Yes, it’s a Ponzi scheme. But who cares? So are the dollars in your pocket.
If you haven’t heard about it, Olympus DAO is a decentralized finance (DeFi) protocol whose primary use case seems to be “making people extremely angry.” Skeptics argue that its core functionality – a staking scheme currently yielding over 7,000% APY via new OHM token mints – is unsustainable to the point of fraudulent.
This article is part of Future of Money Week, a series exploring the varied (and sometimes weird) ways value will move in the future.
OHM investors, in turn, would tell you that most of contemporary economic life – buttressed by state actor expenditure exceeding revenues and perpetual inflation – is also unsustainable to the point of fraudulence. Both parties believe the other to be naive, and watching each chide the other as callow is one of CryptoTwitter’s chief pleasures.
Even a healthy skeptic has to give the OHMies credit for novelty. Money is simply a collectively shared delusion enabling economic exchange, the OHMies argue – so they went and invented a new kind of money. These fanciful notions are, staggeringly, currently worth more than $3 billion.
OlympusDAO has achieved this feat by borrowing engineering principles from hundreds of failed experiments before it. Algorithmic stablecoins are a class of cryptocurrency that leverage a series of bonds, coupons, staking mechanisms, and “rebases” – tools that programmatically and automatically expand or contract the circulating supply of a currency – to create a digital asset, usually one intended to track the value of the US dollar.
OHM’s interpretation casts aside the notion of a dollar peg (like those behind FRAX and FEI), and now sustains what may be the most successful algorithmic asset experiment in the sector’s short history.
It’s done so with lightly-tweaked rebasing and staking tools that have been well-trod from a technical standpoint, and while the protocol does boast genuine mechanistic innovations, its primary contribution to the field (if it can be called a contribution) is the devout ferverence of its community.
Doubters sneer and say it’s doomed to collapse – blockchain’s equivalent of a High-Yield Investment Program scheme. Believers, meanwhile, rest easy with the smug confidence derived from working at the bleeding edge of DeFi – a widely-maligned and misunderstood sector that’s nonetheless ballooned to $250 billion in total value locked, the equivalent of a mid-sized American bank.
“At the bare minimum, this is one of the most interesting economic experiments in recent history,” said pseudonymous Olympus founder Zeus in an interview with CoinDesk. “That’s honestly the angle that Olympus started with, modeling this and saying, ‘this looks insane,’ and then finding out what it looks like in the real world.”
“There’s a good bit of that in central banking as well,” he added, chuckling.
So they sit across from each other, the credulous and the incredulous, each smirking at the other and believing their opposite to be naive. If the sceptics are right, the only houses of cards that perpetuate into the foreseeable future will be state-sponsored.
Meanwhile, if the OHMies somehow, ludicrously and impossibly, dodge the run on the bank that’s felled so many algo stables before it, things could get pretty weird. “A bunch of degenerates wielding the power of small nations and handling monetary policy for a trillion-dollar asset” kind of weird.
Personally? I’m long on “things getting weird.”
it's going to get SO MUCH WEIRDER https://t.co/OUYry6ONHN
— loomdart 🫐 (@loomdart) November 1, 2021
The Great Work
For years now, algorithmic stablecoins have been crypto’s equivalent of the philosopher’s stone.
The dream has long been that, with a delicate application of seigniorage acumen and a sufficient wellspring of mathematical wizardry, one can create a floating-supply currency accurately tracking the value of the dollar – and, crucially, generate huge sums of wealth in the process.
Dozens if not hundreds of projects have at first flourished, only to wither in pursuit of what medieval scholars called The Great Work – each minting millions of digital dollars only to watch their value drift to zero. It reads like some sort of on-chain parable: misguided technologists destroying untold sums of investor funds ad nauseam as they try to convince the market, over and over again, that this time they have the concoction right.
Here’s the algo stable equivalent of nigredo, albedo, citrinitas, and rubedo, the ingredients of the stone:
First you have rebases that expand or contract the supply of a currency, often directly into holder’s wallets and incentivizing demand
Second are bonds that can be purchased and redeem at set values for the algorithmic asset, giving a market mechanism that helps the asset keep its peg.
And finally you have staking, a method for locking up portions of the asset supply in order to secure utility and further incentivize demand.
Early failures such as Basis Cash sought to work with only these tools. Olympus harnesses them and newer mechanics as well.
Olympus users can purchase bonds using either stablecoins such as DAI and FRAX or liquidity pool tokens representing portions of the OHM/ETH and OHM/FRAX decentralized exchange pools. Stakers are also eligible to receive the majority of new OHM minted every eight hours – a inflationary mechanism that isn’t technically a rebase, but is broadly referred to as such; all standard algo stable mechanics so far.
The first of Olympus’ innovations is that it abandons the notion of a dollar peg, which alone gives it a much broader psychological dearth to determine success of the asset for investors – death spirals and bank runs aren’t necessarily prompted by the asset falling below a dollar peg.
Additionally, the protocol leverages the latest and buzziest development in algo stable theory: protocol controlled value (PCV). This manifests as a treasury that can deploy huge sums of cash to defend the price of the asset and help maintain a peg or defend a price point.
Right now that treasury, along with much of the economic policy of the protocol, is managed by a team of 20 conducting biweekly meetings since March, according to pseudonymous DAO contributor Wartull. The group determines protocol parameters, decides on adding new forms of crypto reserves for the treasury, debates on yield-bearing strategies for the treasury, and votes with DAO tokens accumulated from other protocols. Those decisions are executed by 4-of-7 multisig, and the protocol plans to transition to a fully on-chain DAO “soon.”
This structure, with central banking-like human intervention, is a stark contrast to a “pure” algorithmic stablecoin, like RAI, that seeks to minimize human involvement and relies almost entirely on preset, programmatic conditions to execute monetary policy – e.g. to dictate the supply of the currency in circulation.
Human decision-making also allows the protocol to better respond to the whims of the market, however.
“On a mechanism level, I’ve always seen this as kind of like sailing. You don’t want to sail directly into the wind, you want to harness natural phenomena – you want to use it,” said Zeus.
The team has tremendous powers that can hypothetically be used to step in and stabilize the OHM asset in a variety of ways. Wartull noted that the bond process means that the protocol controls 95% of its own liquidity on decentralized exchanges – if there’s ever a run, they could simply pull liquidity as they devise a stabilization plan, for instance.
“When people complain about these powers that central banks have, it’s generally not complaining about the powers themselves, but instead who gets to control them,” said Zeus of Olympus powers. “Volatility is a natural phenomenon, and if you want to suppress that you need unnatural forces counteracting it.”
So far, the experiment is working. A Dune dashboard shows the treasury growing and the market cap of OHM rising in lock-step effectively in a steady uptrend since inception, barring a few short-term bank runs that failed to push OHM into true crisis territory. The simple existence of the treasury rather than its actual deployment has proven to be a sufficient psychological cue to keep the token in an expansionary mode.
This is the great irony about algorithmic stablecoins: the solution to such a grandiose and difficult conundrum appears for now not to be ever-more complicated engineering, but instead simple faith.
How is OHM supposed to be a stable currency you ask?
— Ryan Watkins (@RyanWatkins_) October 11, 2021
This solution may not be a solution at all, however.
Here is the problem with OHM, the part of this piece that will most delight the skeptics and cause OHMies to give me the most grief in the mentions:
The treasury, the most heavily relied-upon fallback believers invoke, means next to nothing. At least at the moment, the widely-touted “backing” the treasury provides is effectively nonexistent.
Before explaining why, read this passage from Eisenstein’s seminal “Sacred Economies,” comfortably the best book on the magical thinking of money:
“The proclamation that money is backed is little different from any other ritual incantation in that it derives its power from collective human belief. […] But this backing is obviously a fiction: no one is ever going to exchange their terras for actual, physical delivery — on their doorstep — of the prescribed combination of oil, grain, carbon credits, pork bellies, iron ingots, and whatever else is on the list.
Like the hypothetical asset-backed currencies Eisenstein discusses, OHM cannot be directly redeemed for a proportional share of Olympus’ treasury. The only current, public protocol-level relation the treasury assets have to the OHM token is that the value of the treasury is used to calculate the rebase that expands OHM’s total supply – a total supply that is then either staked for OHM rewards or traded on an open market and entirely subject to market forces.
Hypothetically, if sell pressure forces OHM’s market cap below the value of its risk free stablecoin treasury, the team will step in – an implicit promise that itself serves as a stabilizing mechanism for OHM. This is, of course, a behavioral assumption that has proven to be the death of countless other algorithmic stablecoins.
Faith can come into crisis, and models like OHM’s can bottom-out, and if they do fire their silver bullet – step in and buy back with treasury assets – and it fails buoy price in a black swan scenario, then what?
The uncomfortable truth is that OHM is conceptually near-identical to every other dead project before it, and the “backing” of the treasury is notional enough to effectively be a fiction. In essence, Olympus’ treasury has created the financial equivalent orographic clouds, the type that crown mountains:
The treasury, the mountain, is a collection of useful, plastic assets; the value of OHM, the cloud, is an immaterial abstraction based on market forces and the ritual belief those forces are somehow tied to the hard treasury assets (despite the presence of only amorphous, tenuous links). Those devout believers, the OHMies, exist between the mountain and the cloud, the real and the unreal, and by force of spirit are keeping the cloud tethered to the mountain rather than letting it drift off into blue nothing.
The paradox that OHM faces (and why the extremely entertaining Twitter fights are unlikely to die down any time soon) is that the only way to prove that you can live forever is by living forever. So far, OHM’s price is volatile but vital – very much alive. The cloud continues to hover above the mountain. How long can the believers keep it up?
Forks and spoons
Here’s the wild bit though: an honest answer to the above question – and a potential bugaboo for skeptics – is “maybe forever.”
A handful of OHM’s architectural properties are in the process of becoming standalone product verticals, which could help ossify its currently ineffable value.
The bond mechanism – which allows a protocol to “own” and control its liquidity on a decentralized exchange rather than “rent” it with generous governance token subsidies – is now Olympus Pro, a bond-as-a-service model with multiple clients generating revenues for the platform.
Almost $20M liquidity secured through bonds for 20+ protocols across DeFi pic.twitter.com/LuANTvBBg7
— jawz (@sayinshallah) December 2, 2021
Additionally, a growing number of forks are utilizing Olympus’ staking rewards mechanism as a method to accumulate assets. This trend arguably began with Klima, a fork that uses funds generated from Olympus’ ponzinomic model to buy carbon credits.
The trend has since continued with Lobis and Redacted, two platforms planning to use Olympus’ system as a kind of money game that will allow them to accumulate huge sums of CRV (Curve) and CVX (Convex) – both income-generating assets that are systemically important for DeFi.
“It validates that this is a powerful underlying mechanism to accumulate not only assets, but also influence and importance in whatever sphere you’re in,” said Zeus of the forks.
Consider an asset-accumulating fork scenario where the Ponzi collapses and buyers refuse to purchase more of the base asset regardless of the incentives. A DAO would eventually end new token emissions because there’s no point to continuing them if market participants refuse to buy. With the game concluded and yields halted, suddenly there could be a DAO in charge of a significant share of CRV and CVX, and with governance tokens that could harness them for income.
“There are constantly these bribe revenues being pushed to CVX holders. But what about instead of needing to bribe the holders, you have to hold their governance token? What kind of premium does that dictate for the token?” Zeus speculated.
Multiple forks are also currently working to accumulate OHM, which itself now holds generous sums of CVX in its treasury as well. There is a world in which this expansion-by-proxy leads to sustainability as multiple parties look to control OHM as a way to control its treasury.
“This is one future vision of Olympus: Olympus is being governed by the protocols that own OHM, deciding where to direct a war chest of billions. Olympus will become a vehicle of all of DeFi, the reserve currency of DeFi,” Zeus said of this hypothetical endgame.
What started as a psychological experiment (how long can internet weirdos keep believing in their magic beans?) is slowly becoming a genuine economic one as a host of stabilizing forces, including treasury growth, inter-DAO reliance, concentrated liquidity, verticalization, and normalization – all conspire to make OHM a legitimate asset.
In short, it can last a whole lot longer than doubters would like.
Weirdos in the desert
Still, let’s be real: the OHMies are a bunch of pseudo-anonymous anime women avatars in a Discord channel.
The idea these basement-dwelling dorks can will a new form of money into existence is ludicrous. Anyone who holds this belief should be mocked and pitied, for they are a silly frog shortly to be disabused of their delusions of grandeur.
But! Then again. Then again, all of Abrahamic religion can be traced back to a few hundred lost souls wandering the Levantine deserts.
Consider that: the many millennia of contributions to art, philosophy, music, architecture – all that makes life worth living and the very treasures of our species, gifted to us from the traditions of Judiasim, Islam, and Christianity and others – all because some hungry, shambling believers refused to give up the faith.
What, all of a week ago I witnessed 17,000 strangers raised $40 million to buy a copy of the United States Constitution – and their DAO’s ostensible governance token, PEOPLE, rallied 20x despite their efforts failing miserably.
Why can’t OHM last a decade-plus? Hell, a hundred years? Wilder things have happened just this month.
My mind says it’s going to collapse. Probably in flames, crash-and-burn style, with suicides and, depending on the size they reach before failure, maybe even congressional hearings.
But my heart is with the frogs. Their money isn’t very different from the shoddy, debasing stuff the state forces into our bank accounts (and it’s certainly not dumber). It’s just a whole hell of a lot weirder, and as many have observed, it doesn’t seem to me things are getting less weird any time soon.