What if there was a cryptocurrency that was meant to be a stable coin, but you could earn up to 8 000 apy on it. What if this stable coin was backed by something? Unlike the US dollar and the decisions about the project were made by the community quickly and cheaply, also, unlike the US dollar, one last question I have for you is have you seen that strange three commas, three memes on Twitter or YouTube that hardly anyone explains. In this article, we are going to explain how Olympus DAO works.
1) Olympus DAO
The simple math behind it and what 3 comma 3 means now before we start this article, I do want to say, Olympus DAO is very complicated and it personally took me quite a while to completely understand it. So, let’s dig in first off money is simply something that a bunch of people agrees has value and that we use for transferring that value. For example, a long time ago, specific seashells used to be used as money. They were traded between groups of people for other things like tools and food. Now the shills technically represented tools and food because they could be traded for them. Eventually, people stopped using seashells and started using more rare things like metals now, not too long ago.
2) The transition of the US Dollar
Our US dollar was backed by gold, meaning that every dollar had its equivalent of gold somewhere in storage, and, if you wanted to you, could trade in your dollars for gold. However, for many reasons that we will not discuss in this article, we went from being backed by gold to silver, meaning that every dollar was then backed by silver, and then eventually, we went to the dollar not being backed by much now. This is important because it means that your dollars only hold value to other people, thinking that they’re worth something which was technically the case when it was backed by gold.
3) Digital Assets replacing Gold
However, it was difficult to make more gold, while printing money is so easy that it’s done by criminals. The big issue here is that we have to trust our government with the power of printing more money and affecting what our currency is worth. Taking a look into the future, we may start to use digital assets to trade with, but the question this article is going to take a look at is: will a reserve currency protocol work for digital assets too, so Olympus DAO created a token called the ohm Token and right now, all ohm tokens are backed by dying.
4) Difference between Backed and Pegged
Now before we explain this, we first need to explain the difference between being backed by something and being pegged to something if you buy a stable coin like us, that coin is pegged to the US dollar. Now you might ask how well if you give tether a dollar, they will give you one USD t and if you give them a USD t, they will give you a dollar. So, it’s like an open exchange that allows for trading your United States dollars to and from the blockchain the terminology for this is being pegged to a dollar, and this is not how ohm works.
I recently had a great talk with the calculator guy, who helped me completely understand how Olympus works. Ohm is backed by a basket of crypto assets in the treasury, including dye, frax, and raptor.
Ethereum gives the home a floor or bottom value where the backing assets will keep the price until supply increases. The market value of Olympus DAO’s treasury assets is over 700 million dollars and each home is currently backed by 178 worth of assets to explain the crazy high-interest rate that Olympus is currently offering. We first need to understand the treasury, so the treasury allows you to buy bonds, and this is a mechanism where you can buy ohm tokens from the treasury, but at a discount, they might be wondering how you get that discount.
6) Buy an Ohm
Well, first, you must pay in another coin or token like Ethereum. For this example. Let’S say: ohm is ten thousand dollars and you want to buy a one-ohm token. The treasury allows you to buy ohm at nine thousand and six hundred dollars effectively cutting you a four percent discount on it, but the catch is that you must pay with Ethereum, and you must also wait five days to receive all of that ohm if the price stays the same, you made a profit in a more advanced example. You can sell liquidity, and pool tokens to the treasury for discounted ownership, and this is where Olympus shines. This allows the treasury to own more and more of the total owned liquidity enabling the protocol to earn the fees that traders pay when buying or selling a home. In short, this means Olympus is earning money. All right, let’s go back to buying ohm at a discount. The trick here is that one ohm is only supposed to be worth one DAO now.
Dye is a stable coin technically worth around one dollar. So, when the treasury sells you an ohm token for nine thousand six hundred dollars, technically nine thousand five hundred and ninety-nine dollars of that is all profit to the treasury. So bonding is a mechanism that earns the Olympus treasury money and it also allows bonders to earn a profit, and the only risk they’re taking is that their price might fall.
In short, bonding allows Olympus to create more ohm tokens as long as the price of ohm is over a dollar. The treasury also allows staking, which is a mechanism where you can deposit your tokens to earn even more ohm tokens staking takes ohm off of the market, decreasing the total supply, but the main benefit to you is that it allows holders to gain all those extra Printed ohm tokens using our example earlier since Olympus technically has an extra nine thousand and five hundred ninety-nine dollars’ worth of Ethereum in its treasury. It can now mint nine thousand five hundred ninety-nine own tokens, and it gives these tokens to the stakers.
9) Value of Ohm
The idea is that when you stake, you’re not selling Additionally when you buy bonds, you’re not selling, either way, your actions are not selling. So, even though the total supply increases with each rebase, the value of ohm is not dramatically impacted by that increasing supply. Now, here’s a quick recap when om is backed by more than it needs it simply prints more tokens and gives those tokens to the stakers.
10) Ohm’s Liquidity
However, when ohm is backed by less than it needs Olympus will start to buy back ohm and we’ll talk about this later. Another important thing worth thinking about is something called lp rewards. Remember how we said that the treasury buys their liquidity through the bonding mechanisms, because of this Olympus owns a very large majority of ohm’s liquidity 99.88, because of this, they capture nearly 100 of all the trading fees involving ohm. They earn millions of dollars from people simply buying and selling their tokens.
11) Source of Revenue
This acts as a major source of revenue for Olympus now, and this is what helps build the ohm treasury to back their tokens. Moving on, let’s talk about the 3 commas 3 memes now the 3 commas 3 meme that you probably see floating around here and there is representative of something bigger. It represents an idea out of game theory, which is a philosophical thought process of how to win games using economics and human behavior.
12) The Dilemma
First, let’s explain something called the prisoner’s dilemma. Let’s say: there are two criminals and they both have two options to either cooperate with law enforcement or not cooperate if a criminal cooperates that criminal gets a better sentence, but their partner gets a worse sentence if they both cooperate and confess, they both get a pretty Bad sentence, but if they both deny the accusations, they actually both get off easier. Now, assuming you don’t know which idea your partner is going to choose, which one do you choose? Let’s take a look at the prisoner’s dilemma square.
This shows the outcome for both criminals depending on what they choose. You can see in these two squares that, if one confesses and the other doesn’t it ends well for whoever confesses but bad for whoever doesn’t you can also see here that if they both confess that it ends up equally bad for both of them? Lastly, if they both deny it, they both receive the best possible treatment for them both and because of this game. The theory says that if both criminals are rational people, they should select this option now.
13) Ohm Token
Olympus DAO extends this square into their realm of a 3×3 matrix using the same theory. The best possible case is, if you and everyone else, stake the ohm token, while the worst possible case is if everyone sells again, this means that the best possible case is, if everyone stakes long term, assuming everyone participating, is rational and aware of this thought process. I will say, unfortunately, this relies on humans, so you’ll have to check back in a year or maybe 10 years to see the outcome.
14) Worst Case Scenario
However, instead of guessing what might happen, let’s quickly go through two worst-case scenarios. The first is: what happens if the price falls to what it’s backed by one die. Remember how I said each ohm is supposed to be equal to one dollar. Well, that’s technically the very minimum that it should ever be. There’s something called the floor price, which represents the price at which ohms should not fall below due to the amount of money in the treasury. Now I haven’t talked about this yet but let’s say: there is a thousand-ohm token out there and the treasury owns four thousand dollars.
This means each home is backed by four dollars’ worth of assets and if the price of a home ever goes below four dollars, then Olympus itself as a protocol will start buying back ohm tokens, reducing the total supply out there. Now some of you may be wondering how this project might be similar to iron finance and the titan token ohm is completely different from the iron finance bank run, which resulted in the collapse of the project, iron and titan were susceptible to bank runs down to zero Olympus is susceptible to the same thing, but this time there is a floor to the price and the protocol will buy back your tokens and in theory, you won’t lose all of your money. If a bank run happens, you would only lose the difference between the current price and the amount of backing each own.
15) Collecting Fees
Now, as time goes on and more people buy ohm, the protocol will continue to collect fees since it technically owns over 99 of its liquidity, meaning that the treasury should continue to grow at a quick rate. So, yes, the Olympus dial protocol does have risks, but it should be noted that they differ from the iron finance risks.
We can’t be sure if Olympus will survive well in the next five years or if there’ll be a bug in the code that allows exploitations or even for some reason it just won’t fall like iron finance. Although the project has brought some new ideas to light, it’s an impressive experiment in behavioral economics and the world of crypto.
Thank you, guys, for reading this article. We hope that you enjoyed it.