Tokenomics / Ponzinomics case study: Olympus DAO

Summary

The script delves into Olympus DAO, a project with a token OHM that soared from $8 to $1,400, only to plummet by 99.3%. It aimed to become a stablecoin with a $1 floor price but allowed trade above it. Olympus DAO's treasury strategy involved discount OHM sales and staking with high APY rewards, funded by excess profits and trading fees. Despite amassing a $850 million treasury, the project was speculative, with high rewards unsustainable without continuous high-priced OHM purchases. Its success narrative attracted clones offering even higher rewards, leading to a desertion of speculators and a market collapse.

Takeaways

• 📈 Olympus DAO's main token, OHM, experienced a dramatic rise and fall, launching at $8, reaching an all-time high of $1,400, and then dropping by 99.3%.
• 🏛 The project's long-term goal is to become a new, nation-independent stablecoin with a value of one OHM equivalent to one US dollar, but this is only a price floor, not a strict peg.
• 💼 Olympus DAO has a treasury mechanism that allows users to buy OHM at a discount, with delivery after a waiting period, similar to a bond, and accepts payment in tokens that share in trading fees.
• 💰 High APY staking rewards are offered to users who lock up their OHM, funded by the treasury's profits and ongoing revenues from OHM trading activity.
• 🔄 The treasury's ability to mint new OHM at $1 without violating its reserve requirement creates a scenario where supply might create its own demand, but this is risky and speculative.
• 🚨 The high market cap of OHM, reaching over seven times its treasury value, indicates a significant speculative bubble and a big bet on the project's leadership and governance.
• 🚫 The project's utility for the short term is purely financial speculation, with no meaningful advancement towards its long-term aim of becoming an internet reserve currency.
• 📊 The treasury's value and profits are exposed to being overstated by speculative sentiment, including the value of OHM and its derivatives in the balance sheet.
• 🔄 The treasury's claim to recurring revenues is also subject to a positive feedback loop, where higher trading volume during speculation periods inflates the perceived value.
• 📉 Supply policies in Olympus DAO were designed to appeal to speculators, but the underlying design does not support the high valuations that investors were paying for OHM.
• 🌐 Olympus DAO's success led to the creation of clone projects offering even higher APY rewards, which siphoned off its speculative investor base and contributed to its downfall.

Q & A

What was the main token of Olympus DAO and what was its initial launch price?

The main token of Olympus DAO was OHM, and it launched at $8.

What was the all-time high price of OHM and what was the return on investment at that point?

The all-time high price of OHM was about $1,400, delivering a 176-fold return on investment.

What was the daily trading volume of OHM before the crash?

The daily trading volume of OHM before the crash was about half a billion dollars.

What is the long-term goal of Olympus DAO in terms of its stablecoin?

The long-term goal of Olympus DAO is to become a new, nation-independent stablecoin with one OHM having the value of one US dollar.

How does Olympus DAO's stablecoin value claim differ from a strict peg?

Olympus DAO's value claim isn't controlled as a strict peg; instead, it's offered as a price floor, allowing the price of OHM to trade freely in exchange markets above one US dollar.

What mechanisms did Olympus DAO create to grow its treasury?

Olympus DAO created two mechanisms: one allowing users to buy OHM at a discount with a five-day wait, and the other being staking, which offers high yields funded by the treasury's excess profits and trading fees.

What were the high APY rewards offered by Olympus DAO, and how were they funded?

Olympus DAO offered APY rewards that at one point stood at over 7000%. These rewards were funded by the excess profits earned by the treasury and the ongoing revenues from trading activity captured by the protocol.

How did Olympus DAO's design potentially lead to its own downfall?

Olympus DAO's design led to its downfall by spawning several clone projects that offered even higher APY rewards, causing its speculator base to desert, and by relying on speculative sentiment which was unsustainable when the market turned.

What was the role of 'Zeus' in Olympus DAO, and why was investing at seven times the treasury value considered a big bet?

'Zeus' was the pseudonym of the head of Olympus DAO. Investing at seven times the treasury value was considered a big bet because it relied heavily on the abilities of 'Zeus' and the governance capabilities of the DAO, which were unproven at the time.

How did the treasury's claim to recurring revenues become prone to overstatement?

The treasury's claim to recurring revenues was prone to overstatement because the value of fees and trading volume depended on the value of OHM, which was influenced by speculative sentiment, creating a positive feedback loop.

What was the key trick used by Olympus DAO to convince investors that their supply policies were not inflationary?

The key trick used by Olympus DAO was to commit only to defending a $1 price floor for OHM, while having ample reserves to credibly defend that policy, even though the market price was much higher, creating the illusion of value without supporting the speculative prices.

Outlines

00:00

📈 Olympus DAO's Speculative Surge and Design

The script introduces Olympus DAO, a project with the OHM token that experienced a dramatic rise from $8 to an all-time high of $1,400, followed by a significant drop. The project's complex design and long-term goal to become a stablecoin valued at one US dollar are outlined. Unlike a strict peg, OHM is allowed to trade freely above $1, with the treasury's role being crucial in defending this value. Two mechanisms are highlighted: a discount bond purchase and staking with extraordinarily high yields funded by treasury profits and trading fees. The summary emphasizes the speculative nature of the project and the risks inherent in its high-reward staking system.

05:03

🚨 Red Flags and Speculative Pitfalls in Olympus DAO

This paragraph delves into the red flags associated with Olympus DAO, focusing on the demand and supply sides. On the demand side, the utility is primarily speculative, with bonding and staking based on price speculation and high APYs. The long-term goal of becoming an internet reserve currency is criticized for its lack of tangible progress. The treasury's value is questioned as it may be overstated due to speculative sentiment, including the inclusion of OHM and its derivatives in the balance sheet. On the supply side, while the design is unique, it appeals to speculators and may generate inflationary pressure. The paragraph concludes by discussing the unsustainable nature of high rewards funded by the issuance of OHM tokens and the project's vulnerability to clones offering even higher rewards, leading to a desertion of speculators and a forced liquidation crisis.

Keywords

💡Olympus DAO

Olympus DAO is a decentralized autonomous organization (DAO) that utilizes its main token, OHM, to achieve a stablecoin status with a long-term goal of pegging its value to one US dollar. In the video, it is described as having a complex design and is prone to speculation, which is a central theme of the discussion. The script mentions its launch price, all-time high, and the significant drop in value, illustrating the speculative nature of the project.

💡Stablecoin

A stablecoin is a type of cryptocurrency designed to minimize price volatility by pegging its value to a stable asset, often a fiat currency like the US dollar. In the context of the video, Olympus DAO aims to become a stablecoin, but with a unique approach where the value is not strictly pegged but offered as a price floor, allowing the price to trade freely above one US dollar.

💡Herding

Herding in finance refers to the behavior of investors following the actions of others, often leading to a collective buying or selling trend. The script describes how Olympus DAO's design reinforced herding both on the way up, with high returns, and on the way down, with significant price drops.

💡Treasury

In the context of Olympus DAO, the treasury represents the reserves held by the DAO to defend the floor price of OHM. The script explains the importance of a large treasury to support the value of OHM in circulation and to achieve the project's scale and stability goals.

💡Staking

Staking in the video refers to the process where users lock up their OHM tokens to earn high yields, funded by the issuance of new OHM by the treasury. It is a key mechanism that Olympus DAO uses to incentivize holding and is central to the speculative dynamics discussed in the script.

💡APY (Annual Percentage Yield)

APY represents the annualized rate of return on an investment, which in the case of Olympus DAO, is the yield offered for staking OHM tokens. The script highlights the extraordinarily high APYs, such as over 7000%, which attracted speculative interest and contributed to the project's volatility.

💡Inflationary

In the context of the video, 'inflationary' refers to the potential for the issuance of new tokens to devalue existing ones. While Olympus DAO claims to back all OHM tokens with real value in the treasury, the script argues that the issuance of new tokens at high prices is inflationary and unsustainable.

💡Speculation

Speculation is the act of investing based on the anticipation of market conditions and price changes, rather than the intrinsic value of an asset. The script identifies speculation as the primary utility offered by Olympus DAO in the short term, with both bonding and staking mechanisms being speculative in nature.

💡Red Flags

Red flags in the video are warning signs of potential issues or unsustainable practices within Olympus DAO. The script discusses several red flags, such as reliance on speculation, the high APY being unsustainable, and the treasury's value being overstated by speculative sentiment.

💡Clone Projects

Clone projects, as mentioned in the script, are new projects that replicate the base code of an existing project like Olympus DAO but modify certain parameters, often to offer even higher rewards. The video describes how these clones contributed to Olympus DAO's challenges by attracting away its speculative investor base.

💡Liquidation

Liquidation in the context of the video refers to the forced selling of assets to repay borrowed funds when the value of the collateral falls below a certain threshold. The script mentions liquidation as a factor that accelerated the decline in OHM's price during periods of market downturn.

Highlights

Olympus DAO's main token OHM launched at $8 and reached an all-time-high of $1,400, delivering a 176-fold return.

OHM experienced a significant drop of 99.3% in value.

The daily trading volume of OHM pre-crash was about half a billion dollars.

Olympus DAO's long-term goal is to become a new nation-independent stablecoin with a value equivalent to one US dollar.

The value of OHM is not strictly pegged but offered as a price floor, allowing it to trade freely above one US dollar.

Olympus DAO requires a large treasury to defend the $1 value of OHM and achieve scale.

Users could buy OHM at a discount with a five-day wait, similar to an ultra-short zero-coupon bond.

The treasury accepts payment in tokens that give holders a share of fees from OHM trading on decentralized exchanges.

OHM staking offers extremely high yields funded by treasury profits and ongoing trading activity revenues.

At one point, OHM staking yields reached over 7000% APY.

Olympus DAO's treasury amassed a total of 850 million US dollars, seen by many as an indicator of success.

The market cap of OHM stood over seven times its treasury value, indicating a high level of speculation.

Investment in Olympus DAO resembles a SPAC, with capital given in advance for promised future returns.

OHM's utility for short-term demand is primarily financial speculation, with no meaningful advancement towards its long-term aim.

The treasury's value and profits are exposed to being overstated by speculative sentiment.

Supply policies in Olympus DAO were designed to appeal to speculators and outperform in a speculative environment.

Olympus DAO's commitment to a $1 price floor allowed for the issuance of OHM at higher prices, inflating its value.

Olympus DAO became a victim of its success, with clone projects offering even higher APY rewards.

Speculators began to desert Olympus DAO as it lowered its APY to become more sustainable.

Forced liquidations of borrowed funds accelerated OHM's decline in value.

Transcripts

okay, next up we have Olympus DAO whose main token was the OHM.

It launched at $8 and reached an all-time-high about $1,400 delivering

a 176 fold return and a drop of 99.3%.

The daily volume pre-crash was again at about half a billion.

This project had a more intricate design than SafeMoon and exploring it

in full depth would take a longer video.

So we're just gonna present an outline in the essentials here that made it

prone to speculation and which reinforced herding on the way up and on the way down.

So Olympus DAO's stated long term goal is to become a new

nation independent stablecoin.

And in this final state, one OHM will have the value of one US dollar,

but interestingly, this value claim isn't controlled as a strict peg,

but only offered as a price floor.

The price of own is allowed to trade freely in exchange markets

at any value above one US dollar.

To achieve the end goal of being a stable coin that people could

trust would keep this floor price.

The foundation needs to have a treasury one that's large enough to defend this

$1 value, given the number of OHM in circulation and for this stable coin

to achieve any relevant scale that treasury will have to grow considerably.

The developers at Olympus DAO created two user driven mechanisms to achieve this.

The first allowed users to buy home at a discount to the current market price

on condition of them waiting about five days for the delivery of OHM,

like an ultra short zero coupon bond.

Note that one of the payments that the treasury accepts for the sale of these

bonds are tokens, which give holders a share of fees generated by the trading

of OHM on decentralized exchanges.

Now, remember the treasury has only made a commitment to defend

a floor price of $1 per OHM.

So any price paid over $1 becomes profit to the treasury and all the

while some of the assets, the treasury holds are generating income from

that trading volume in OHM and all of these profits and reserves are being

held in deeply liquid crypto assets.

If Olympus do is only guaranteeing a floor price of one US dollar, why would

anyone pay more than that for their OHM?

Well, it all comes down to the second feature that

Olympus is offering its users.

Staking.

The only things you can do with your own, besides buying it at a discount

as a bond, or buying and selling it at spot on exchanges is to lock it up in

exchange for insane yields paid for by the issuance of new OHM by the treasury.

And when I say insane, I'm not just trying to be colorful or exciting.

We are talking about yields that at one point stood at over 7000% APY!

How would those rewards be funded??

By the excess profits earned by the treasury and the ongoing

revenues from trading activity that are captured by the protocol.

Think about it since the guaranteed floor price is only $1.

The treasury reserves the right to mint more OHM at that rate, without

endangering its floor price pledge.

Using the numbers on this chart, we could pass a full $99 of the bond

proceeds to mint new OHM without violating its stated reserve requirement.

Since any tokens bought from the treasury could instantly be saved

again for these galactic yields.

Olympus DAO was effectively proposing that supply would create its own demand.

And because this utility required tokens to be locked up, the issuance

of new rewards might not be as inflationary as you might expect.

If this is starting to make you feel nervous, that's probably not a bad hunch!

But actually this all went on for long enough for the treasury to

amass of full 850 million US dollars.

The fact that such a headline worthy sum was raised was read by many,

to be an indicator of its success.

And people continued buying in, even when the market cap of OHM stood at

over seven times its treasury value.

Those of you keeping up with events in the world of traditional finance

may notice that this investment play resembles a SPAC in some sense.

You are handing over capital in advance to a treasury, which is making some

promise about the returns it's going to generate with that capital later on.

However, if you choose to buy in at seven times, the value of the treasury,

that is really quite a big bet on the abilities of the head of Olympus DAO a

person who's only known as "Zeus" and the governance capabilities of that DAO.

So really brave bets, uh, to put on at this stage.

So which of our red flags show up in Olympus DAO?

Well, on the demand side, once again, the only utility being offered in the

short term is financial speculation.

If you're bonding, you're speculating on the price five days out.

And if you're staking, you're betting on the APY and the market price,

holding up to cash out at a profit.

The stated long term aim of becoming a new internet reserve currency was not advanced

in any meaningful way in the interim period, nor could it ever be in that time.

To the extent that the growing treasury value was seen as a signal that Olympus

DAO was going to succeed in those long term ambitions, a closer look also warns

us that those treasury fundamentals were themselves exposed to being

overstated by speculative sentiment.

OHM and OHM derivatives were part of the balance sheet, for one.

That meant that as OHM grows in value, its treasury grows in value as well.

Treasury profits that fund the high APYs are also only available when

people are buying home at values that far exceed its floor price.

And that creates another similar feedback loop.

Similarly, the treasury's claim to recurring revenues is also prone

to overstatement by speculation.

Since the value of fees also depends on the value of OHM.

And the quantity of trading volume is itself likely to be higher

during periods of speculation.

Another positive feedback loop.

So that's demand.

What red flags show up on the supply side.

While the vulnerabilities here are a little more disguised, they

don't appear to fit as neatly with our red flags as we defined them.

The design here was definitely not generic.

So top marks there!

We do get some sense that supply rules were armed to appeal to speculators and

outperform in a speculative environment.

But Olympus appears to have this full proof counter to us saying that

supply policies are not going to generate value eroding inflation,

because all the tokens are backed by real value held in the treasury.

And this is the crucial trick used to pull the wool over investors' eyes.

Olympus DAO only committed to defending a one US dollar price floor.

And it certainly had ample reserves to credibly defend that policy.

But for speculators to realize a return, OHM, couldn't be valued at one

us dollar, but rather something close to the level that they bought in at.

And there is nothing in the underlying design that supports you paying seven

times the reserve value - paying $7 - for something that's only designed to

have reserve backing, to be worth $1.

Other than, of course the opportunity to be part of those crazy, crazy high rewards

that are only fundable sustainably while people continue paying $7 for a $1 token.

So once you stop being distracted by the stablecoin story and shift your frame of

analysis to those higher price levels, the continuing issuance of OHM was

clearly inflationary and unsustainable in a totally ordinary and predictable way.

But Olympus do was "guilt free", because they always said upfront that

they were only committed to backing one US dollar and the rest was,

you know: "free markets and stuff!"

Anyhow, this analysis and the chart earlier already tells us enough about

what happened, but to fill in some more of the story there, Olympus actually

became a victim of its own success by spawning several clone projects - or

forks - that copied its base code verbatim, but then tweaked some of

the parameters to offer even higher APY rewards than Olympus DAO did.

Never forget kids, there's always a bigger number out there.

What this meant was that as Olympus lowered its APY to make it more

sustainable with regards to its own internal objectives, its mercenary

speculator base began to desert.

And a perfect storm was cooked up by the fact that many users wanted

to ratchet up OHM's APYs even higher by buying in through borrowed funds

that then forcefully got liquidated, further accelerating the ramps up

and the tumble on the way back down.