What is Olympus DAO?
Olympus DAO is the first of its kind, a 9-month-old decentralised “bank” with a current market cap of over $2.8 Billion and over $750 Million in assets progressed Decentralized Finance (DeFi) in many new and exciting directions.
In this article, my goal is to provide an overview of DeFI and explain how OlympusDAO works:
- What is Decentralized Finance — DeFi?
- What is a smart contract?
- What is OlympusDAO?
- Why is it important?
- What is Annualized Percentage Yield (APY) and how is it related to interest? Why and how does it change? How can it be so high?
Note: Do Your Own Research. This is for learning and shouldn’t be taken as investment advice
DeFi
DeFi is a new financial system governed by tokens and smart contracts. Anyone on the internet can create a new token underpinned by a smart contract/s.
- DeFi enables anyone on the internet to create new, trustless, financial systems underpinned by smart contracts
- Smart contracts explain the “trustless” nature of crypto and decentralization. For example, a trustless renter-lender example scenario is a smart contract that when executed says “Sally needs USDC and has BTC. But Sally doesn’t want to sell her BTC, she wants a loan. Kim gives $100 USDC to Sally, Sally gives $120 worth of BTC to the contract as collateral and will pay Kim $110 USDC within 6 months to receive her BTC back. If not, the BTC will be given to Kim. If the price of BTC falls, Sally needs to recollateralize her loan (add more BTC) otherwise it will be sold & proceeds sent to Kim to pay for the loan”
- Being trustless in this example refers to 2 parties trusting the smart contract, without a bank or entity managing the loan. The contract can’t be manipulated by either Kim, Sally, or the “bank”. The loan could be a direct P2P crypto loan, or facilitated by a protocol like Aave
- a DAO (Decentralized Autonomous Organization) draws parallels to a real-world “organisation” except it’s run by anonymous members, membership is via tokens, policies and decisions are governed by smart contracts and democratic-style voting procedures (sometimes based on token ownership weight)
- U.S. dollar dependency: whilst Bitcoin and Crypto was initially conceived after the 2008/9 global financial crisis as a means to separate a new financial system from the existing financial systems, Crypto and DeFi still heavily use U.S. dollar-backed stablecoins such as USDC & USDT and algorithmic U.S dollar-pegged stablecoins such as DAI & FRAX in many scenarios to provide stability and value to the ebbs and flows of the crypto market — thus, connecting Crypto to the U.S. dollar.
OlympusDAO
OlympusDAO aims to create a new reserve currency, the OHM token with the ability to stabilize against U.S. dollar depreciation.
How?
The OlympusDAO Market Cap is split among OHM tokens. The value of each token consists of 1.) crypto assets such as ETH & CVX, 2.) risk-free assets such as DAI & FRAX (risk-free because of the U.S. dollar backing), 3.) OlympusDAO value
Note: OlympusDAO displays a circulating supply of 556921/653229. The current token price is the Market Cap value/556921. I’ll edit this post when I understand what 653229 is.
OlympusDAO rewards Stakers and Bonders
Staking
Staking is similar to depositing money in a bank for interest, stakers earn rewards for locking tokens in the protocol.
- APY on the left-hand side is the compounded interest rate
- Current Index started at 1 when OlympusDAO was created and compounds based on the APY. A holder with 1 token at the DAO genesis would now have 42.4
APY, the Annual Percentage Yield is the total yearly compounded interest — the return on your principle investment, automatically compounded AKA rebased every 8 hours by the protocol.
For example, Jenny stakes 1 OHM token (current price $542.28) with an APY of 7,206.90%. After 8 hours, Jenny will have 1.0039 Tokens, a $2.13 gain.
Here’s a summary:
The sheet here contains all my calculations and a weekly/monthly/yearly returns calculator found on reddit.
How is APY calcuated
APY calculation includes reward rate, reward yield, tokens distributed, tokens staked, token supply
- Reward Rate: The reward rate is the reward yield per rebase period (8 hours). In the example above, the reward rate is 0.3926%. Reward rate’s are set arbitrarily by the protocol and automatically adjusted based on the total supply of tokens and the percentage of tokens staked.
Large token supply + smaller amount staked = lower reward rate.
Large token supply + large amount staked = higher reward rate.
Small token supply + smaller amount staked = lower reward rate.
Small token supply + large amount staked = higher reward rate.
Rebase periods are every 2200 Ethereum blocks, or around 8 hours.
2. Tokens Distributed: each rebase period, the protocol creates tokens and distributes them to the staking contract. Tokens will then be distributed from the contract to stakers.
Tokens Distributed = Total Supply X Reward Rate
3. Reward yield
Reward Yield = Tokens Distributed/Tokens Staked
4. APY
APY = (1 + Reward Yield)¹⁰⁹⁵
How does token supply, reward rate and the number of tokens staked affect APY?
- Fewer tokens staked = higher APY: High APY encourages staking making the DAO more valuable
- More tokens staked = lower APY: More tokens staked increases tokens price stability & DAO value which incentivises stakers to hold
- Early users: early-users are encouraged to stake because of the high APY and high reward rate set by the protocol. Reward rates are decreased by the DAO to decrease APY as the total supply increases
Bonding
Bonding enables OlympusDAO to grow its treasury. OlympusDAO sells its token at a discounted rate in exchange for assets. These assets grow the DAO treasury and provide liquidity for both the token backing and the DAO to use for revenue-generating activities.
Bonds generally vest 20% per day over 5 days; bonders are incentivised to deposit crypto assets in exchange for the bonds to receive a discount on the token price.
Depending on the market conditions, bond discounts can be negative. When the price of the bonding asset falls and the price of the DAO token remains the same, or rises, the bonds will be more expensive than buying or swapping on an exchange.
A good time to bond is when
- The bond buyer predicts the token price will be stable or rise
- Bond is provided at a discount of
- The discount given is higher than the returns possible from staking
- Each day the bond vests 20%, the 20% is re-bonded or staked
A bad time to bond is when
- The token price is falling
- The discount is negative
- The bond discount is at a lower rate than what you can earn staking
This is my own interpretation, please DYOR
Further questions
- What’s the value?
- What’s a DAO?
- What’s the use in the future?
- What’s (3,3)
- Why it’s important, it’s a store of value
- Notable forks & their innovations
- Is it reliable?
- How do I know they won’t pull the rug?
- Isn’t the high APY just inflation?
