DeFi is an experiment between currency and value?

DeFi’s dependence on the U.S. dollar forms an intricate network of risks. Is DeFi on a path of creating better/new things, or is it destined to make incremental improvements to traditional finance?

Abstract: DeFi’s dependence on the US dollar forms an intricate risk network. Is DeFi on a path of creating better/new things, or is it destined to make incremental improvements to traditional finance?

DeFi exists in a wide range of areas of innovation and decentralization. In the environment where DeFi is located, anyone can code their opinions into a smart contract, so the experiment is conducted in a high-risk coordinated game. Perhaps the most risky coordination game in human history is currency—especially centrally issued currencies and the governments, organizations, power structures, and policies that govern them.

DeFi has built a system that relies heavily on old currency games. By relying on the U.S. dollar as the reserve currency of DeFi, we associate ourselves with the traditional financial system. So far, DeFi has anchored the value of more than 100 billion U.S. dollars to the U.S. dollar.

DeFi is an experiment between currency and value?

This growth and reliance on stablecoins in DeFi does not seem to be slowing down. In May alone, more than 750 billion U.S. dollars of value was transferred through USDT, USDC, DAI and BUSD chains. Taking away these stablecoins anchored to the US dollar, DeFi has returned to the Stone Age-no obvious escape to safety, no more lending market (high dependence on stablecoins), and loss of one of the most popular farming /Liquidity tools.

DeFi is an experiment between currency and value?

DeFi’s darling DAI, MakerDAO’s stable currency has always been backed by various assets, mainly ETH. Over time, it has increased its risk to the U.S. dollar, using USDC and other centralized stablecoins as the main means of maintaining the exchange rate during economic downturns. Please note that after entering May, MakerDAO added a large amount of USDC to its balance sheet.

DeFi is an experiment between currency and value?

Data source: Dune analysis

The U.S. dollar was once a major participant in the Bretton Woods system and used gold to support its currency, but it has long since abandoned the convertibility of the U.S. dollar and gold and entered our new floating-rate legal tender model. Affected by the Fed’s monetary policy, the US dollar’s policy decisions and risks are directly mapped to DeFi, because it relies on stablecoins backed by the US dollar.

Monetary policy: The management of steps taken by central bank entities to meet a series of targets-inflation targets, growth targets, employment targets, etc.

Some of the risks of anchoring DeFi to the U.S. dollar monetary policy include:

Regulatory pressure : The use of the U.S. dollar needs to be supervised by those who manage the U.S. dollar, especially in the case of strong anchor assets such as USDT and USDC, holding 1 U.S. dollar for every USDT or USDC issued.

Inflation : An average annual CPI of about 2% in the 2010s (the Federal Reserve’s target is 2%).

Foreign exchange risk : The risk of depreciation of assets relative to currencies such as the Euro, RMB or other currencies that participants may use locally.

Counterparty (centralization) risk: In a world that claims to value decentralization, in the case of the Federal Reserve, there is a strong reliance on small groups, and even in the case of Circle and Tether, there is a strong reliance on and attention to small groups The proposition of centralization is in sharp contrast.

Get rid of dependence on central monetary policy.

A new type of currency has emerged in DeFi, trying to solve these problems. Although we may not be able to get rid of our dependence on stablecoins pegged to the U.S. dollar, we can certainly start experimenting with alternatives . If enough people adopt, these alternatives can slowly cannibalize the anchored stablecoin.

Some of these alternatives completely abandon anchoring, incorporate monetary policy into smart contracts, and adopt varying degrees of community governance and decentralization. These are new experiments in monetary policy and value. In this article, we will explore the OHM of Olympus DAO, which is a new experiment on currency, trust, and community governance. This is one of a class of new currency experiments, which became the focus of its strong performance compared to the broader cryptocurrency market during the May/June market downturn (more than 45% of the market value since the May crash).

Note: These are experiments in monetary policy and should be treated as such-any trade/investment in OHM or similar assets bears an incredible set of new and higher risks.

Olympus DAO ($OHM)

OHM is a new attempt by DeFi to create a reserve currency that is not subject to legal currency anchoring. Its lofty goal is to separate itself from the support of the US dollar.

DAO manages the monetary policy of OHM. OHM is a reserve currency currently supported by asset vaults. The most famous ones are DAI, FRAX, OHM-DAI SLP, OHM-FRAX LP and SUSHI rewards from OHM-DAI SLP.

As a reminder, these assets are:

  • DAI : A stablecoin softly anchored to the US dollar, backed by various assets, mainly ETH and USDC.
  • FRAX : partly mortgaged stablecoin , partly algorithm-stabilized stablecoin.
  • LP : Uniswap liquidity position.
  • SLP : Sushiswap liquidity position.
DeFi is an experiment between currency and value?

The DAO has established a rule that for every DAI in the treasury, only one OHM can be issued. If the trading volume of OHM is less than 1 DAI, DAO will buy back and burn it. This does not mean that OHM and DAI/USD are anchored. OHM trades at the value of DAI + market premium, and has shown amazing power in the May/June DeFi price drop.

DeFi is an experiment between currency and value?

However, this pure dollar asset value is far from explaining the whole problem. At present, under the issuance model, the inflation rate of OHM is high enough that even OHM buyers, if calculated in US dollars, even if they buy the absolute apex, they will still have a profit. The current APY of OHM regular investors is about 34,000%, which is lower than the 40,000% at the beginning of this week and the data of more than 100,000% at the beginning of June and the previous months.

DeFi is an experiment between currency and value?

Data source: Dune analysis

How could this APY be so high? Recall our explanation of APR and APY in the previous article. A high APR (reward without compound interest) can become a huge annual interest rate with regular compound interest. OHM has a mechanism that can automatically group pledgers together.

It is important to realize that if the price of OHM rises and the pledger releases the arbitrage to sell OHM, APY will rise and the selling pressure will be relieved accordingly. This feedback loop creates a powerful incentive mechanism for people to keep mortgages.

The token re-adjusts the benchmark every 8 hours, and the mortgager charges ~+0.52% at the current exchange rate. This is about 570% of the APR. This annual interest rate plus the compound interest for each revaluation becomes the current ~34,000%.

  • Users buy OHM or bonds on the open market (discussed later)
  • Users pledge OHM to obtain sOHM
  • sOHM will compound interest every period and automatically callback 3 times a day.
  • Users can get about 34,000% or more of APY from their sOHM (3,3) in 3 callbacks per day or use the sOHM in the loan agreement to conduct transactions, etc.

Note the increase of 100 OHM in the graph below. The flat line is APR and it looks flat because it shows that 100 OHM has grown to more than 1,000 OHM, APR is 600%, and 40,000% APY has grown to 39,000 OHM, with 3 callbacks per day. Bettors automatically receive an annual interest rate of 39,000% instead of 600%, because the automatic compound interest function is built into the betting contract.

APY is currently changing a lot, and may change with the number of OHM pledges and DAO management voting.

DeFi is an experiment between currency and value?

Please note that the DAO has near-term future plans and is beginning to walk out of this period of massive token inflation. They have a short-term plan to reduce APY, but they also increase the lock-up period to increase rewards. However, more examples show the innovative power of monetary policy managed by the DAO. This large-scale APY of course led to the inflation of the token, but the price has remained strong, so despite the decline in asset prices, its market value has risen to historical highs.

Please keep in mind that for every OHM issued, there must be at least one DAI in the vault to form a price bottom line of 1 DAI/OHM.

DeFi is an experiment between currency and value?

Enough token inflation and sufficiently low price deflation led to profits. This is a sign of increased adoption, and as expected, the number of holders continues to increase over time.

DeFi is an experiment between currency and value?

Data source: Dune analysis

Considering that each DAI controlled by DAO can only issue 1 OHM, we can understand how such a high APY/token inflation exists. Therefore, we can calculate how long OHM can last under the current ownership of APY and DAI. At an annual interest rate of 40,000%, before the amount of OHM equals the amount of DAI in the vault, OHM can continue to be issued for 180 days at the current value of the vault. As the size of the treasury increases, this runway will continue to remain stable or increase.

DeFi is an experiment between currency and value?

Data source: Dune analysis

As a reminder, although the risk-free value of the DAI vault is the lower limit of the price of OHM, OHM trades at a certain premium. This premium is determined by the market. Currently, betting on the continued growth of the DAO and its treasury, liquidity commitments, yield expectations, and other advantages of the currency have a high premium. Future management votes can easily vote to grant the token holders/recipients a percentage of the return on the treasury assets, thereby creating more premium incentives.

As mentioned earlier, the current market value of all treasury assets (DAI, FRAX, OHM-DAI SLP, OHM-FRAX LP, OHM, SUSHI) is approximately US$30 million or more. This makes OHM’s market capitalization $175 million and the net asset value (NAV) price close to 6. Due to the current high volatility of issuance volume and price, the price of net asset value (NAV) can easily rise and shrink.

Based on the pure “no risk value” or the value of stable coins such as DAI and FRAX, the vault currently holds 9 million U.S. dollars. In the circulating supply of 450,000 OHMs, this means that 8.6M-450k = 8.15M can be issued before the lower price limit is reached.

Inevitably, you should now ask how the DAO obtains its DAI, FRAX, and liquidity positions? DAO has established a clever binding mechanism. Users can purchase bonds through DAI, FRAX, OHM-DAI SLP or OHM-FRAX LP to receive OHM. These bonds can be purchased at a price lower than OHM, exercised continuously and fully mature in 5 days.

DeFi is an experiment between currency and value?

In some periods, these bonds were purchased at a discount (ROI) of up to 20%. Smart traders can develop proactive strategies around these bonds to benefit both themselves and the DAO. This is a win-win for users and the agreement, usually they float in the range of 2-8% discount, 5 days reload [vest not clear]. The user received a (potential) discounted OHM, and the agreement increased the warehouse of DAI and FRAX + the liquidity of OHM-DAI and OHM-FRAX.

A transaction sample is to see whether the bond investment return rate is greater than the 5-day OHM pledge rate, because the bond is constantly reloading within 5 days.

In addition to holding> 8 million U.S. dollars of DAI and FRAX risk-free value, the agreement also controls over 90% of OHM-DAI SLP on Sushiswap and over 50% of OHM-FRAX on Uniswap. On Sushiswap, this allowed DAO to get 81% APY of DAO in SUSHI rewards + fees, and a lower APY in the pure Uniswap fees of the OHM-FRAX pool.

DeFi is an experiment between currency and value?

Data source: Dune analysis

You can imagine that in the future, 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 projects like OHM is that there are precedents for how to value them. Assets such as bank stocks can use indicators such as asset under management (AUM) and the ratio of price to net asset value, where the net asset value (NAV) describes the total value of the balance sheet, and the price is the total value of the stock. In this case, we can observe the relationship between the circulation of OHM and the risk-free value of the OHM warehouse (balance sheet). In the case that DAO assets have appreciated to a certain extent and continue to hold shares, the total holdings of shareholders can become “risk-free”, which means that the risk-free value of their OHM becomes more than their original investment + premium high.

DeFi is an experiment between currency and value?

Source: Olympus DAO Asfi

The chart is based on many assumptions, the main one being that the OHM vault will continue to grow. The members of the DAO built this model to understand the growth of stakeholders in the context of the treasury’s growing balance sheet.

DeFi is an experiment between currency and value?

Source: Olympus DAO Asfi: Google Sheets

Current and future challenges

The price fluctuation of “stable currency”?

The volatility of OHM prices makes its stability questionable. The asset will of course not claim to be a “stable currency”, but a reserve asset. In other words, reserve assets should not experience large fluctuations. The project is currently in the issuance stage and does not care about price stability. Once OHM withdraws from its large-scale APY issuance stage and shifts to a carefully controlled monetary policy and simple treasury growth model, the premium is likely to shift to stricter transactions.

Reliance on DAI and risks to the U.S. dollar

DAI is highly dependent on USDC as collateral. This move has brought risks to the U.S. dollar, and the U.S. dollar exposure may run counter to DAO’s stated goals. If DAI is still the main asset on the balance sheet, DAO’s risk to the US dollar will continue to increase. Increasing FRAX and continuing to collect SUSHI rewards in SLP is an important step in the right direction for the decentralization of treasury assets. If DAOs are serious about decoupling from the U.S. dollar, they can come up with clever ways to continue to dilute their DAI holdings over time.

Smart contract risk

DAO itself is innovative and has many related smart contract risks. In addition, over time, DAO continues to increase its assets, positions, and more third-party smart contract risk exposure. In the case of fully diversified funds, any single loss on the balance sheet due to smart contract risks should be relatively small.

Governance risk

Any radical community governance measures will bring the risk of coordinated attacks. According to the actual degree of decentralization of fund management, if a sufficient number of holder groups choose to make decisions that are beneficial to their small group on a certain day, they can lead the governance vote in this direction.

OHM and the future of non-pegged currencies

For now, OHM is still a risky bet, that is, non-anchored currencies have growing finances, compound innovations and enthusiastic communities, and have sufficient premiums in the medium term to ensure continued growth and growth in purchases and pledges. participate.

If implemented properly, all the typical added value of DeFi may be applicable to the future of OHM, with some unique added value.

  • A risky asset that is not affected by inflation, regulation or dollar currency pressure
  • Robust lending market with OHM as collateral and borrowing

On Tuesday, OHM was added to its first lending agreement. Rari Capital’s Fuse has added a dedicated OHM pool, where DAI, FRAX, USDC and ETH can be used for borrowing and collateral. Within a day, the OHM pool on Rari’s Fuse has attracted more than $10 million in collateral, making it the second largest pool of Fuse. Users can lend sOHM (Pledged OHM) and use it as collateral while continuing to increase the pledged OHM.

DeFi is an experiment between currency and value?

Data source: Rari Grafana

  • Sources of liquidity for all major DEXs
  • The advantage of composability-unique ways of using bonds, rewards, OHM flash loans, governance, gamification, partnerships, etc.
  • Autonomous monetary policy and codified accountability

Concluding remarks

OHM is a new type of attempt to create a reserve currency and stable currency without relying on the currency anchoring of certain central banks. The DAO has managed to ensure that there are nearly $30 million in assets on the DAO’s managed balance sheet, about $9 million in risk-free value, and more than 4,000 stakeholders participating in the agreement. In the context of the market downturn, the vault continued to show strong growth, bringing the total market value to a record high.

It is fascinating to observe in which direction the DAO takes its growing asset library and how to allocate its funds to benefit the DAO and support 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 flourish in a competitive environment. After all, this is an experiment in monetary policy.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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