Is Olympus a Ponzi or an innovation? Talking from the master-level incentive design mechanism

OlympusDAO’s incentive model and the strategy to completely control its own liquidity can be called a master-level incentive design. Crucially, this is an encrypted native model, what an out-of-the-box tool should look like.

A few months ago, when we studied the Alchemix discussed in the previous article, we first learned about OlympusDAO and its native token OHM . At that time, on encrypted Twitter, there are more and more (3,3) (a meme representing money-making) projects and their likes that are now ubiquitous. At that time, we thought it was worth investing some capital for risky experiments and bought some OHM and pledged it.

Is Olympus a Ponzi or an innovation?  Talking from the master-level incentive design mechanism

Olympus is an absolutely fascinating story, a good combination of game theory, incentive design and new encryption primitives. To be clear, as always, this article should not be construed as any investment advice and does not constitute a recommendation for any assets. The usual applicable rules in the field of encryption: do your own research, make your own decisions, if necessary, call your friendly banker and they will provide you with payment advice.

For centuries, the market has been regarded as a comprehensive decision of market participants, which is correct. However, the market’s role in creating incentives for specific forms of behavior, especially coordinating positive behaviors, has largely failed.

Price fluctuations in the crypto sector are mainly due to the fact that the liquidity of tokens is in the hands of large traders and market makers (also known as “giant whales”). However, they are considered a necessary evil-otherwise how can the tokens of new projects be liquid, especially when developers want to focus on construction rather than market making?

OlympusDAO’s incentive model and the strategy to completely control its own liquidity can be called a master-level incentive design. Crucially, this is an encrypted native model, what an out-of-the-box tool should look like. This single fact may be more important than any other content in this article. 

To reach the summit, we must start at the foot of the mountain. 

Olympus: Fundamentals

All encrypted projects have a rich document library and readily available reading resources, and Olympus is no exception. The purpose of this article is to highlight specific parts of the project we are interested in, but if you want to really satisfy your own curiosity (you should have it!), you can find the official documentation here.

On this basis, OlympusDAO set out to build encrypted native reserve assets.

Simply think about it, and you can clearly understand the arduous mission they have to face. In the early days of the development of the crypto industry, the “basic” asset was Bitcoin -everything was paired with Bitcoin, and the only place in the market that could be invested with a “neutral” strategy was to go long Bitcoin. The problem is that, unlike what we are used to now, Bitcoin was more volatile at the time.

Then as the Ethereum ecosystem began to flourish , stablecoins appeared-whether they were centralized (such as USDT or USDC ) or decentralized (such as DAI ), they all provided an exit valve for the crypto world. The position can be withdrawn and converted into a “stable” asset, which is pegged to the value of the U.S. dollar. 

The emergence of stablecoins promoted the Cambrian explosion of cryptocurrencies, but the problem that is always lurking behind the scenes is the risk associated with the U.S. government, because the potential value (support, peg, or other) depends on the U.S. dollar or its equivalent. In fact, with the increasingly frequent small-scale conflicts between stablecoin suppliers and regulators, this risk has now surfaced.

The team behind OlympusDAO (which is still anonymous so far, it can be called a strong evidence of the absolute glory of the decentralized network) has a unique vision: to create a crypto-native reserve asset that is given by pure decentralized assets instead of legal assets support. In other words, their envisioned future is not a “real asset”-the base currency will not be the US dollar, and the monetary policy decisions of the Federal Reserve (or any other central bank that issues fiat currencies) will not directly affect its prices.

In other words, they want to assemble an institution equivalent to a crypto central bank from scratch, accumulating a variety of high-quality crypto native assets in their asset reserves, which can be used to support the value of the reserve assets issued by the agreement-their native generation Currency, OHM.

This sounds like a great idea, although the problem is obvious: if OHM is a reserve asset, and it needs to be stable, then why doesn’t this crypto token get sold as often as other tokens?  

Secret Recipe: Game Theory

Game theory allows us to discuss for many hours, and it can hardly touch the tip of the iceberg of the most fascinating part of behavioral economics. Anyone can study this field. The key thing we need to know here is Olympus’ application of the principles of game theory, to say the least, is very clever.

As one can imagine, the language of game theory is very concrete, so when needed, we will try to provide simple explanations of how specific terms differ from their daily usage. First, let’s look at the concepts of “strategy” and “equilibrium”.

The colloquial “strategy” always implies some kind of complexity, such as military invasion or company acquisition. In contrast, the “strategy” used in game theory is a simple and clear course of action. For example, in the game of rock-paper-scissors, the strategy can be: “Play 5 times first, then randomly choose rock or scissors”, “Put the rock first, then the scissors, and then the cloth, always in this order”, or “after the opponent’s cloth, the next time I will always produce the cloth.” Of course, most people will not play the game this way, but economists (and game theorists) tend to simplify. 

Similarly, “equilibrium” in spoken language often indicates a certain state of balance. In game theory, “equilibrium” is actually much more specific: in this state, all participants in the game have no incentive to change their strategy.

To figure out these two terms, the game theory result required to construct reserve assets is very simple: everyone must buy, and everyone else will buy; no one should sell, because if they sell, they will lose huge profits.

Olympus’ goal from the beginning was to build an incentive mechanism so that anyone who participated in this “game” prospect would have a strong incentive to buy, pledge, and most importantly, always insist on holding OHM generation regardless of market conditions. currency.

If they can really do this, OHM will be able to establish a reputation as a stable and reliable reserve currency in the cryptocurrency world. After all, the reliability of reserve assets depends on the trust of its holders, and trust can only be built over time.

This is the wonderful feature of the Olympus mechanism design: the pledge reward set exceeds the potential dollar loss caused by market fluctuations over a period of time, and the incentive structure effectively eliminates all reasons for any pledger to sell his pledge OHM. This was achieved in the early days of OHM by offering a ridiculously high 150,000% APY pledge reward, which is currently around 8,167% as of this writing. In other words, buying and staking OHM at the current price of OHM can basically guarantee the pledger a profit in USD for one year, unless the value of OHM tokens falls by more than 98.8%. 

We provide some figures for this: Based on the current OHM price of around US$881, the 1-year “break-even” price of pledged OHM is US$20.20. In other words, at the current price, if you persist until the end of the OHM distribution phase (currently in progress), if the price is higher than $20.20 after 312 days, you will get a profit in USD.  

What we need to study next is what are the crypto assets in the Olympus vault-in other words, what are the reserve assets that provide value support for each OHM. These data can be obtained at any time on their dashboard.

But let’s look at some numbers first-the current market value of OHM’s treasury assets is $407 million. 

Is Olympus a Ponzi or an innovation?  Talking from the master-level incentive design mechanism

Among them, excluding assets such as ETH and SUSHI that fluctuate in the market value of the U.S. dollar , only stable coins such as DAI and FRAX are retained. The value of “risk-free assets” is close to US$107 million.

Is Olympus a Ponzi or an innovation?  Talking from the master-level incentive design mechanism

The capped supply of OHM is 3,342,369 (of which 2,13,676 are currently issued), and the “book value” of the maximum diluted market price of each OHM is US$121.20, of which the value of US$32.07 is supported by stable currency assets.

Comparing with the $20.20 “break-even” price of OHM pledge for one year, the incentive temptation of OHM is obvious. Unless all cryptocurrencies are destroyed, it is a very reasonable choice to hold and pledge OHM: OHM pledger’s income The rise is almost guaranteed.

But the premium relative to the net asset value (NAV) is almost a crazy 9 times premium! On the one hand, the calculation of the break-even point is based on the current market price of OHM, which includes the premium, and takes into account the potential risk of the price falling thereafter. In addition, the goal of OlympusDAO is not just to create a static reserve asset pool. In fact, this asset pool can generate income, incurring expenses from the assets it collects.

In the final analysis, if someone thinks that cryptocurrency will go to zero, because it will eventually evaporate from the world, only then will OHM be worthless in his/her eyes.

OHM aims to become a purely encrypted native reserve asset. Therefore, in order to become a member of Olympus, the premise must be the belief that encryption technology will continue to exist, which is a necessary prerequisite.

So far, we have talked about the ingenious incentive design of the project, how to make OlympusDAO essentially incentivize OHM holders to not only purchase OHM, but also pledge and continue to hold OHM, regardless of market fluctuations.

Returning to the theoretical language of game theory, knowing that other pledgers have little motivation to make any strategy changes (where the pledgers choose to pledge and hold OHM), an equilibrium strategy is achieved. The result is a win-win, or a typical return symbol (3,3).

But the beauty of Olympus is more than that. Next comes the really interesting part.

Another big advantage: own liquidity

OlympusDAO is building itself as the central bank of the cryptocurrency world. Attracting a stable group of “diamond hands” coin holders, holding OHM and having zero motivation to sell, is one aspect of this mechanism. But the “diamond hand” caused another problem: insufficient liquidity.

If no one wants to sell, the asset has no liquidity and is of little use. Therefore, it is necessary to create liquidity for OHM in order to conduct transactions. However, in the encryption field, creating liquidity usually means handing over OHM to market makers. Incentive mechanisms usually mean that they only provide liquidity when they are profitable, and choose to withdraw liquidity when the project needs liquidity the most. Vicious price fluctuations of tokens. Most importantly, there is no final buyer. All of these will seriously weaken the ability of OHM to establish the status of reserve assets.

The solution OHM created for this is to have its own liquidity. It is achieved through the “bonding” mechanism, that is, buying liquidity tokens representing shares in the liquidity pool of large automated market makers (mainly Sushiswap), in exchange for selling OHM in the total nominal issuance at a discounted price Tokens, the latter can be unlocked in installments over a short period of time. In this way, OlympusDAO eventually owns most of the liquidity pool of OHM (mainly the OHM/DAI stablecoin liquidity pool on Sushiswap).

The end result is that the OlympusDAO protocol itself becomes its own market maker, which can promise to provide liquidity regardless of market conditions and ultimately reduce the volatility of its token price. If a liquidity provider (LP) sells its LP tokens, it will be compensated for buying OHM at a discount and enter the same incentive structure as any other OHM pledger. In this case, the benefits are a win-win situation-sellers of LP tokens can buy OHM at a discount relative to the market price, and the agreement obtains liquidity and assets for their treasury, which further increases the net value of each OHM’s underlying assets.

These LP tokens further generate revenue for the agreement, as they receive most of the market maker commission from the transaction. OlympusDAO owns 99.66% of all liquidity in the OHM/DAI currency pair. In the past 7 days, OHM/DAI has been the currency pair with the largest transaction volume on Sushiswap, creating considerable revenue for OlympusDAO and further increasing its total reserves The value of the asset:

Is Olympus a Ponzi or an innovation?  Talking from the master-level incentive design mechanism

Solves a wider problem

The whole concept of “agreement has liquidity” has spawned a revolution for many projects striving to keep their token prices stable. The founders of many projects are developers, not traders, and have to deal with the anxiety caused by price fluctuations (and subsequent community morale), which is a big headache for them.

However, they also face the double-edged sword that Olympus has to deal with: how do you deliver tokens to as many users as possible at the same time, ensure sufficient transaction liquidity, and ensure that market makers are committed to providing liquidity when needed most Sex, rather than divestment and run away at the most critical time?

To some extent, the pledge project has been implemented for a long time, although in the inevitable cryptocurrency downturn, the pledge can only relieve some of the selling pressure. In fact, what is controversial about pledges is that liquidity will be removed from the market during a downturn, which will in fact aggravate the price volatility of encrypted assets.

Therefore, although everyone is excited about earning sky-high APY through OHM pledge, we actually believe that the biggest master design of the project lies in the combination of pledge and bonding. After proving the success of this model (staking + Bonding), they recently launched Olympus Pro, a platform that allows other protocols to copy the pledge + Bonding settings and provide them as a service. Other protocols only need to pay for it. This is called “agreement as a service”.

This means that other projects can also take advantage of the benefits of the Olympus model: control their own liquidity, earn fees by making their own markets, and ensure that their tokens are always liquid, especially on DEX.

There are currently five other DeFi agreements in cooperation with Olympus Pro: Abracadabra, Alchemix, Float, Pendle and StakeDAO. We think this list will become longer in the future.

For Olympus itself, it is an understatement to say that they are developing “fast”. From the time we started writing this report to the completion of the report, Olympus launched a new version of the contract, and its development focus is on Bonding, which is not surprising. The OHM proceeds received by Bonder can now be automatically pledged immediately, which means that any Bond purchased at a discounted price will automatically exceed the pledge. The more bonding, the more liquidity there will be, and the greater the control of the agreement over liquidity.

In addition, they have added the ability to tokenize fixed-term Bond into NFT (yes, NFT is not only applicable to JPEG images), and also allow fixed-term Bond to be tokenized into ERC-20 (fungible token) , The latter creates a more liquid market for Bond itself, somewhat similar to the traditional bond market: Bonds in operation with similar maturity dates are basically equivalent to alternative assets that may be adjusted slightly, and specific maturity dates The fixed-term Bond is usually not replaced by other maturity bonds.

Similar but different. Decentralized Bond trading instead of over-the-counter (OTC)? why not.

Non-physical assets (our favorite word right now)

Can this new method of managing incentives structurally change the market dynamics of cryptocurrencies? There is such a possibility. By ensuring that a good liquidity distribution can be guaranteed in all price ranges, the risk of severe volatility of encrypted assets can be reduced, which can greatly reduce the range of encrypted prices that characterize price fluctuations.

But one of the basic points we want to emphasize is that although such a solution seems to have obvious effects in hindsight, it is actually impossible to implement it in the traditional financial world. Traditional listed companies can repurchase shares and provide incentives for holding stocks (such as dividends and ex-dividend dates), but unless each listed company starts to establish its own internal trading platform to manage the volatility of its stocks, the stock price To a large extent, it is dominated by the market.

In addition, where is the boundary between “stability” and “market manipulation”? In traditional finance, stabilizing prices after an initial public offering (IPO) is usually allowed to keep prices stable for a limited period of time, but after this time window is over, if similar operations are performed again, it will trigger public criticism And regulatory concerns. In the cryptocurrency world, the use of automated market makers such as Sushiswap instead of order book-based market making enables the agreement to ensure liquidity (thus suppressing price volatility) without the need to actively make discretionary quotations on prices. In the early days of encrypted DEX as a solution to the lack of liquidity, it turned out to be an elegant, passive, and even profitable means of managing the liquidity of tokens.

In addition, the creation of (not completely similar) fixed-income instruments with a fixed maturity date can be traded with high liquidity through decentralized traders, so that the price remains unusually stable, which is almost impossible in the traditional world. possible. Consider the scene in the movie “Big Short”. As traders begin to panic and withdraw liquidity, bond discounts become more and more aggressive in a day. One can only hope that there is a mechanism that can protect the situation from becoming worse. So chaotic (although equally unprofitable), can persist in providing liquidity until the end.

In our view, the above mechanism design is just the beginning of an innovative method, and this method can only appear in the crypto world. These methods are not only non-physical assets (for example, not just encrypted versions of assets that exist in traditional finance), they are also cryptographic primitive solutions built on encrypted native systems. #OnlyInCrypto

We can’t wait to see what great ideas the geniuses in the encryption field can come up with in the coming months and years.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/is-olympus-a-ponzi-or-an-innovation-talking-from-the-master-level-incentive-design-mechanism/
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