Making Sense of the Olympus DAO

If you have been reading up on Olympus DAO you have probably been going mental trying to understand all the jargon and how this cryptocurrency actually works.

When I looked at the site I thought it was neat and organized with a FAQ section yet I came out none the less wiser.

After reading countless articles, 6 podcasts and many hours on YouTube I decided to try to break down Olympus into baby steps.

In this article I will walk you through the key crypto concepts you need in order to fully grasp how Olympus DAO works.

I hope this will help you make the mental leap to wrapping you head around Olympus DAO and its OHM token.

It is important to understand Olympus DAO because it has stirred up both exhilaration and controversy.

Exhilaration because its conceptual model was though to be groundbreaking, heralding a new era in DeFi called Defi 2.0.

Controversy because of the multitude of forks that boomed and crashed and the indirect association with some shady characters on the periphery. More on all of this later.

For now let’s focus on the building blocks you need in order to wrap you head around Olympus.

1. Mental Step Number One: How Tokens Usually Start off and What is Wrong With That

Say I want to create a token. Like most I will probably start writing some code in Solidity and issue an ERC-20 coin. Let’s call this mentalToken.

Note: if you did not understand the above sentence then I don’t think you are ready just yet to figure out how Olympus DAO works. I would suggest you read my foundational article on Ethereum first and then come back.

So! I have my mentalToken.

Now I want people to be able to buy it. I can give some away for free to founders.

I might also give some to investors in exchange for capital.

Finally, I might gift some to active members on my Discord channels who have been enthusiastic supporters from the start.

But none of that helps to circulate the token. Even those who have my token cannot sell it because there is no marketplace to do so.

In order for my token to start circulating in the crypto economy it needs to be available on exchanges. I have two options which I will pursue simultaneously here.

1. I make a deal with a centralized exchange for exclusive rights to sell my token on their platform. In return they get a cut. So effectively I need to pay rent for using the exchange
2. I place my token on a decentralized exchange such as Uniswap. Here too I pay rent. Let’s explore how:

Decentralized exchanges and AMMs

A typical exchange will match buyers with sellers.

You will surely have seen the order book of a centralized exchange where there are people bidding to buy at different prices and people offering to sell at different prices.

The centralized exchange acts as an intermediary matching orders and takes a fee.

Centralized exchanges have an order book where buyers bid prices get’s matched with sellers’ ask prices.

Decentralized exchanges (DEXs) don’t have order books. Instead they use Automated Market Makers (AMMs)

AMMs

Say I have been gifted $100 worth of mentalToken. And say I have $100 worth of ETH.

I can put them together on Uniswap, a decentralized exchange, in what’s called a liquidity pool.

Now Uniswap has mentalToken available to anyone who wants to exchange ETH for it. In exchange for providing this liquidity, Uniswap gives me a cut.

When I want I can exit the liquidity pool and I will have some mixture of ETH and mentalToken.

I am oversimplifying and will write a separate article on AMMs and decentralized exchanges. But for now what you need to keep in mind is that

1. The token issuer needs to pay rental fees to get the token on exchanges.
2. This fees have to be attractive enough to get people to create liquidity pools on Decentralized exchanges.

The problem with creating liquidity

The problem is that in order to attract liquidity you start paying high fees.

To pay these fees you issue more mentalToken. This dilutes your token’s value.

This issue is compounded when others launch their own tokens. Let’s say there is a new kid on the block.

We will call this madToken. MadToken also want to place their token on exchanges. They offer even more attractive rewards to liquidity providers than you do.

Your fickle liquidity providers abandon you and start offering their funds to madToken.

As your liquidity reduces it causes price volatility. If I want to buy mentalToken my purchase could move the price significantly if there is no liquidity in the pool.

This makes the token less attractive.

How Olympus DAO solves the liquidity trap

Instead of renting exchange services Olympus directly issues its OHM token to buyers. It does this through a process called Bonding.

2. Mental Step Number two: Protocol owned liquidity and how Olympus raises money though Bonding

You can buy OHM directly from Olympus DAO through a process called bonding.

The way this works is that you offer Olympus money today and then in a few days you get discounted OHM tokens.

It is kind of like giving them a loan which they pay you back in OHM with some interest. Hence the name bond.

Let’s look at an example:

Say I have $100 worth of a cryptocurrency.

Let’s say this is the stablecoin DAI which is pegged 1:1 to the US dollar. So I buy a 100 DAI bond from Olympus.

Let’s assume OHM is trading for $50 currently and that the bond allows me to buy OHM at $40.

So, after a few days I can buy 100/40=2.5 OHM and sell it for 2.5*50=125 making a nice profit of 25%.

This mechanism is similar to how governments issue bonds. You buy a bond now for some return in the future.

Olympus’s founders are super proud of this mechanism.

They compare it to how central banks operate by buying and selling bonds to control the supply of their currency.

Protocol owned liquidity and the beginning of a new era for Defi.

What is unique about this method is that is allows them to own assets. Right?

If I place my token on an exchange I need to pay high rental fees but don’t get anything back.

The only thing to hope for is that my token becomes super popular and appreciates in price.

Then the % I have retained as a founder will also increase.

However, what Olympus DAI is doing, is it is raising funds for itself.

It gets to keep that $100 in DAI that you gave them. This concept of the protocol owning the liquidity was groundbreaking in Defi.

Many called this the beginning of a new era for Defi and named it Defi 2.0

3. Mental Step Number Three: Staking OHM which is not like staking on blockchains

Once you have OHM you can either sell them, hold them or stake them.

1. You might sell them because you bought a bond a few days ago and now you want to cash out like in the previous example
2. You might want to keep them because you expect the price to appreciate.
3. But the most logical thing is to stake them. By staking OHM you earn a return for doing so.

Now to clarify, the word “staking” does not mean providing a token to a validator to support the proof-of-stake process.

Olympus DAO is not a blockchain. Rather, Olympus DAO is a protocol, a set of smart contracts, that sits on the Ethereum platform.

Hence, all the validation of transactions and security checks etc. happen on Ethereum in the background.

When they say staking they just mean putting up your OHM in their pool of funds in return for a reward.

Olympus DAO incentivizes staking because not selling props the price of OHM up.

The innovation introduced with staking OHM

Through the bonding mechanism Olympus maintains a lot of funds in reserve.

They call this the risk-free value of their treasury assets.

They say risk-free because they also own other assets such as ETH and BTC but because these fluctuate in price they do not consider them risk-free.

Let’s keep it simple and zoom in on DAI. In the graph below you can see that Olympus DAO currently owns about $120M worth of DAI.

Olympus DAO maintains about $243M in stablecoin reserves as of February 2022. Source: Dune analytics

Say the price of OHM is $50. Taking our previous bonding example, bonds get issued and are sold for $40.

So someone comes along and deposits $40 in DAI and gets a bond.

Now pay attention.

Olympus DAO says that every 1 OHM should be worth at least $1. And if the price of OHM is greater than $1 it creates more OHM out of thin air. They call this minting.

The total amount of OHM that can be minted should equal the amount of DAI in the treasury. So if there was 1OHM and 40 DAI another 39 OHM is created and now we have 40 OHM.

What happens to the newly minted OHM?

The DAO keeps 10% and the remaining 90% is distributed to stakers.

So imagine 5 days have passed and now my $40 bond has turned into one OHM. I can sell it for

a profit like before or I can stake it and get another 39 OHM.

So my original 1 OHM grows 39 times!!!. That is a massive increase in OHM.

Indeed if you visit the Olympus staking page you will see a massive interest rate.

For example today it is 1,335% APY. This is low compared to what it used to be.

In the early days of OHM rates were as high as 10,000%.

Now, you would logically expect the price of OHM to drop as more of it becomes available.

Olympus fans believe that won’t always happen because people are incentivized to stake. If everyone is staking, no one is selling which props the price up.

They believe in an equilibrium model called (3,3)

4. Mental Step Number Four: What does (3,3) mean for Olympus DAO?

For those of you who studied Economics let’s go back to our economics 101 class and remember some game theory and the prisoner’s dilemma.

Imagine the following setting: Andy and Neil have just been arrested for a crime in downtown

Chicago police station. They are each being interrogated in separate rooms.

If they stay silent they will be charged on a lesser crime for one year each.

If Andy tells on Andy but Neil stays silent then Andy will get 0 time and Neil will get 3 years.

Similarly for Neil: if he tells on Andy while Andy stays silent then Neil gets 0 and Andy gets 3.

If they both tell on each other they both get 2 years.

If Neil tells on Andy and Andy stays silent Neil gets 0 jail time and Andy gets -3 : (0, -3)

The outcome that minimizes collective jail time is for both of them to stay silent (-1,-1) = -2.

Yet they are each individually incentivized to tell on the other. And this will instead result in an outcome that maximizes their total time: (-2 ,-2) = -4

This theoretical model was conceived by economists to describe societal issues where people acting in their self interest work against the collective societal interest.

One well-known example is the tragedy of the commons where if we all graze our sheep on the municipal pasture grounds we deplete it and end up with no grazing ground for anyone.

An alternative model would have the land getting parceled out: if it is individually owned then each person will take care not to overdo it and allow for the grass to grow back.

What does game theory have to do with Olympus?

Olympus DAO’s founders have devised their own theoretical model around how OHM token holders will act.

The game theory matrix of Olympus DAO. Source: Olympus DAO

According to their model everyone is incentivized to stake.

Both the individual and the collective maximize outcomes when they stake. If you sell your OHM you make a margin but because the interest rate is so high you are better off staking.

If I bond but you sell you push the price down. Because I can only exercise my bond after a few days I will lose money.

If we both sell we push the price down and hence both end up worse off.

You don’t need to study the matrix too hard as it is meant as a conceptual model for how everyone is expected to behave.

It is meant to illustrate what Olympus DAO believes everyone is incentivized to do. The numbers are for illustrative purposes rather than being backed by any data.

(3,3) quickly became a widespread meme in the crypto world and was common on Twitter and other social media alongside bullish sentiment that OHM could only go up.

The (3,3) meme on Zeus (the pseudonymous founder of Olympus DAO) on twitter. Source: twitter.com

Summing up until now

Let refresh what we have understood so far

1. Olympus DAO raises funds on its own by selling token directly to buyers in exchange for cryptocurrencies
2. They issue bonds to do this
3. Each OHM should be worth at least one dollar.
4. Olympus will mint OHM as long as OHM >= 1 dollar
5. Users are incentivized to stake their OHM in return for some insane exchange rates

5. Mental Model Number Five: Rebasing

Let’s go back to staking for a moment.

Olympus acts kind of like a stablecoin in that it does not let the value of Olympus fall below one dollar. It protects this lower bound because it has enough funds in its treasury.

It is different from a stablecoin in that it does not mind if the price of OHM is above $1. You can think of stablecoins aiming for stablecoinToken=$1 whereas Olympus is aiming for OHM >= $1

Olympus can sustain this as long as they are able to sell bonds to raise more funds.

They also provide a chart for how many days they can sustain minting OHM from their treasury if no bonds are sold.

Take a look at the runway chart for different APYs below.

Olympus can provide an insane 20K% APY for 267 days given the funds in its treasury. Source: Dune Analytics

Rebasing

During their quarterly report in February 2022, Alphabet, Google’s parent company, announced they were planning to do a stock split.

This means that each GOOG stock will be split into 20 stocks.

So if you hold one GOOG share the company will issue you another 19. This does not mean you will get richer.

The issuance of more GOOG shares will dilute the price. Hence the value of each share will drop by a factor of 20.

Say you are Larry Page, one of the founders of Google and you own 10% of the company. And say there are 1Mn shares.

After the stock split there will be 20Mn Shares. Larry will own 20x more shares but still only 10% of the company.

So nothing has changed in terms if an individual shareholder’s wealth.

The only thing that has changed is the price of one GOOG share. Hold on to that thought.

You might be thinking why would Google do this?

The reason is to make their stock, which currently trades at around $3K, more affordable to the average investor.

This could indirectly cause the price to appreciate and allow Google to raise more funds to invest in new projects.

Google’s stock split is like a rebase

What Google just did is rebase their share. Everyone still owns the same % as before. And the company’s valuation has not changed as it continues to do the same business as before.

he only thing is that you now operate from a different base.

You used to assume 1 share = $3K. Now you need to assume 1 share = $150 (=$3k/20)

This is exactly what Olympus is doing when it mints more OHM.

Its token is rebasing. Except that there are a few differences

1. Firstly OHM takes the rebasing mechanism to the extreme. OHM rebases every 8 hours. When you stake OHM, new OHM get’s minted every 8 hours.
2. Secondly newly minted OHM only gets distributed to stakers. Hence if you hold OHM without staking it you are taking a very risky bet. For this reason it is technically not a rebase. But it is close enough.
3. Thirdly minting new OHM does not necessarily dilute the price of OHM like the stock split dilutes the price of Google shares. Let’s explore this last point further.

Share dilution vs. OHM dilution

I remember back during my MBA years learning about how to value a company.

The value of a company, we were taught, is the value of all of the company’s future cashflows discounted to the present.

A lot of analysts at various investment funds and banks pay analysts high salaries to estimate these valuations.

Google today is estimated to be worth a whopping $1.78Trillion.

To derive the share price all you need to do is is divide $1.78T by the number of shares. No matter how many shares get issued you will always divide them by $1.78T to derive the share price.

Everyone agrees with this and understands it.

The market is highly liquid so the moment the 20x stock split happens the price will drop by a factor of 20.

This is because no one will be willing to purchase at a higher price that current price divided by 20.

At least in the beginning…

Yes, very soon after, the cheaper share price may make it more attractive to people with fewer savings etc. and this might push demand for the share and its price up.

But let’s keep things simple.

How OHM rebases

Now with OHM you don’t have any fundamentals.

Like with most of crypto there is no one building a valuation model of discounted future cash flows.

You can be pretty sure that the (3,3) meme and the high APY quoted are driving emotional investors to act unpredictably.

During the recent bull run the price of OHM kept increasing despite the massive issuance of OHM tokens.

This is because, unlike with Google stocks, no one was willing to sell at a lower price and people were willing to buy at a higher price. When the market started turning OHM followed suit and started dropping.

OHM traded all the way up to $1400 and then reversed all the way down to $42. Source: coinmarketcap

Currently there are 11.7Mn OHM tokens. But these are growing very quickly with 1.5Mn to 2Mn getting added each month.

You can see how powerful the (3,3) meme was since the price went on increasing despite the massive injections of new OHM.

OHM supply has been increasing by 1.5-2Mn per month. Source: Duneanalytics

6. Mental Model Number Six: Compound interest

When new OHM is issued it gets added back to the staking pool. This way there is interest on the interest.

Let’s look at an example.

Assume interest stands at 10% every 8 hours and you stake 100 OHM.

In 8 hours you get 110 OHM.

If you leave it in the staking pool you will now get 10% on your original 100 OHM but you will also get 10% on the extra 10 OHM you made as interest.

This is called compounding.

So after 16 hours you will have

110 + 10% * 100 + 10%*10= 121 OHM. Over 16 hours you have 21%

So instead of 10% + 10%= 20% you have 21% which is like having earnt 10.5% + 10.5%.

If you keep repeating this process, your effective interest rate ends up being much higher than 10%.

In this example your APR is 10% but your APY was 10.5%. If you keep looping this over time you end up with astronomical APYs.

Now every time that new OHM is minted the OHM token is rebasing. Yes you may have astronomical APYs but the token it rebasing.

The golden goose that keeps on giving

On their website the Olympus team share an example explaining how you could still make money despite the increase in supply.

They do the maths for you but essentially their point is that even if the price drops rapidly you still end up making a return on your investment because the interest rate is so high.

Here is one of my examples.

Say you started with 1 OHM and a rebase rate of 0.4%.

Then at the end of one year you would end up with 80 OHM (trust me).

So even if you had invested at the peak price of $1226 and the price has dropped to $44 you still make a profit of 80*$44-1*$1226=$2,294

The problem with the above example is that I have used the PUMA method (Pulled out of My Ass) to find the rebase rate.

In reality the rebase rate changes every 8 hours.

According to this person you would have made a 73% loss if you had invested 3 months ago and 73% profit if you had entered the market 6 months ago.

The top graph shows how you would have made a 73% return if you had invested 6 months ago.

The bottom graph shows how you would have made a 73% loss if you have invested 3 months ago. Source: Dune Analytics

So no, OHM is not a golden goose that keeps on giving.

You need to understand that you don’t really understand what is going on and that the potential upside of the issuance of new OHM is not going to always going to outpace the potential downside in price.

7. Mental Model Number Seven: Of Forks, the high APY craze, scandals and rug pulls

In Defi everything is open for everyone to see.

This means your code if free for anyone to copy and improve upon. Forking refers to the process of taking existing code and building on top of that.

Imagine Olympus is version 1 of the code. Someone can take it and build a version 2 with added features.

Forking is seen as an innate feature of Defi.

In Defi it is widely accepted that anyone can come along and take your code and repurpose it or add features to it.

If they make a better product then so be it.

In any case Defi is about community ownership and decentralization. There is little room for egotistical feelings.

Competition also spurs the original version to do better and build a value proposition that will allow it to create a sustainable moat that will give it a unique advantage against copycats.

In Olympus DAO’s case this moat is the treasury reserve it has built. Others may be able to copy the code and offer higher APYs but it will be a while before they can build as large a treasury as Olympus DAO.

Many of the copycats tried to offer the same thing that Olympus does but just on another blockchain.

The twin innovations of protocol owned liquidity model and high token APYs spurred the creation of over 70 forks in a short amount of time. Some of the most famous of these are

• Wonderland and its TIME token built on Avalanche.
• Redacted Cartel and its BTRFLY token
• Klima DAO and its KLIMA token that aims to tackle climate change

Below are the top OHM forks by market cap.

OHM forks by market cap. Source: coingecko.com

Rug Pulls

Many of the OHM forks started offering even crazier APY in order to attract new users.

The first wave made forks for other chains such as Avalanche Binance Smart Chain and so on.

But many times, founders were just copy pasting the code and adapting it to offer insane and unsustainable APYs in the billions.

Once they had amassed enough capital from naive investors the model would often collapse as people were over-extending themselves to invest in these projects by borrowing money.

Leverage became so popular that a new meme came about: (9,9) signifying that you can borrow to buy more OHM and then borrow again.

After all, this was the golden goose that would keep on giving.

Founders would eventually pull the rug taking or losing all the treasury value.

This cast the whole sector in a bad light. They call it the “DAOpocalyspe”.

Not all of them were rug pulls though.

Let’s zoom in on Wonderland and another problem that emerged.

The Wonderland scandal

Wonderland is an OHM fork that lives on the Avalanche blockchain.

It’s TIME token works in a similar way to OHM but it recently came under a lot of scrutiny.

While many forks have anonymous or pseudonymous founders Wonderland was heavily promoted by Daniele Sestagalli.

Daniele is a key influencer and stakeholder in the Defi space. He has founded popular defi protocols such as Abracadabra Money and its stablecoin, Magic Internet Money, Popsicle

Finance and Wonderland Money.

Daniele also started the concept of a “Frog Nation”, a random meme that rallied people around the mission to #OccupyDefi i.e. to take control from the venture capitalists and other “bad” players in the space who favor centralization and create a truly decentralized ecosystem.

If you have spent any time on crypto Twitter you will have surely come across the Frog nation meme.

In the tweet below Daniel is announcing the launch of a new Olympus fork that he is partnering on with Andre Cronje, the famous developer who founded Yearn.finance.

Frogs Unite ! If you’re in for the tech you can’t miss this one! https://t.co/rKbR3VtsuD

— Daniele never asks to DM (@danielesesta) January 17, 2022

Daniele Sesta launches another Ohm fork with seasoned crypto developer, Andre Cronje

Mirky waters

While Daniele is a public persona, Wonderland’s treasury manager, going by the Twitter handle 0xSifu, was not.

In January 2022 a self proclaimed crypto detective going by the twitter handle @zachxbt announced that he had uncovered the true identity of 0xSifu.

The treasury manager responsible for more than $700M in assets was found to be a convicted criminal by the name of Michael Patryn.

Michael has changed his name multiple times. His real name is Omar Dhanani.

In 2015 he spend a year and half in a US prison for credit card and other financial fraud.

Omar also co-founded a Canadian crypto exchange, QuadrigaCX, which collapsed after its CEO died during a trip to India.

Instead of distancing himself, Daniele owned up and confessed to the crypto community on twitter that he knew about 0xSifu’s past but felt that one’s past should not determine their future.

Daniele has also associated with a number of other shady characters.

One of his partners for his first venture, Zulu Republic, was sentenced for money laundering and other financial fraud.

These associations may have contributed to the sell off that happened across all Defi forks and Olympus as people started feeling more distrustful of these high APY projects.

Many started likening them to Ponzi schemes.

8. Mental Model Number Eight: Ponzinomics vs tokenomics and other criticisms

Supporters of OHM claim that it heralds a new era and that OHM will become the reserve currency of the world.

OHM detractors claim it is a sophisticated Ponzi scheme.

A Ponzi scheme is a fraudulent investment scheme whereby new payers fund the profits for earlier investors.

Unless new users keep coming in the whole scheme collapses.

In his medium article, crypto fund manager, Jordi Alexander, heavily criticizes Olympus and its forks for being nothing other than complicated Ponzi schemes laden with impressive vocabulary

borrowed from economics without any substance behind them.

In a recent podcast he said that OHM’s lofty ambition to become the reserve currency of the world is not realistic.

Both the article and podcast are excellent so I leave it to you to explore the criticisms in more details.

To sum it up though:

Jordi claims that there cannot be a win-win situation without someone else losing. Instead of the (3,3), he says, it is more like (3,3,-6).

It is easy to see the angle that Olympus is a Ponzi. After all its game theory model of success relies on others buying the token and propping the price up for early investors to cash out at a massive profit.

Also, while it aims to be the reserve currency of the world, OHM has no real world use yet. It’s sole use is to stake it and this is what makes it more Ponzi-like.

Another criticism of OHM is that too few people hold keys to its treasury. Apparently only 7 individuals hold keys and it would only require 4 of them to collude and drain the treasury from its funds.

9. Mental Model Number Nine: Reserve currencies and I’ve got your back brother

The introduction to Olympus starts as follows:

“Olympus is a decentralized reserve currency protocol based on the OHM token.”

That’s a mouthful! What on earth is a reserve currency?

If you Google it you get:

A reserve currency is “a strong currency widely used in international trade that a central bank is prepared to hold as part of its foreign exchange reserves.”

You have probably guessed correctly that the reserve currency of the world is the US dollar.

After the second world war, the US held the most gold reserves. Most countries had used up their gold reserves in order to finance the war.

With the US hoarding all the gold and powering the world economy (at some point the US was 50% of world GDP), everyone agreed that it made sense to hold US dollars as a reserve currency.

This would allow countries to influence their domestic exchange rate and transact internationally in a stable currency.

In effect, adopting the US dollar as a reserve currency led to more stability at the time.

In the 70s the US needed to finance the Vietnam war and started increasing the supply of US dollars thus decoupling from gold.

The world continued to hold US dollars despite its inflationary trajectory simple because everyone believes that the US government is going to always pay back it debt.

Olympus’s vision

Many in the crypto cipher punk movement who kicked off with Bitcoin and other cryptocurrencies view governments as pests.

They see Bitcoin, a non-inflationary store of value, as the answer to saving the world from wars and other woes.

In this context it is rather ironic that, through stablecoins, the crypto world has digitized the US dollar and continues to use it as the main unit of account and currency for transactions.

Olympus DAO is hoping to change this.

Just like the US dollar is the centralized reserve currency of the world, Olympus’s founders aspire that OHM will become the decentralized reserve currency of the world.

A basket of decentralized crypto-assets will back the currency.

I’ve got your back brother

The collection of stablecoins is there to back the value of each OHM so that it cannot fall below $1.

Notice that even though OHM aims to become a reserve currency the unit of value against which they want to maintain a floor is the US dollar.

Anyway…if the value of OHM drops below $1 the treasury could start purchasing OHM to prop its price up to above a dollar. However there is no mechanism or guarantee to ensure this will happen.

Actually the Olympus team have said that they won’t do this.

Let’s talk about McDonalds

Take McDonalds as an example.

Imagine that everything goes terribly wrong and the world turns against McDonalds and stops buying burgers. The market panics and the share price of McDonalds drops to 0.

Now, someone out there is going to think: “hang on a moment…McDonalds has a lot of cash and a lot of real estate. This has got to be worth something so the stock value can’t be zero”.

Remember stock market valuations correspond approximately to the value of the company. So if the company has assets such as cash on its balance sheet then its value should reflect that.

In a similar manner OHM advocates expect that crypto markets will react in the same way investors would on the stock market.

Olympus DAO won’t have to buy back OHM when it drops below a dollar. Rather, the market will never let the price fall below a dollar for too long because for each OHM there is at least $1 worth in stablecoins.

This is what they mean when they say that OHM is backed by the risk-free value (the stablecoin value) of their treasury assets.

10. Mental Model Number Ten: OHM’s income generation and B2B services

The unusual thing about Olympus is that even if you are a sceptic thinking this is some kind of ponzi there is an aspect of OHM that is very un-ponzilike.

And that is that Olympus’s treasury is generating revenue. YouTuber Jesse Eckel says he spoke to Olympus DAO and says they are generating about $200Mn in annual revenue. I break it up below.

How does Olympus DAO generate revenue?

Liquidity pool fees

Apart from offering stablecoins in exchange for bonds you can also offer liquidity pool tokens.

Let me do your head in a little more:

Say I have $1000 I want to invest in crypto.

I’ve bought ETH, BTC and some other coins in the past and want to try something new. So I buy $500 worth of DAI and $500 worth of OHM on Uniswap.

I then go to Uniswap’s liquidity pool and offer them my DAI and OHM.

Uniswap gives me liquidity pool (LP) tokens in exchange. My pool of DAI and OHM is sitting on

Uniswap so that if someone wants to exchange DAI or OHM, Uniswap can offer it to them.

Since I am providing liquidity, Uniswap rewards me with transactions fees.

Now instead of keeping the LP tokens I can sell them to Olympus in exchange for a bond. I can then convert my bond in OHM and stake it for an astronomical APY.

Many people have done this.

In fact most people have to the extent that Olympus’s treasury owns more than 99% of OHM-DAI liquidity.

This means that the treasury is earning all those fees from transactions on Uniswap and other exchanges.

The treasury makes about $75M per year from liquidity pool fees

Olympus Pro and bonding as a service

The DAO has B2B or protocol-to-protocol service whereby other projects that don’t own liquidity can issue bonds just like Olympus does.

This way they can buy and own their own liquidity. Olympus naturally takes a cut.

Olympus pro is estimating to bring in around $20Mn this year through this service.

They plan to continue developing this feature to make it permissionless i.e. for it run on its own. Currently there is quite a lot of manual work to bring on new partners.

Yield Farming

The DAO makes about $110M per year from yield farming. This means it is placing its treasury reserves on other protocols in order to earn an interest.

Incubation

A number of projects have launched on the Olympus DAO platform and these are estimated to bring in $50Mn. The incubator side of the business is also expected to grow rapidly over time.

Olympus Odyssey

Apparently a substantial amount of NFT art is exchanged in the very active OHM community.

Their plan is to now build a marketplace to buy and sell NFTs with OHM. They say they have more than 30 partners lined up and expect around 40K ETH to enter the system.

11. Mental Model Number Eleven: sOHM, gOHM, pOHM

Congratulations! You have almost wrapped you head around OHM.

There are a few technicalities you should know about though.

sOHM

When you stake your OHM it lives on the Olympus treasury.

In order to give you some kind of receipt that those staked OHM belong to you the treasury issues sOHM. These mirror your OHM 1:1. When OHM get’s minted you get the equivalent amount of sOHM.

gOHM

When you stake OHM your balance increases dramatically over time due to the high interest rate.

You start off with 1 OHM which say becomes 3OHM which becomes 6 OHM and so on. I am plugging in random numbers.

Similarly the value of your holdings changes from 1 OHM * price of OHM at that time to 3 OHM * new price of OHM etc.

Olympus introduced gOHM to simplify this equation.

If you old gOHM it acts the same way as if you held staked OHM. With gOHM you always hold one gOHM and its value changes according to the new issuance of OHM. So you start with

• 1 gOHM = 1 OHM * price at time 1
• 1 gOHM = 3 OHM * price at time 2
• 1 gOHM = 6 OHM * price at time 3

gOHM is like holding staked OHM. Source: Olympus DAO

gOHM is also the governance token that you can vote with on the DAO.

It is also important to note that you can purchase gOHM on almost any blockchain.

This makes it harder for forks to claim they are the OHM of binance, OHM of Avalanche etc. because gOHM is already available.

In essence, gOHM allows you track the purchasing power of your holdings better.

pOHM

pOHM was the pre-token sale used to raise funds from investors.

Olympus describe in detail how pOHM works and why they needed to raise funds from VCs.

pOHM is like a stock option that vests as supply grows. You can exchange each pOHM for OHM if you give them a dollar.

The dollar is required in order to support OHM being greater or equal to a dollar.

The pOHM will completely vest once the supply has reached 5Bn OHM. This ensures everyone aligns with the long term interest of the project.

Olympus DAO’s Founders

Olympus DAO was founded by a pseudonymous person by the name of Zeus. Thought to be in his early 20s, Zeus is described by his followers as a data nerd with a warm personality.

Zeus spent a couple of years in traditional finance and then later started trading crypto all the way into the 2018 downturn.

During that summer he became fascinated by the proliferation of ideas. He became inspired by a new mechanism called rebasing that was put forward by AMPL, a new coin on the market.

He was also interested in Basis which was an algorithmic stable coin.

Combining these and other concepts he came up with the idea of Olympus and launched in March 2021.

The community of users on Discord and other social media are called Ohmies. They are a very active community with a lot of people taking on roles that they grew into.

The core team consists of about 20 people.

As described before only 7 people have keys and need a majority of 4 to execute a change to the protocol.

The DAO’s vision is to become more decentralized over time.

It’s a wrap: summing up Olympus DAO and OHM

Thank you for following me on this journey to understand OHM.

We have seen how OHM hopes to become the decentralized reserve currency of the world.

Over time Olympus DAO expects that OHM price will stabilize and will become a standard across the crypto industry.

There are some who believe that OHM is a ponzi and other who feel it is a revolutionary construct as important as the printing press.

Summing up the 11 mental steps your mind needs to make in order to understand OHM:

1. Ohm owns its own liquidity. Protocol owned liquidity is above $500Mn today. The risk free value, which is the value of it stablecoins, is around $250Mn. The rest is ETH and BTC and DAI-ETH LP tokens.
2. The treasury grows its assets by issuing bonds. Bonds allows users to buy OHM at a discount after a few days
3. It grows its supply by minting and distributing OHM to stakers. It will continue doing this as long as OHM > $1.
4. Game theory ensures everyone maximize their outcome at (3,3). When everyone stakes, the price stays high.
5. The growth (rebase) in OHM supply is equivalent to a stock split but now quite.
6. Insane APYs result from compounding every 8 hours. This made OHM very attractive to emotional investors who may have not understood the mechanics well. The growth in OHM supply does not always outpace a drop in price.
7. Many copycats emerged. Rug pulls and scandals left a bad taste in people’s mouths
8. Following this many criticized OHM and its forks for being sophisticated Ponzis. In order for someone to win someone else has to lose (3,3,-6).
9. OHM wants to be the new reserve currency of the world
10. OHM generates about $200Mn in annual revenue through multiple revenue streams
11. sOHM is the same as OHM. gOHM is like having staked OHM. pOHM is the stock option issued to early investors.

OHM and Olympus DAO are a fascinating project.

The verdict is not out on wether it will prevail or not but it has heralded a new era in Defi.

If you enjoyed this article you might also want to read my foundational article on how Compound works.

First published here