What if there was a cryptocurrency that was meant to be a stablecoin, but you could earn up to 8,000 APY on it?
What if this stablecoin was actually backed by something unlike the US dollar, and the decisions about the project were made by the community in a quick and cheap way, also unlike the US dollar?
One last question I have for you is that have you seen that strange 3,3 meme on Twitter or youtube that hardly anyone explains?
Welcome to Shavuna, the number one website channel for crypto education. Here we explain topics of the cryptocurrency world using analogies, stories, and examples so that you can easily understand them.
This blog post will explain how Olympus DAO works, the simple math behind it, and what 3,3 means.
Let’s get started.
Reserve Currency Protocol
First, money is simply something that many people agree to have value and that we use for transferring that value.
For example, a long time ago, specific seashells used to be used as money; they were traded between groups of people for other things like tools and food.
The shells technically represented tools and food because they could be traded for them.
Eventually, people stopped using seashells and started using rarer things like metals. Not too long ago, our US dollar was backed by gold, meaning that every dollar had its equivalent of gold somewhere in storage, and if you wanted to, you could trade in your dollars for gold.
However, for many reasons that we will not discuss in this post, we went from being backed by gold to silver meaning that every dollar was then backed by silver, and then eventually, we went to the dollar not being backed by much.
This is important because it means that your dollars only hold value by other people thinking they’re worth something, which was technically the case when it was backed by gold.
However, making more gold while printing money is so easy that criminals do it was challenging.
The big issue here is that we have to trust our government with the power of printing more money and basically affecting what our currency is worth.
Looking into the future, we may start to use digital assets to trade with. Still, the question this article is going to take a look at is: Will a reserve currency protocol actually work for digital assets too?
Treasury Backs All OHM Tokens
Olympus DAO created a token called the OHM token, and right now, all OHM tokens are backed by DAI.
Before we explain this, we first need to explain the difference between being backed by something and being pegged to something.
If you buy a stablecoin like USDT, that coin is pegged to the US dollar. You might ask how?
Well, if you give tether a dollar, they will give you one USDT, and if you give them a USDT, they will give you a dollar.
It’s like an open exchange that allows for trading your united states dollars to and from the blockchain.
The terminology for this is being pegged to a dollar, and this is not how OHM works.
OHM is backed by a basket of crypto assets in the treasury, including DAI, Flax, and wrapped Ethereum, giving OHM a floor or bottom value where the backing assets will keep the price until supply increases.
The market value of Olympus DAO’s treasury assets is over 700 million dollars, and each OHM is currently backed by $178 worth of assets.
To explain the crazy high-interest rate that Olympus is currently offering, we first need to understand the treasury.
The treasury allows you to buy bonds, and this is basically a mechanism where you can buy OHM tokens from the treasury but at a discount. You might be wondering how you get that discount?
Well, first, you must pay in another coin or token like Ethereum. For this example, let’s say OHM is ten thousand dollars, and you want to buy one OHM token.
The treasury allows you to buy OHM at nine thousand and six hundred dollars effectively, cutting you a four percent discount on it.
But the catch is that you must pay with Ethereum, and you must also wait five days to receive all of that OHM.
If the price stays the same, you make a profit.
In a more advanced example, you can sell liquidity pool tokens to the treasury for discounted ownership, and this is where Olympus shines.
This allows the treasury to own more and more of the total owned liquidity and enables the protocol to earn the fees that traders pay when buying or selling OHM.
In short, this means Olympus is actually earning money.
All right, let’s go back to buying OHM at a discount.
The trick here is that one OHM is only supposed to be worth one DAI. Now, DAI is a stablecoin technically worth around one dollar.
When the treasury sells you an OHM token for nine thousand six hundred dollars, technically nine thousand five hundred and ninety nine dollars of that is all profit to the treasury.
Bonding is a mechanism that actually earns the Olympus treasury money, and it also allows bonders to earn a profit. The only risk they’re taking is that the OHM price might fall.
In short, bonding allows Olympus to create more OHM tokens as long as the price of OHM is over a dollar.
The treasury also allows staking, which is a mechanism where you can deposit your tokens to earn even more OHM tokens.
Staking takes OHM off of the market, decreasing the total supply but the main benefit to you is that it allows holders to gain all those extra printed OHM tokens using our example earlier.
Since Olympus technically has an extra nine thousand and five hundred ninety nine dollars worth of Ethereum in its treasury, it can now mint nine thousand five hundred ninety nine OHM
tokens, and it gives these tokens to the stakers.
The idea is that when you stake, you’re not selling additionally. When you buy bonds, you’re not selling.
Either way, your actions are not selling. Even though the total supply increases with each rebase, that increasing supply does not dramatically impact the value of OHM.
Here’s a quick recap, when OHM is backed by more than it needs, it simply prints more tokens and gives those tokens to the stakers. However, when OHM is backed by less than it needs, Olympus will actually start to buy back OHM, and we’ll talk about this later.
Another important thing worth thinking about is something called LP rewards.
Remember how we said that the treasury actually buys its liquidity through the bonding mechanisms?
Because of this, Olympus owns a vast majority of OHM’s liquidity, 99.88 actually. Because of this, they capture nearly 100 of all the trading fees involving OHM.
They earn millions of dollars from people simply buying and selling the OHM token. This acts as a major source of revenue for Olympus. And this is what helps build the OHM treasury to actually back their tokens.
Let’s talk about the 3,3 meme.
The 3,3 meme
The 3,3 meme that you probably see floating around here and there represents something more significant. It represents an idea out of game theory, a philosophical thought process of how to win games using economics and human behavior.
First, let’s explain something called the prisoner’s dilemma.
Let’s say there are two criminals, and they both have two options to either cooperate with law enforcement or not to cooperate.
If a criminal cooperates, that criminal gets a better sentence, but their partner receives a worse sentence. If they both cooperate and confess, they both get a pretty lousy sentence, but if they both deny the accusations, they actually both get off easier.
Assuming you don’t know which idea your partner will choose, which one do you prefer?
Let’s take a look at the prisoner’s dilemma square:
This shows the outcome for both criminals depending on what they choose. You can see that if one confesses and the other doesn’t, it ends well for whoever confesses but really bad for whoever doesn’t. You can also see that it ends up equally bad for both of them if they both admit it. Lastly, they both receive the best possible treatment if they both deny it.
And because of this, the game theory says that if both criminals are rational people, they should select the last option.
Olympus DAO extends this square into their realm of a 3×3 matrix.
Using the same theory, the best possible case is if you and everyone else stakes the OHM token, while the worst possible case is if everyone sells.
Again, this means that the best possible case is if everyone stakes long term assuming everyone participating is rational and aware of this thought process.
I will say, unfortunately, this relies on humans. You’ll have to check back in a year or maybe ten years to see the outcome.
However, instead of guessing what might happen, let’s quickly go through two worst-case scenarios.
The first is what happens if the price falls to what one DAI backs it. Remember how I said each OHM is supposed to be equal to one dollar.
Well, that’s technically the very minimum that it should ever be.
In fact, there’s something called the floor price, which represents the price at which OHM should not fall below due to the amount of money in the treasury.
I haven’t talked about this yet but let’s say there are a thousand OHM tokens out there, and the treasury owns four thousand dollars; this means each OHM is backed by four dollars worth of assets.
If the price of OHM ever goes below four dollars, then Olympus itself, as a protocol, will start buying back OHM tokens, reducing the total supply out there.
Some of you may be wondering how this project might be similar to iron finance and the titan token?
OHM is entirely different from the iron finance bank run, which resulted in the project’s collapse.
Iron and titan were susceptible to bank runs all the way down to zero. Olympus is vulnerable to the same thing, but there is actually a floor to the price this time, and the protocol will buy back your tokens.
In theory, you won’t lose all of your money if a bank run happens; you would only lose the difference between the current price and the amount of backing each OHM.
As time goes on and more people buy OHM, the protocol will continue to collect fees since it technically owns over 99 of its liquidity, meaning that the treasury should continue to grow at a quick rate.
The Olympus DAO protocol does have risks, but it should be noted that they differ from the iron finance risks.
Ending this post, we can’t be sure if Olympus will survive well in the next five years or if there’ll be a bug in the code that allows exploitations, or even for some reason, it just won’t fall like iron finance.
Although the project has definitely brought some new ideas to light, it’s an impressive experiment in behavioral economics and in the world of crypto.
Thank you guys for reading this article. I hope that you enjoyed it. I hope that maybe you’ve learned something, and most of all, we hope to see you in our next blog post.