Olympus DAO

Overview

Introduction

Olympus incentivizes liquidity by offering rewards to users who provide liquidity to the protocol and stake their tokens in the Olympus treasury. This is known as "bonding" and "staking" incentives.

In particular, Olympus offers a token called OHM, which is designed to maintain its value over time and provide a stable store of value for users. Users who provide liquidity to the protocol by depositing OHM and another asset (such as ETH or a stablecoin) into a constant function market maker (CFMM) and provide proof of liquidity provision to the Olympus protocol are referred to as "bonders". These users provide their assets to the protocol to ensure that new buyers who want to buy OHM have ample liquidity to enter into positions.

Olympus offers different types of bonds, some that have shorter durations (weeks) and others that are longer (months). The longer the duration of liquidity provision, the higher the expected OHM reward. This represents the protocol leasing liquidity from liquidity providers rather than simply renting it.

In addition to bonding incentives, Olympus also offers staking incentives. Users who stake their OHM tokens in the Olympus treasury can earn additional OHM rewards. The amount of rewards earned depends on the length of time the tokens are staked and the total amount of OHM staked in the treasury.

Liquidity management

Olympus incentivizes users to lease liquidity by offering different types of bonds with varying durations. The longer the duration of liquidity provision, the higher the expected reward. This encourages users to commit to providing liquidity to the protocol for a longer period of time, which helps to increase the stability and efficiency of the system.

In addition to leasing liquidity, Olympus also incentivizes users to stake their OHM tokens in the Olympus treasury. By staking their tokens, users commit to holding their tokens in the treasury for a longer period of time, which helps to reduce the circulating supply of OHM and increase its stability. This is similar to buying an asset, where the user commits to holding the asset for a longer period of time in exchange for potential future gains.

Olympus does not buy liquidity in the traditional sense, but it does use its earned fees and governance tokens to provide liquidity to the protocol. This is known as "protocol-owned liquidity".

In particular, Olympus uses a portion of the fees earned from the protocol's bonding and staking mechanisms to provide liquidity to the protocol. This liquidity is then used to ensure that new buyers who want to buy OHM have ample liquidity to enter into positions.

By providing liquidity to the protocol in this way, Olympus is effectively "buying" liquidity using its own earned fees and governance tokens. However, this is different from traditional liquidity provision, where users provide liquidity to the protocol in exchange for a fee or reward.

The concept of protocol-owned liquidity has become increasingly popular in the DeFi ecosystem, as it allows protocols to ensure that there is always sufficient liquidity available for users to trade their assets. This helps to increase the stability and efficiency of the system and provide a better user experience for traders and investors.

While Olympus does not buy liquidity in the traditional sense, it does use its earned fees and governance tokens to provide liquidity to the protocol and ensure that there is always sufficient liquidity available for users to trade OHM.

Olympus Game Theory

In its simplest form, the game theory in Olympus consists of two users with three available actions: Stake (Buy), Bond, and Sell. Users are likely to stake when they expect an increase in supply and/or price, to sell when they anticipate a decrease in supply and/or price, and to bond when they don't have a strong preference for a specific direction but don't expect significant downside.

Staking causes a price increase of +2, selling causes a price decrease of -2, and the player that affects the price receives half of the result. Bonding does not impact the price but offers a discount of 1.

In a nutshell, the dominant strategies are all cooperative and working together produces optimal outcomes.

By buying a bond from the Olympus Treasury, the buyer is paying a lower price in exchange for receiving a higher amount of OHM Tokens at the end of the vesting period.

For example, if a person had $1,000 USD in ETH and wanted to purchase a 4% OHM-ETH bond with a 5-day vesting period, and the price of 1 OHM was equal to $1,000, the bond would be purchased for $960 in ETH. After the vesting period, the person would receive $1,000 in OHM. The "discount" is the percent reduction in price received by bonding tokens into the protocol.

Shortcomings

The idea behind (3,3) is to amalgamate the three actions (stake, bond, sell) in a way that maximizes profits for the user. For example, a user could stake their tokens to gain the highest APY, bond their liquidity to earn rewards and locked-up liquidity, and sell only when necessary to avoid losses. However, it is important to note that (3,3) is not foolproof and is based on the assumption that the value of the native token will continue to increase. In practice, the value of the token may fluctuate, and users may need to adjust their strategy accordingly. For example, if the value of the token drops significantly, it may be more beneficial to sell rather than stake or bond.

While the game theory of Olympus may seem attractive in theory, it has several shortcomings that have been exposed in practice. One of the main issues is that the high APY offered by the protocol is unsustainable in the long run, as it is based on minting tokens out of thin air at high rates. This leads to the value of tokens continuously dropping due to the increased supply, which ultimately harms the early investors who sold into the liquidity pool.

Moreover, the game theory of Olympus is based on the assumption that users will act rationally and in the best interest of the protocol. However, in practice, users may act irrationally and engage in behaviors that harm the protocol, such as selling their tokens at the first sign of trouble, ie value drop of the token which triggers a negative price feedback loop.

The negative price feedback loop works as follows: if the value of the token drops, users may panic and start selling their tokens, which can lead to a decrease in liquidity and a further drop in the value of the token. This can cause more users to sell their tokens, leading to a further decrease in liquidity and value, and so on .

Moreover, the negative price feedback loop can also harm the protocol's treasury, which holds a large amount of the native token. If the value of the token drops significantly, the treasury may become worthless, which can harm the protocol's ability to maintain liquidity and reward its users .

Overall, the negative price feedback loop is a significant risk associated with the game theory of Olympus and other similar protocols based around (3,3). It highlights the importance of considering the risks and uncertainties associated with the protocol and adjusting the strategy accordingly.