Author | Luke Pose
DeFi exists in a broad spectrum of innovation and decentralization.DeFi exists in an environment where anyone can program their views into a smart contract, so experiments are battle-tested in high-stakes coordination games. Perhaps the highest-stakes game of coordination in human history is that of currencies—specifically, centrally issued currencies and the governments, organizations, power structures, and policies that govern them.
DeFi has built a system that relies heavily on the old money game. By relying on the U.S. dollar as the reserve currency for DeFi, we tie ourselves to the traditional financial system. so far,DeFi Already Pegged Over $100 Billion in Value to the U.S. Dollar。
This growth and reliance on stablecoins in DeFi does not appear to be slowing down. In May alone, more than $750 billion in value was transferred on-chain via USDT, USDC, DAI, and BUSD. Take away these USD-pegged stablecoins, and DeFi is back to the stone age - no apparent flight to safety, no more lending markets (high reliance on stablecoins), and loss of one of the most popular farms /liquidity tools.
Data source: Dune Analysis
Data source: Dune Analysis
The U.S. dollar, once a major player in the Bretton Woods system, backing its currency with gold, has long since abandoned its convertibility into gold and into our new floating rate fiat currency model. Influenced by the monetary policy of the Federal Reserve, the policy decisions and risks of the US dollar are directly mapped to DeFi because it relies on stablecoins backed by the US dollar.
Monetary Policy: The steps taken by a central bank entity to manage to meet a set of objectives - inflation targets, growth targets, employment targets, etc.
Some of the risks of anchoring DeFi to USD monetary policy include:
Regulatory pressure:The use of USD requires the supervision of those who manage USD, especially in the case of strongly anchored assets such as USDT and USDC, where every USDT or USDC issued holds 1 USD.
inflation:CPI averaged around 2% per annum in the 2010s (Fed target of 2%).
Foreign exchange risk:The risk of assets depreciating against currencies such as Euro, Chinese Yuan or other currencies that participants may use locally.
Counterparty (centralization) risk:secondary title
Get rid of dependence on central monetary policy.
A new class of currencies has emerged in DeFi to try to solve these problems. While we may not be able to wean ourselves off our reliance on dollar-pegged stablecoins, we can certainly start experimenting with alternatives. If enough people adopt, these alternatives can slowly cannibalize the pegged stablecoin.
Some of these alternatives forego pegs entirely, codify monetary policy into smart contracts, and employ varying degrees of community governance and decentralization. These are entirely new experiments in monetary policy and value. In this post, we'll explore Olympus DAO's OHM, a new experiment in money, trust, and community governance. It's one of a new class of currency experiments that came into focus due to its strong performance compared to the broader cryptocurrency market during the May/June market downturn (more than 45% in market capitalization since the May crash).
secondary title
OlympusDAO ($OHM)
OHM is a new attempt by DeFi to create a reserve currency unencumbered by a fiat peg, with the lofty goal of detaching itself from the backing of the U.S. dollar.
The DAO manages the monetary policy of OHM, a reserve currency currently backed by a treasury of assets, most notably DAI, FRAX, OHM-DAI SLP, OHM-FRAX LP and SUSHI rewards from OHM-DAI SLP.
As a reminder, these assets are:
DAI: A stablecoin soft-pegged to the U.S. dollar, backed by various assets, mainly ETH and USDC.
FRAX: A partially collateralized stablecoin, partially algorithmically stabilized stablecoin.
LP: Uniswap liquidity position.
SLP: Sushiswap liquidity position.
The DAO has established a rule that only 1 OHM can be issued for every 1 DAI held in the vault. If the transaction volume of OHM falls below 1 DAI, the DAO will buy it back and burn it. This does not mean that OHM is pegged to DAI/USD. OHM trades at DAI's value + market premium and has shown incredible strength in the May/June DeFi price drop.
Data source: Dune Analysis
Data source: Dune Analysis
How can this APY be so high? Recall our explanation of APR and APY in the previous article. A high APR (reward without compounding) can turn into a huge APR when compounded regularly.OHM has a mechanism to automatically group stakers together。
It is important to realize that if OHM prices rise and stakers unwind and sell OHM, APY will rise and selling pressure will ease accordingly. This feedback loop creates a strong incentive for people to keep staking.
Tokens rebase every 8 hours and stakers receive ~+0.52% at the current exchange rate. That's about 570% APR. This annual rate, compounded with each revaluation, becomes the current ~34,000%.
User buys OHM or buys bonds on the open market (discussed later)
Users pledge OHM to obtain sOHM
sOHM will compound interest every period and automatically call back 3 times a day.
Users can earn ~34,000%+ APY on their sOHM (3,3) on 3 pullbacks per day or use that sOHM in lending protocols, trade, etc.
Note the growth of 100 OHM in the graph below. The flat line is the APR and it looks flat as it shows 100 OHM growing to over 1,000 OHM with an APR of 600% and 40,000% APY growing to 39,000 OHM with 3 pullbacks per day. Bettors automatically receive 39,000% APR instead of 600% APR due to automatic compounding built into the betting contract.
APY is currently highly variable and may change with the amount of OHM staked and DAO governance votes.
Note that the DAO has near-term future plans to start coming out of this period of massive token inflation. They have plans to lower APY in the short term, but also increase the lockup period to increase rewards. Yet more examples show the power of DAO-managed monetary policy innovation.This massive APY has of course led to inflation of the token, but the price has remained strong, so despite the asset's falling price, its market cap has risen to all-time highs。
Please remember that for every 1 OHM issued, there must be at least 1 DAI in the treasury, forming the price floor of 1 DAI/OHM.
Data source: Dune Analysis
Data source: Dune Analysis
Data source: Dune Analysis
Data source: Dune Analysis
As a reminder, while the risk-free value of the DAI vault is the price floor for OHM, OHM trades at a certain premium. This premium is determined by the market. Betting on the continued growth of The DAO and its vaults, the promise of liquidity, yield expectations, and other advantages of the currency carry a substantial premium right now. Future governance votes could easily vote to award a percentage of the yield on the treasury's assets to token holders/recipients, creating more premium incentives.
As mentioned, the current market cap of all vault assets (DAI, FRAX, OHM-DAI SLP, OHM-FRAX LP, OHM, SUSHI) is ~$30M+. This gives OHM a market capitalization of $175 million and a price of nearly 6 in net asset value (NAV). With issuance and prices currently highly volatile, the price of Net Asset Value (NAV) can easily rise and fall.
In pure "risk-free value," or the value of stablecoins like DAI and FRAX, the vault currently holds $9 million. In a circulating supply of 450,000 OHM, this means 8.6M - 450k = 8.15M can be issued before the price floor is reached.
Inevitably, you should now be asking how the DAO gets its DAI, FRAX and liquidity positions? DAO has built an ingenious binding mechanism. Users can receive OHM by purchasing bonds through DAI, FRAX, OHM-DAI SLP or OHM-FRAX LP. These bonds can be purchased at a discount to OHM, are continuously exercised and fully mature in 5 days.
During certain periods, these bonds were purchased at a discount (ROI) of up to 20%. Savvy traders can develop aggressive strategies around these bonds, benefiting both themselves and the DAO. This is a win-win for users and protocols, usually they float in the range of 2-8% discount, 5 days reload [vest not sure]. Users receive (potentially) discounted OHM while the protocol increases the treasury of DAI and FRAX + the liquidity of OHM-DAI and OHM-FRAX.
A trade sample is to see if the bond's ROI is greater than the 5-day OHM pledge rate, as the bond is constantly reloaded over the 5-day period.
Data source: Dune Analysis
Data source: Dune Analysis
You can imagine a future where The DAO will continue to actively manage and allocate its balance sheet, supporting OHM with various token allocations and strategies.
One of the interesting parts of a project like OHM is that there is precedent for how it is valued. Assets such as bank stocks can use metrics such as assets under management (AUM) and the ratio of price to net asset value, where net asset value (NAV) describes the total value of the balance sheet and price is the total value of the stock. In this case, we can observe the relationship like OHM's circulation and the risk-free value of OHM's treasury (balance sheet). When DAO assets appreciate to a certain extent and continue to hold shares, the total holdings of shareholders can become"no risk"image description
Source: Olympus DAO Asfi
image description
Current and Future Challenges
Current and Future Challenges
Price volatility for 'stablecoins'?
The volatility of OHM's price calls into question its stability. The asset would of course not claim to be a "stablecoin" but rather a reserve asset. That is, reserve assets should not experience large fluctuations. The project is currently in the release stage and does not care about price stability. Once OHM exits its massive APY issuance phase and moves to a carefully controlled monetary policy and simple treasury growth model, the premium will likely shift to tighter deals.
Reliance on DAI and Risk to USD
Smart Contract Risk
Smart Contract Risk
DAOs are inherently innovative, with many associated smart contract risks. Additionally, the DAO continued to add assets, positions, and more exposure to third-party smart contracts over time. With adequate diversification of funds, any single loss on the balance sheet due to smart contract risk should be relatively small.
governance risk
Any aggressive community governance initiative carries the risk of a coordinated attack. Depending on how decentralized fund management actually is, if a sufficient group of holders chooses to make a decision in favor of their small group on a given day, they could dominate governance votes in that direction.
OHM and the future of unpegged currencies
For now,OHM remains a risky bet that a non-pegged currency with growing treasury, compound innovation, and passionate community holds enough premium in the medium term to warrant continued growth and participation in buying and staking。
If executed properly, all the typical value-adds of DeFi may apply to the future of OHM, with some unique value-adds.
A risk asset unaffected by inflation, regulation, or dollar currency pressures
Robust lending market with OHM as collateral and borrowing
image description
Liquidity source for all major DEXs
Advantages of composability - unique ways to leverage bonds, rewards, OHM flash loans, governance, gamification, partnerships and more
text
Data source: Rari Grafana
conclusion
OHM is a new class of attempts to create reserve and stable currencies without relying on a currency peg to some central bank. The DAO has managed to secure nearly $30 million in assets on the DAO's managed balance sheet, around $9 million in risk-free value, and over 4,000 stakeholders participating in the protocol. Amid the market downturn, the vault has continued to show strong growth, bringing the total market capitalization to an all-time high. It will be fascinating to watch which direction the DAO takes its ever-growing pool of assets, and how its funds are allocated to benefit the DAO and back its reserve currency, OHM. It remains to be seen whether the flexibility of this decentralized currency experiment with a lot of built-in governance can thrive in a competitive environment. After all, this is a monetary policy experiment.
Original link: https://insights.glassnode.com/defi-uncovered-experiments-in-money-and-value/
