Olympus DAO – New DeFi Archetype or Elaborate Ponzi Scheme?

Olympus DAO – New DeFi Archetype or Elaborate Ponzi Scheme?

In 2021, Decentralized finance (DeFi) grew into a multi-billion industry and opened advanced financial instruments to nearly everyone in the world. It’s obvious that this financial niche is getting more traction, and it’s unlikely that this trend will recede.

That said, DeFi comes with its own set of weaknesses, such as its dependence on fiat-pegged stablecoins. These cryptocurrencies are notorious for being centralized and quite opaque regarding their backing reserves. And while there have been attempts at creating algorithmic (decentralized) stablecoins in the past to alleviate this issue, these projects have been destined to fail. Or so it seems, until now.

In this article, we will take a look at Olympus DAO, a platform that attempts to become the new DeFi paradigm through its algorithmic cryptocurrency OHM. To provide you with an honest Olympus DAO review, we will first discuss the current state of DeFi and its shortcomings. Then, we thoroughly analyze Olympus’ mechanisms to see whether this project’s promises are just a pipe dream, or they can genuinely help us overcome some of DeFi’s biggest challenges.

The Current State of DeFi

DeFi revolutionized finances as we knew them. Thanks to smart contracts, we have managed to decentralize some of the most advanced financial products that were previously only accessible through the banking system. Lending, borrowing, trading, and generating interest on capital – all have become widely available, as long you have an internet connection.

Consequently, the advent of DeFi has been quite a success. Individuals embraced it for the freedom it provides, but also for the sometimes less-than-believable ROIs. And of course, with huge profits, came the scammers, exploiting protocol’s weaknesses and investor’s gullibility.

However, the weaknesses of DeFi go beyond the simple rug pull scams and protocol vulnerabilities. The entire ecosystem has become overly reliant on two unpredictable elements – stablecoins and liquidity providers.

The Stablecoins Dilemma

Stablecoins have been controversial since their beginnings. Supposedly backed by an equal amount of physical assets, these cryptocurrencies serve as the perfect on-and-off ramp to the crypto markets. They are usually pegged to the USD and offer investors an ideal tool to shield themselves from the volatility of cryptocurrencies. At the same time, they allow them to remain in the ecosystem and avoid costly transfers to fiat.

That said, only a handful of stablecoins issuers have been completely upfront about their holdings. And without proper regulation, we will never be certain whether the number of coins issued is really equal to the reported backed assets. Tether, in particular, the largest stablecoin issuer by market cap, has been notoriously vague about its reserves.

Many large centralized exchanges heavily rely on Tether for most of their trading volume. Additionally, decentralized exchanges and lending platforms have countless liquidity pools paired with USDT. So, it makes you wonder what would happen if we suddenly found out that there’s no value behind each USDT.

An event where Tether becomes worthless could be a death sentence to a large portion of the crypto markets. Legitimate projects that are relying on these assets could simply disappear. People and corporations will lose billions of dollars, which will trigger an inevitable and heavy involvement from governmental regulative bodies. Simply put, it could shake the very foundations of the blockchain industry itself.

Consequently, distancing ourselves from stablecoins would be the ideal solution. But is it still possible? They have become so easy to deal with, so convenient. And convenience can be hard to shake off once we’ve accepted it in every facet of our lives.

Main Issues With Liquidity Pool Providers

The second issue that is plaguing the DeFi ecosystem is its overreliance on mercenary liquidity providers (LPs). You see, to be able to provide their services, decentralized financial platforms need liquidity. To receive liquidity, they provide incentive mechanisms through rewards from transaction fees and LP tokens proper to each platform. To take advantage of these benefits, LPs lock funds into smart contracts and put them at the disposal of the platform.

When a new DeFi protocol opens, incentives are usually very high in order to attract a high amount of liquidity. Then, the smart contracts reduce the yield once there’s enough liquidity in the protocol. History, however, has shown us that this mechanism can act as a double-edged blade.

These schemes can effectively attract a high number of liquidity providers and increase the total value locked (TVL) considerably in a short amount of time. That said, they also attract the wrong type of LP. Тhese so-called mercenary yield farmers withdraw their liquidity as soon as the protocol lowers the reward scheme yield.

They then sell their LP rewards tokens, crash the price and leave the project’s real supporters holding worthless bags of LP coins. The platform, on the other hand, loses its liquidity and becomes unable to provide its services, drawing prices of the tokens even lower. It’s a vicious circle that has become the demise of many DeFi platforms, and is still afflicting well-established DEXes.

Olympus DAO tries to resolve both of these issues through a rather unique mechanism that rallies on a treasury-backed algorithmic token. That’s certainly a mouthful, so let’s try to analyze it in detail.

What Is Olympus DAO?

Released in February 2021, Olympus DAO is a blockchain project that creates a financial ecosystem relying on a non-pegged, stable cryptocurrency.

With their OHM token, they wish to create a reserve currency that flows together with the market’s supply and demand. In the long term, Olympus’ goal is for people to use OHM as a global unit-of-account and a primary means of exchange in DeFi.

To achieve this, OHM tokens are backed by other decentralized assets such as DAI, FRAX, and LUSD that are kept in the Olympus DAO treasury. A critical difference with other stablecoins is that, while each OHM token is backed by at least 1 DAI, it isn’t pegged to it. This means that OHM is not equal to 1 DAI, its value will instead be superior or equal to it.

Additionally, the protocol doesn’t have an upper limit price for OHM. This means that it can become a tool for accumulating wealth, storing value, and hedging against inflation. This is in contrast to pegged stablecoins, which will always be worth 1 unit of whatever fiat currency they are pegged to. If the value of the dollar falls, so will the value of the pegged stablecoin. This isn’t the case for OHM, or at least, in theory.

To understand how all of this works, we need to have a closer look at the elements that build up the Olympus DAO protocol.

Olympus DAO Architecture – How Does It Work?

In a nutshell, Olympus DAO relies on three mechanisms to keep the price of OHM in check and provide investors incentives for participating in the protocol. These are:

  • The bonding mechanism which allows the Olympus DAO to accumulate its own liquidity.
  • The staking of OHM tokens which rewards the protocol’s users and serves to adjust the supply of OHM tokens.
  • Protocol managed treasury which serves as a vault to hold all the assets accumulated by the protocol through bonding.

To assess whether Olympus DAO is a scam or not, we need to deconstruct each of these in detail.

How Does Olympus DAO Bonding Work?

The goal of the bonding mechanism is to create liquidity for the Olympus DAO treasury and provide backing for every OHM token. Through bonding, users are able to purchase OHM tokens directly from Olympus, at a discount from the open market price. At the same time, bonding triggers the minting of new OHM tokens that are stocked in the treasury and distributed to stakers as a reward.

Users can bond assets such as DAI, FRAX, or even liquidity pool reward tokens such as OHM-DAI rewarded by Sushiswap. In the latter case, while Olympus DAO doesn’t directly receive liquidity in its treasury, it receives ownership of its liquidity pool positions.

After a vesting period of 5 days, users receive their OHM tokens. The goal of the discount is to provide an immediate profit opportunity to bonders, as they can sell their OHM on the open market for a higher price immediately after receiving them. Moreover, they can benefit from upwards market movement, and sell OHM as the price increases.

However, the bonder loses out if the market price of OHM goes below the discounted price during the vesting period. Consequently, Olympus DAO considers bonding to be an active investment strategy. It requires you to closely follow the markets and take advantage of every opportunity you have to make profits.

How Does Staking on Olympus DAO Work?

Staking, on the other hand, is supposed to be the long-term play of the Olympus DAO platform. Users can stake their OHM tokens on the protocol and receive rebase rewards in the form of sOHM tokens.

OHM tokens remain locked within the protocol, and users receive an equal amount of sOHM in their wallets. In the meantime, users can use sOHM just like any other cryptocurrency and trade them on DEXes such as Uniswap.

However, there’s a huge incentive for investors to hold onto their sOHMs. Every 8 hours (an epoch in Olympus’ terms), sOHM tokens earn a ridiculously high rebase (interest) between 1000% and 10.000% APY!

This is because 90% of the minted OHM tokens through bonding are used for providing rewards to stakers. The other 10% are sent directly to the Olympus DAO treasury to ensure the liquidity of their own tokens.

Worth noting is that, at any time, users can unstake their holdings. They will then receive a 1:1 ratio of their rebased sOHM for OHM.

The Importance of the Treasury and Protocol Controlled Value (PVC)

Both these mechanisms serve as a means to grow the Olympus DAO treasury, which is the backbone of the protocol.

First of all, thanks to the assets locked permanently in the treasury, the DAO is able to provide each OHM token an intrinsic value of at least 1 DAI ($1). In an event where the price of OHM goes below this intrinsic value, the DAO would step in and buy back tokens on the market for 1 DAI. Then, the protocol would burn a set amount of tokens to decrease the supply and continue to keep the price above said intrinsic value.

There’s an additional advantage, however. While each OHM token is backed by at least 1 DAI in the Olympus DAO treasury, the market value of OHM is much higher. With a market price of around $400, means that even at a discount, Olympus sells OHM at a high premium.

This creates a surplus for the treasury, which Olympus uses for inflation supply as the tokens minted from the premium are redistributed as staking rewards.

Additionally, the treasury serves two more purposes:

  • Provide a permanent source of liquidity for OHM tokens – Through the protocol owned liquidity (POL) initiated by bonding, Olympus DAO can continuously provide liquidity for swaps on DEXes. This way, it eliminates one of the main issues of DeFi that we previously discussed – the dependence on mercenary LPs.
  • Generate passive income through deployment to other protocols – By providing liquidity, the treasury generates wealth by receiving LP fees from various DEXes. This passive income is essential for meeting the promised APY rates of above 1000% and increasing the floor value of OHM.

All in all, the treasury is key to both keeping the value of OHM somewhat stable and above intrinsic value and providing high yields to stakers.

The Crazy APY – Is It Sustainable or a Scam?

Making over 1000% gains a year sounds incredibly appealing, so there must be a catch somewhere.

Well, the first thing we need to consider is that OHM is currently selling at a high premium. This premium allows the protocol to accumulate profits, and later use these to support their incredible APY promises.

However, through bonding, the protocol mints new tokens are minted and releases them into circulation. As the supply of OHM increases, their market value is expected to decrease over time. The staking APY is there to counteract this phenomenon and provide a higher yield than the price drop itself.

Let’s say you bond $5000 worth of tokens at the current price of $400, netting you 12.5 OHM. You stake these tokens for 3 years on the protocol, receiving 1000% every year. Through compounding, you should have around 16.500 OHM by the end of your staking period.

Now let’s imagine the price drops to $1 during this period. You would still be well in the black, as your holdings would equate to 16.500x$1= $16.500. That’s still a hefty amount of profit, even though the price of OHM has plummeted to its intrinsic value.

The protocol even provides a live runway estimate at which the APY rates could be sustained. Even in a worst-case scenario, such as a bank run, Olympus DAO would be able to continuously provide profits for at least one more year.

Even with all that in mind, Olympus DAO is far from perfect.

Is Trouble Brewing on Mount Olympus?

If all of the above sounds pretty utopian, it’s because it kind of is. We need to mention some issues with Olympus DAO to give you the full picture.

The Treasury is Centralized

While smart contracts handle the APY rates and issuance of new tokens, this is not the case for the protocol’s treasury.

The most vital part of Olympus DAO follows an extremely centralized structure and remains in the hands of its high-level participants. A 4 of 7 multisig wallet controls all the treasury transactions. This means that only 4 individuals are in control of a growing $700 million capital in digital assets. Even ardent supporters of Olympus have raised concerns about this issue which could lead to a hefty rug pull scam.

Moreover, the entire mechanism of stabilizing OHM’s price above its intrinsic value relies on a simple promise. Supporters in the project choose to believe that when the time comes, the team will step in to balance the odds in their favor.

However, there’s no real guarantee that the treasury will be used for its intended purpose. Consequently, many might hesitate before they put their savings into the hands of a bunch of pseudonymous crypto nerds.

It Resembles a Ponzi Scheme

Detractors of Olympus also point out the eery similarity of the protocol bonding and staking mechanism to a Ponzi scheme. And we can’t blame them for it, as the implementation of the yield mechanism is textbook Ponzi.

New investors inject funds, and the protocol redistributes these funds to others until the scheme runs out of money. As long as there are new investors, the scheme can continue. Only this time, seemingly valuable tokens are created out of thin air. The protocol reinvests the “real” money into liquidity pools to generate even more revenue and fill the treasury. A treasury, which we already pointed out, remains in control of a select few.

And Yet, Olympus DAO Is a Success Story

Despite its flaws, Olympus DAO is a resounding success. Today, the total value locked exceeds $2 billion, and the incredible yields remain, even a year after launch. But more importantly, Olympus DAO has begun spreading its POL benefits onto other blockchain projects.

Through the Olympus PRO protocol, it allows other upcoming DAOs such as Diatom DAO to adopt its bonding mechanisms. This provides smaller projects with a solution to accumulate liquidity without relying on LPs on decentralized exchanges. And the benefits of POL in reducing volatility and providing revenue to the DAO are undeniable.

We should mention that Olympus PRO is another source of passive income for the treasury, ensuring even longer periods of eye-watering rebases.

Olympus Introduces OHM for Charity

Before we conclude this Olympus DAO review, we would like to open a short parenthesis of a recent addition to the protocol – Olympus Give.

Olympus Give is a donation platform that is directly linked to the blockchain protocol and allows users to either:

  • Directly donate funds to a selection of partners chosen by the Olympus team.
  • Redirect a portion of their rebases towards one or multiple projects of their choice.

The principle is simple – users link a wallet with sOHMs and the rebases are directly sent to the beneficiary. However, what’s really interesting, is that this mechanism allows users to make lossless donations. In fact, they can withdraw their original principal at any time. Meanwhile, the beneficiary still receives 100% of the rebases their sOHM tokens have generated.

It’s a nice, ethical addition to a platform that detractors often bash for putting profits first. It allows users to opt in to fund projects that are genuinely trying to make the world a better place.

Conclusion

Olympus DAO has achieved a tour de force with its protocol-owned liquidity approach. It has shown us that there are potential solutions to the issues plaguing the current DeFi environment. By adopting bonding, DeFi projects can do away with mercenary liquidity providers and remain in control of their platform’s liquidity.

One might argue that OHM is way too volatile for us to consider it a reserve currency. While this remains true at this moment, this volatility should subside if given enough time. At least, the assets that back its intrinsic value are transparently recorded on the blockchain, unlike most stablecoins.

That said, we are yet to witness whether Olympus can hold on to its success in the long term. With dozens of copycats appearing on the market, it will be challenging for it to conserve its current growth. The same growth upon which the protocol has based its entire rewards system.

And while we wouldn’t qualify it as a scam, it remains an experimental financial project that has yet to prove its worth. Centralization of the treasury is an ongoing issue that could lead to the demise of the entire project. In our eyes, Olympus falls short of one of the pillars of blockchain tech, which is the trustless, decentralized environment.

Nevertheless, Olympus DAO could well be the foundation of the DeFi 2.0, an ecosystem without stablecoins and rogue LPs. Whether it can succeed at this task entirely depends on how many people continue to believe in the project’s viability.

Ivan Djordjevic

Ivan is a professional copywriter that specialized in cryptocurrencies and blockchain. He has been an active contributor and participant in this space since 2013. Over the years, he has built up some serious knowledge about blockchain protocols and has taken the opportunity to share this valuable information with his readers on various blogs.

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