Olympus forks to mitigate rug risk. Check it out?

There is a saying in the Olympus Community now - Time in OHM > Timing OHM. What this means is that the amount of time that you spend in OHM is much more a point of focus than timing the entry price. The reason for this is around the APY (mind you, NOT APR) that Olympus is able to pay - a mind boggling ~7,000% APY, which is why its commonly accused of being a Ponzi Scheme. However, even at this run rate, the treasury as it stands now will be able to fund it for almost a year without interrupting rewards.

The reason for this is because of the way growth in Olympus works. If I own OHM, to claim these rewards I have to have my OHM staked within the protol. In exchange for loaning Olympus my OHM, I collect rebases - basically stock splits - every 8 hours. Over time, this provides a huge compounding interest effect, but you only receive it if you’re staked. Historically, between 89-93% of Olympus has remained staked. This also serves to provide price support, as the holder base is very sticky.

Olympus’s aggressive rebase rate & APY are necessary, in part, because of the bonding mechanism. Consider it this way, in the short term, buying liquidity rather than renting it is expensive. Its cost comes in the form of the treasury minting new tokens, which, in turn, serves to dilute existing holders. This balance is difficult for the protocol, and to combat it the treasury utilizes the assets that it’s able to accumulate at an incredible pace to increase the balances of stakers through rebases. Through this method, dilution can be minimized & make the system economically viable, despite short term cost. Dilution is a major issue with many Olympus forks. If you're unable to properly incentivize bonding, you're simply going to end up continually reducing the backing of your token.

It’s not necessarily worthwhile, or even possible, for every protocol to make full use of Olympus in this fashion. One thing that Olympus’s founder has mentioned as a potential alternative for this is for protocols that want to make use of Olympus Pro, but don’t necessarily have the monetary bandwidth to back their growth, is to approach Olympus. Olympus then has the option to purchase some portion of the pool, which will consist of both OHM and the counterparty’s token. This gives Olympus, as a protocol, the optionality of continuing to accumulate assets (which is its ultimate goal) and continuing to increase use of OHM as a base coin in liquidity (good for long term adoption of OHM as a reserve currency, the end goal). On the other side of the equation, the protocol approaching Olympus is able to significantly lower their cost of capital, while simultaneously bringing new capital into Olympus’s economy, creating circular economic gains. If Olympus owns 20% of the LP, they claim 20% of fees on the pool, better capturing and retaining financial energy. As mentioned above this can become significant quite quickly). Furthermore, the risk that Olympus takes on should be minimal, as it will be insignificant relative to their total holdings (while remaining important for the new protocol).

When I think about valuing Olympus I consider a few metrics:

The reason I like to use Backing is because Olympus generates 'real' revenue through yield from its balance sheet. Backing reflects the balance sheet available per unit of floating OHM, and is effectively the revenue generating power (think EPS) of Olympus. By looking at the wallet bundle of Olympus Treasury assets, an investor can actively monitor backing to help inform price action. This is particularly relevant for Olympus forks. As mentioned above, their high APY can end up being extremely dilutive in the long term.

Through a combination of the treasury and the yield on OHM, I personally believe that it’s hard to argue against Olympus’s current value proposition. They’re swallowing assets at an alarming rate, while offering top of industry yield at a constantly increasing runway. As Olympus’s balance sheet grows, so too does the amount that it can take home (the same way a bank works, when profit on money earned scales fairly linearly with deposits added). The treasury is the easiest metric to see this through, as it captures the increasing revenue brought in through pooling. MV/OHM (Market Value per OHM Floating), is also relevant and popular. It’s almost worth thinking of OHM as a Blackrock of sorts. They’ll help make markets through their tremendous depth and liquidity on their balance sheet, and take profit on that business; they’ll invest in new companies symbiotically, and earn directly from their success. 

As a thought experiment, JP Morgan trades at ~2x P/B with a dividend yield of about 2.5%. Blackrock trades at 3.5x P/B, with a dividend yield of ~2%. So, Olympus is trading rich to JP Morgan on P/BV, but is also offering a significantly higher yield. What multiple do we put on the combination of their growth and the additional yield? That’s up to you to decide, and will most importantly be a factor of the incredible yield OHM offers. One should model that APY will be decreasing over time as float increases, as outlined in OIP-18. It’s also important to consider the rate of inflows that OHM is experiencing, and the rate at which they can utilize those flows vs. a traditional allocator. Unlike Blackrock, OHM is extremely nimble, and has early stage exposure to promising ventures through OHM Pro. Without getting too long winded, I think it’s worth trying to value this separately when looking longer term by testing different projected values as follows:

OHM Pro Value = (# of Protocols) * (Average Value of Bond Sales) * 3.3%

Given OHM’s rapid expansion, we can try forecasting price - this is where it gets speculative, so feel free to adjust with any other numbers that you’d like to test. If, at year end, the treasury hits $1bn with yield holding fixed, we can quickly plug in our numbers from above to get a forecasted price for OHM, assuming multiple holds constant. This would be affected by rate of bonding vs. secondary market selling, success from Olympus Pro and other things affecting float, but is a quick way to do some back of the envelope math to calculate EOY price (1.06 is the current 6% rebase rate / 5 days):

($1.1 BN Treasury) x (4.6x P/BV Multiple) = $5.06bn Market Cap

Current Float = 5,278,655 OHM 

Projected December Float = 5,278,655*1.06^4.5 = 6,861,193

OHM Price = $5.06bn/6,861,193 = $737

$737 is about a $50 discount from where OHM is currently trading. However, at the same time an investor has accumulated 1.06^4.5 in rebases. So, 1 OHM today is equal to 1.3 OHM EOY, making the index adjusted return $958. That’s almost a 30% return on the current price of OHM, despite a projected price dip. Olympus is currently trading on the lower end of its historic multiple range.

The last point that's worth addressing is fear around the decrease in APY scheduled to occur in January. As mentioned above, OIP-18 lays out a rewards reduction framework to transition Olympus from a growth / accumulation period into an accretive one. The reduction in APY can be thought of as a short term multiple blow, that should be largely priced into the token at these levels. When I last did this analysis, Olympus was trading three multiple turns higher on a P/B basis- investors are valuing Olympus more closely to a traditional financial institution at this point than many of its peers.

Furthermore, the reduction in APY will change one major thing for the protocol: it will reduce costs, paid out in the form on newly minted OHM to stakers by up to 10x (the approximate change in APY). This means that, while bonding at the same rate, Olympus can increase the backing per token significantly more quickly than before. When thought of in the frame of the (3,3) motto, phase one was accumulating a lot of OHM, phase two is going to be making it worth more.

As much as that header reads as gibberish, these are three of Olympus's key new initiatives that will allow it to continue absorbing assets. The cornerstone of the additions is Olympus v2. As OHM transitions to its new iteration, gOHM (governance OHM), it will gain full cross-chain capability. To enable this, gOHM does not rebase like sOHM. Instead, it has a "static balance and increasing redemption value".

gOHM = Index * Price of $OHM

Index's value increases over time as a direct factor of APY, so gOHM will track both OHM's price & rebases. All wrapped tokens are basically staked.

gOHM's creation is important for its role enabling Olympus Proteus. Proteus looks to optimize Olympus's cross-chain movement by creating a ~$100mn "liquidity incentives program... to rapidly bootstrap liquidity on new chains and simulate Olympus’ performance on each one. This data will guide the DAO in its long-term cross-chain decisions." As the program unfolds, beginning on Avalanche, Olympus will seek to add discriminately to its war-chest of yield bearing assets and liquidity.

As Olympus gains LP and Farming capital, they'll accumulate governance tokens at an accelerated rate. Doing so cross-chain only emphasizes the potential reach of the project, with juicier yields also generally available on newer Layer Ones and Layer Twos.

As I see it, the most prominent risk for Olympus is protocol risk, as I’ll call it, rather than price risk. What that means is that the risk to your holdings is from an issue with the protocol itself – hack, rug pull, etc.… Rather than just price decrease over time. To help illustrate why price risk isn’t as key of a risk, we can look at a quick example.

Let’s say that I put $1,000 in OHM today, and assume a stable yield of .9%/5days over the next year – which is below the current 5 day rate of 6.1% to account for scheduled decreases in APY over time. Let’s also assume that the price of Olympus goes down an astounding ~80% over the next year, and it settles at the current MV/OHM, $171. How does our initial $1000 in OHM, or 1.28 OHM at current price, Look at the end of the year?

1.28 OHM * (1.009^(365/5)) * $171 = $420

Despite the price of OHM decreasing 80% to the MFV, we’ve still maintained the majority of our initial investment – from $1000 to just over $400. Remember, this is effectively the 'worst case'; decreasing APY is positive for Backing, so I suspect it's unlikely we touch this worst case.

So, what about the other risks around the protocol? The first to note is the risk of a rug pull given many of the forks that have expanded and imploded. At this point, this has become less of a concern for Olympus itself. First, Olympus is still growing extremely quickly & has been for months. Why pull the rug on a platform that is succeeding as a standalone business and can profit continuously over time. Furthermore, looking at the price chart for OHM, we can see that despite the recent bull run, OHM actually hasn’t hit its ATH price. If the founders were planning to simply run away with money on the project, they would likely have done it at the $1500 peak early on. What about a more coordinated hack / later rug pull? Olympus also currently runs a multi-sig system, where multiple people are needed to process any given transaction, which should theoretically significantly lower the risk of attack.

More likely, the risk to Olympus comes from the foundational way that the protocol is built. At the moment, Olympus’s bonding system is highly differentiated and provides meaningful value to both the protocol itself, as well as its partners. If, over time, people are able to develop a better strategy, Olympus would see outflows. However, that would largely affect price and future fund income, rather than the underlying value of OHM itself. Remember, Olympus is a liquidity black hole, meaning that once assets enter the treasury, they never leave. So, even if OHM got sold off aggressively, each token would still be backed by exactly the same amount of underlying revenue-generating assets.

Speaking of selling off in mass, it’s worth taking a look at Asfi’s Bank Run simulation with updated numbers.  What would happen, exactly, if everyone tried to sell their OHM at once? Olympus has thought of this, and has built their incentive structure to dissuade that. Let’s imagine that there’s a worst case scenario- Olympus goes from 92.5% staked to 3.3% staked overnight, and inflows from bonding dry up entirely. Without recreating Asfi’s work (citation has more information on the math), the initial value held by the remaining stakers will still be up ~60% after roughly a year. Risk here is low at this point, as the bank run has already happened, but cannot touch the protocol owned liquidity, which will remain backing existing and newly minted OHM. If things don’t recover, the remaining community can vote to dismantle the treasury and go their own way. Unlike a Ponzi Scheme, where the last investor standing is left holding the bag, even in a bank run situation, investors that hold remain safe from the price drop. 

As Asfi mentions, the primary risks to Olympus are smart contract and stable peg risk. Olympus does audit the protocol to mitigate smart contract risk, but, as Crypto investors know, it remains a risk across any protocol as new exploits are continuously developed. The other doomsday risk would be one of the stablecoins that Olympus owns losing its peg. This is less of a risk than it once was, as Olympus is much more diversified (and that will only continue), but still remains an important one. If DAI, for example, were to lose its peg, Olympus would not only lose all the DAI in the treasury that’s currently held and invested in Aave, but would also be sacrificing their Sushiswap OHM/DAI pool, and all the future fees that it will be responsible for.

Through OHM, as a new protocol, I can now:

- Get cross-chain financing for new DeFi project

- Own instead of rent my liquidity 

- Get price stability from a Treasury, rather than a retail investor, holding my token

All for 3.3% of bonding

Through OHM, as an investor, I can now:

- Hold a token yielding currently 7000% APY, with increasing runway

- Get exposure to crypto projects from blue chips to start ups

- Decreased exposure to price volatility because of 3,3 & large Treasury holding

- Use Olympus Pro marketplace to purchase tokens at a discount

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.