A Comprehensive Understanding of the Algorithmic Stablecoin Project Olympus DAO (OHM)

Original Title: 《WTF is Olympus DAO??》

Author: Ben Giove, President of Chapman Crypto

Translation: Gu Yu, Chain Catcher
The current state of DeFi is a profound irony.
Born out of a desire for de-dollarization, DeFi is highly dependent on dollar-pegged stablecoins, with USDT, USDC, and DAI in circulation amounting to $97 billion. While these assets are more stable than Bitcoin or Ethereum, they reintroduce the dependency and risks of the fiat system we are trying to escape, such as inflation and centralized, irresponsible monetary policy.
One project attempting to address this issue is Olympus DAO. Launched in March 2021, the protocol aims to design a stable asset pegged to the dollar.
This is a project you may have heard of, as it boasts extremely high APY, and the (3,3) profile is all over Twitter. It seems a bit strange why the price of a "stablecoin" like OHM is so high.
How does Olympus work? Is the yield sustainable? What exactly is (3,3)? This is what this article will explain and highlight about why Olympus has quickly become one of the most interesting protocols in DeFi.
1. What is Olympus and OHM?
Olympus is a protocol responsible for issuing and managing a fully collateralized, algorithmic, freely floating stable asset, OHM.
1. Fully Collateralized
OHM is fully collateralized because it is backed by a treasury of crypto assets within the Olympus DAO, known as Protocol Controlled Value (PCV).
The DAO has decided that each issued OHM must be backed by $1 of collateral, although this can be changed through governance voting. Initially, this was solely composed of DAI, with 1 DAI backing each issued OHM in the treasury. However, the protocol has expanded the treasury to include other assets such as FRAX, another algorithmic stablecoin, as well as OHM-DAI LP tokens from SushiSwap and OHM-FRAX LP tokens from Uniswap.
There are also positive governance proposals to add ETH and BTC to the treasury. This means that now each OHM is backed by double the value of these mixed assets, not just DAI.

Source: Dune Analytics
As we can see, the current value of the public treasury assets exceeds $70 million, composed of approximately 71.8% DAI, 27.8% FRAX, and 0.4% SUSHI, the governance token of SushiSwap accumulated from yield farming rewards.
While Olympus is likened to a private bank issuing its own notes, another interesting similarity is the Federal Reserve. It is well known that in the fiat system, the Federal Reserve holds various different assets, such as U.S. Treasury bonds, gold, dollars, and foreign currencies, which it uses to help execute monetary policy.
Olympus manages a similar balance sheet, but the currency it manages and issues is fully backed by these assets, and the dollar is certainly not one of them.
2. Algorithmic Control
While Olympus allows the market to largely determine the price of OHM, it does utilize the assets in the treasury to help keep the price as close to $1 as possible.
When OHM trades at a premium, as it does now, the protocol will mint OHM and sell it on the open market to increase supply and drive down the price. If OHM trades at a discount, the DAO will also intervene, as if its value is below $1, the protocol will buy back and burn tokens to reduce supply and increase the price.
3. Freely Floating
Although Olympus conducts open market operations, the price of OHM is largely allowed to "float." This means that the value of OHM is not pegged to another asset (such as the dollar) but is determined by the free market. Because of this, the price in dollars can and has fluctuated, just like any other non-pegged asset, influenced by supply and demand.
Nevertheless, OHM is considered to have a "floor price" or "Risk-Free Value (RFV)," which is equivalent to the amount of assets backing each token. The current RFV of the protocol treasury is equivalent to stablecoins and, to account for risk, is also equivalent to the discounted value of the LP tokens within it.
Currently, the RFV of the Olympus treasury is $21.1 million, with DAI at $14.4 million (68.2%) and FRAX at $6.6 million (31.8%).
As we can see, this means that the trading price of the 771,985 OHM in circulation is over 22 times its RFV.
This indicates that currently, the trading price of OHM is above its RFV. This could be due to several different factors, such as the demand for staking OHM and the future expectations of yields from the treasury assets deployed in DeFi being allocated to OHM holders.
Additionally, since issuing new OHM only requires $1 of collateral, the premium also represents the future amount of OHM that can be minted. For instance, based on the RVF and circulating supply metrics listed above, the protocol could increase the current supply of OHM by 21 times. Of course, this could change, but it means that as the treasury value grows, the ability to issue more OHM will correspondingly increase.
2. Monetary Policy Tools
Now that we understand the characteristics of OHM, let’s delve into how it formulates monetary policy.
As the protocol is still in its early stages, the current goal of Olympus DAO is to increase the supply of OHM. While it aims to eventually have a stable value, and it may seem counterintuitive, the protocol is not immediately committed to achieving this goal. This means that volatility can and should be expected. Of course, it remains to be seen whether the protocol can effectively stabilize the price of OHM.
The protocol uses two key mechanisms to achieve its monetary policy goals: staking and bonding.
1. Staking
Staking is the process by which the protocol issues new OHM.
There are several reasons why OHM holders want to stake their tokens. First, like other systems, it allows them to lock in their share of the total token supply, avoiding dilution. Additionally, the high returns denominated in OHM can help offset the price risks associated with token volatility.
Currently, over 93% of the OHM supply is staked.

Like any other asset, OHM can be purchased on decentralized exchanges such as Uniswap or SushiSwap. Once staked, holders will receive a new allocation in the form of sOHM, along with 90% of the yields generated by the assets in the treasury. OHM rewards are paid every eight hours, and the staker's sOHM balance is recalculated based on the new tokens.
This also means that rewards compound three times a day, which helps explain why Olympus's yields are so high.

While the current APY for staking is quoted at 15,760%, the APR is "only" 507%, a figure more in line with some of the returns we see in DeFi. Although this yield seems unsustainable, Glassnode's analysis from June of this year calculated that, considering the treasury size at that time and the amount of OHM staked, OHM would be able to pay 40,000% APY within 180 days.
What’s going on?
Due to the premium we discussed earlier, Olympus is able to maintain these yields. Since each OHM only requires $1 of backing, and currently each token in circulation has more backing, the protocol can use these excess assets to issue more tokens. This also means that as the treasury value grows, the ability to mint OHM and continue paying high yields to stakers is also increasing.
2. Bonding
Bonding is the process of selling assets to Olympus in exchange for discounted OHM, which vests over five days. Users are motivated to bond when the returns they gain from it exceed the returns from staking. While the protocol initially only offered bonds for OHM-DAI and OHM-FRAX LP tokens, it has since expanded to include pure stablecoins.

Bonding provides several key functions for Olympus. First, it acts as a funnel for the protocol, allowing it to accumulate more assets and increase its treasury. By doing so, it can increase its RFV, thereby increasing the amount of OHM that can be issued and maintaining high yields for stakers.
In addition to helping with growth, bonding also plays a crucial role as it helps ensure the liquidity of OHM indefinitely. It is well known that capital in DeFi is mercenary, constantly shifting in search of the highest yields. As a result, many protocols have a detrimental relationship with their liquidity providers and are often forced to "pay" them to stick around with token incentives, thereby capitalizing themselves in the process.
Through LP bonding, Olympus is able to completely change this dynamic. That’s because it allows the protocol to own and control its own liquidity, with the LP tokens held by Olympus referred to as Protocol Owned Liquidity (POL). This means that the protocol is not incentivizing or hoping third-party providers to continue providing liquidity; quoting Thanos, it can do it itself.
This also means that if the DAO continues to hold LP tokens, there will be a continuous and growing liquidity floor available for permanent use.
So far, bonding has been an effective mechanism for implementing this strategy, as the protocol currently holds 98.5% of the liquidity for the Uniswap V2 OHM-FRAX pair and 99.5% of the liquidity for the OHM-DAI pair on SushiSwap.
It also allows Olympus, as a protocol, to earn the rewards from providing liquidity. For example, as we mentioned earlier, the protocol itself has already earned a significant amount of SUSHI tokens (the OHM-DAI pair is incentivized on SushiSwap) because it holds almost all the liquidity in the pool.
Additionally, the DAO is able to earn the standard trading fees associated with LPs, which also increases the treasury assets and allows them to increase the supply of OHM.
3. Expanding Adoption
Although the system is just getting started and is extremely complex, Olympus has achieved incredible growth in less than five months since its launch. The current market cap of OHM is $464 million, making it the 10th largest stablecoin and the fifth largest in decentralized currencies.

Moreover, the protocol has begun collaborating with other DeFi projects. It has not only partnered with FRAX and SushiSwap but has also recently helped launch a liquidity pool on Rari Capital's Fuse, a protocol for creating independent money markets.
This liquidity pool accepts deposits of sOHM, DAI, FRAX, USDC, and ETH, allowing OHM holders to improve capital efficiency and unlock asset value by borrowing tokens that have generated yields. This has quickly become a popular place for OHM holders to park their funds, as it currently holds over $49 million, accounting for more than 40% of Fuse's total TVL.
Other major catalysts for adopting OHM are on the horizon. For instance, a recent discussion and vote on the Aave governance forum currently supports listing sOHM and allowing it to be used as collateral within the protocol.
1. Ohmies: The Grassroots Federal Reserve?
Of course, it would be remiss not to discuss the community of Olympus DAO, known as "Ohmies."
Ohmies have become one of the most passionate communities in cryptocurrency in 2021, with over 8,200 OHM holders and 11,000 members in the Olympus Discord. On a more intangible level, the "Ohmie culture" has begun to spread within the broader cryptocurrency space, with (3,3) becoming one of the most popular Twitter suffixes, along with .eth, and of course, ?? .
In addition to distributing 50,000 OHM as an "initial Discord product" to early members of the Olympus Discord server and excellent community building, the protocol has some interesting features that may contribute to its ongoing enthusiastic support.
2. Game Theory
There is an interesting game theory behind whether participants will hold OHM, bond, or sell their OHM.

The pairs of numbers in the above image are one way the community can illustrate this, as well as the degree to which each action by participants in the system is beneficial or harmful to themselves and the protocol.
Staking is considered the most beneficial action for all Olympus participants. This is because it helps increase the value of OHM by creating positive buying pressure through the initial purchase of tokens and increasing scarcity due to the supply being locked.
Bonding is also considered net positive, although not as much as staking, as it provides assets to the Olympus treasury, even though it does not directly purchase to increase the value of OHM.
Selling OHM is considered net negative, as it puts downward pressure on the price of OHM, and a price drop may encourage other participants to sell their tokens.
With this in mind, we can understand why (3,3) has become a popular slogan, as it is a way to convey the positive sum benefits of staking and encourage other participants to do the same.
3. Token Holder Governance
Another interesting feature of Olympus that may contribute to the enthusiasm of Ohmies is that it is directly governed by OHM holders.
This distinguishes it from other stablecoin protocols like DAI, FEI, and RAI, as well as centralized stablecoins like USDC or USDT, whose monetary policies are determined by secondary governance token holders or top management.
This means that the actual holders of the currency are the ones who decide monetary policy, rather than the holders of secondary governance tokens. This is a compelling dynamic, as it encourages active participation from a broader range of stakeholders. Additionally, it aligns the incentives of all participants in the system and encourages monetary policy decisions that are in the best interest of the value and stability of OHM.
Finally, it also minimizes the risk of governance token holders changing the protocol, which could help increase the value of governance tokens at the expense of the currency within their scope of authority.
For example, while unlikely, there exists a scenario where MKR holders might vote to increase the DAI stability fee during a bear market (i.e., income redistributed to them through token burn). This would occur at a time when it might not be in the best interest of other stakeholders in the system, as high rates during economic downturns would hinder the use and adoption of DAI and essentially act as a transfer of wealth from DAI holders to MKR holders.
Because OHM holders and the managers of Olympus DAO are the same, this agency problem no longer exists, as any changes to OHM's monetary policy would result in the same benefits or harms for all participants in the system.
4. An Engaging Monetary Experiment
Olympus DAO is an engaging project.
The protocol is attempting to tackle an ambitious problem through its unique design and incentive mechanisms. It has also achieved tremendous success in attracting rapid growth and a fervent community.
While it remains unclear whether it will ultimately succeed in realizing its vision, it is evident that Olympus is a project worth watching.