The Ohmization of DeFi (3,3)
Why I joined OHM, one of the most ambitious financial experiments in DeFi.
Disclaimer: This is no financial advice. I’m an Ohmie.
Is Olympus DAO a Ponzi scheme?
Olympus DAO is currently the most misunderstood DeFi project out there. Its OHM token promises to generate an extremely high APY of over 8,000% when staked. In addition, there is a cult-like following of “Ohmies” with “(3,3)” in their Twitter handles. This makes many question the legitimacy of the project.
But it would be intellectually lazy to immediately write it off as a Ponzi scheme just because of the ridiculously high APY. It would be also extremely arrogant to simply ignore the unusually healthy community of Ohmies with their world-class memeing skills.
So what’s under the hood?
What is Olympus DAO?
Olympus DAO is building a decentralized financial reserve currency called OHM. In contrast to Tether and USDC, OHM tries to become the first decentralized stable-coin that should hold in theory the same purchasing power over a longer time period. This is certainly not the case for the USD as it loses its purchasing power over time because of inflation.
It tries to achieve this by backing every OHM token with one DAI (=1 USD) and not pegging it. It means that the value of OHM can increase over the intrinsic price floor of 1 DAI. This free-floating part is completely market-driven. This is not the case for Tether or USDC because they are pegged to one dollar.
But why would anyone pay more than just a $DAI or USD for an OHM?
The revolutionary thing about Olympus is the introduction of “protocol-owned liquidity”. It means that every OHM that is staked can earn compounding interest through its community-owned and protected treasury in the form of additional OHM.
This treasury can generate a profit for the community by selling bonds of OHM at a discount to induce liquidity. If OHM trades high above its intrinsic value, the treasury will sell bonds of new OHM in exchange for DAI at a discount to increasing the reserve, distributing most of the rewards to its stakers. If OHM trades below its intrinsic value, the treasury will buy OHM with its liquidity, lowering the supply of OHM and theoretically increasing the price of OHM. Here is a graphic that shows this process:
So in general, Olympus's goal is to build a policy-controlled currency system in which the behavior of the token is controlled at a high level by the DAO (decentralized autonomous organization) and game theory mechanics. The game theory mechanics are explained in the following table. Given two actors, all scenarios of what they could do and the effect on the protocol are shown here:
The (3,3) concept where two players decide to both stake their OHM is the optimal outcome of this game, whereas (-3,-3) will decrease the value of the whole system. If you want to learn more about it, you can read the whitepaper of Olympus DAO.
OHM is growing
Within seven months since its launch, OHM has accumulated close to $700 million in assets for its treasury and has eclipsed $4 billion in market cap. It’s also one of the few DeFi projects that owns 99% of its liquidity. In that same period, the Ohmies have built one of the strongest and liveliest communities in crypto governed by a DAO (decentralized autonomous organization).
The current playbook has been played out extremely often: Anything that has never been tried before faces a lot of skepticism and is claimed to be a Ponzi scheme. But this is just noise. All the data shows that OHM is becoming a major force in the DeFi space. Through its protocol-owned liquidity, Olympus DAO is leading the way out of the crypto casino, and straight into crypto civilization.
OHM’s game theory concept incentivizes growth at first, then stability later. High APY equals high incentive for staking which drives higher price and market adoption, more liquidity floods the market and encourages holders to sell, driving the price back down, when price drops increases incentive for higher APY as it returns. A positive feedback loop ensues, driving higher adoption and growth of ecosystem and DAO.
OHMization of DeFi
They say imitation is the highest form of flattery. In crypto, this manifests as forks or copies of a project’s codebase. OHM’s success attracted many followers and its system acts as a template for many forks. Its intelligent system of sharing the protocols liquidity with the strong community and its DAO organization inspires many to launch their specific forks. But OHM system is battle-tested and has the strongest community. According to DeFi influencer mewnyfish, 30 forks of the OlympusDAO codebase have emerged. Two of the most prominent forks are:
- $KLIMA — a currency that is backed by digital carbon credits and build on Polygon.
- $TIME — an OHM fork based on the Avalanche.
However, forking code is easy but copying OlympusDAO’s contributors, massive treasury, and network-effect is hard. When investing in forks of OHM, one should consider the project’s goal. Do they aim to replace Olympus, or create something that lives beside Olympus? If it’s the first case, it will be a difficult task to compete with Olympus as it profits already from healthy network effects. The anonymous founder of OHM “Zeus” addresses this topic in one of his threads:
Recently, Olympus DAO launched OlympusPro a bond marketplace for protocol-owned liquidity. This service can be described as a bond-as-a-service (BaaS) business where other projects pay a fee for this service.
Bonds are a mechanism by which the protocol itself can trade its native token in exchange for assets. Instead of renting liquidity from third parties, it purchases them outright. Once the bond is created, the protocol owns those assets and, like liquidity mining, has distributed new supply.
Since the initial launch of Olympus Pro last month, Ohm bonds have captured $7.5m of liquidity for its first seven partners: Abracadabra, Alchemix, Float Protocol, Frax, Pendle, ShapeShift, and StakeDAO.
OlympusDAO introduced recently the next five Olympus Pro partners: Synapse, Thorstarter, PoolTogether, Inverse, and BarnBridge.
You cannot escape seeing the (3,3)-meme on Twitter. Recently many prominent investor like Kevin Rose (1.5M followers), Chris Sacca (1.6M), and Tim Ferriss (1.7M) used the “(3,3)”-meme in their tweets. Many of their followers must have seen this and asked what it means.
In addition, Mark Cuban’s wallet showed that he bought $486,000 of OHM (439 OHM) on October 28th, adding to his over 1,200 OHM.
How to buy OHM?
Currently OHM isn’t listed on any centralized crypto exchanges like Coinbase, Binance or Kraken. To buy OHM, you need to setup a Metamask and hold some ETH and swap your ETH to OHM on Uniswap or SushiSwap. There is an extremely helpful guide on Twitter by @takegreenpill. Just follow the guide to learn how to buy and stake OHM:
I’m an Ohmie. One of my favorite part is getting into a new space when society still rejects it and pushes back on the topic. The upside is being early before anyone sees the vision not when it’s obvious and mass adoption occurs. But there are still many risks. We are currently in a very strong crypto bull market and there is no certainty how long it will last.
However, because OHM is backed and has an asset-rich treasury, you’re much better protected from the market going down and there’s a way of restocking liquidity that is just way more wholesome than most cryptocurrencies. So, if a bear market occurs the following should theoretically happen:
- OHM prices go down.
- People unstake & sell their OHM
- Bond ROI increases
- Staking rewards increase because of less stakers
- People buy back more OHM through Bonds
- Price of OHM goes back up
Unfortunately, human psychology is not that predictive once a black swan happens and people start a bank run.
OHM is an extremely ambitious financial experiment that uses economic game theory to ensure there is always more in the treasury than is paid out. It sounds almost too good to be true but it’s actually one of the wildest economic experiments ever.
As always Ohmies,