One of the most common claims you will hear on Twitter about Olympus DAO or any of its innumerable forks is that it is a Ponzi. As someone with strong opinions on Ponzis, I wanted to take a deep look to try to see if the protocol paying out 'thousands of percent' in 'APY' is a Ponzi or not.
What is Olympus DAO supposed to do?
Olympus DAO issues a token called OHM which is meant to be a ‘decentralized reserve currency’. Olympus is not a stablecoin and is not meant to maintain a specific peg, it is instead meant to have a value of at least ‘the backing’ and can range above that.
How does Olympus DAO work?
How do you get OHM?
You get OHM by ‘bonding’ another asset. So, for example you may choose to purchase a bond with some of your Dai. You are then given your OHM over a brief period, at a discount to the current OHM price. This is meant to incentivize more people to bond assets. It is important to note that the price of OHM can fall below your ‘discount price’ during the time your bond is vesting, and you can still end up losing out on this trade.
Can you exchange OHM for the backing?
Sometimes! There is a functionality that can be deployed when the ‘policy team’ chooses called “Inverse Bonds”. These inverse bonds allow for you to exchange your OHM token, at a slight premium to the current market price in exchange for some of the assets backing OHM, and the OHM you use to purchase the bond is then burnt. These are always finite in quantity and are only available when the policy team chooses, and the OHM price is below the ‘backing value’.
The ‘trick’ with these is that they are priced at a premium to current market OHM prices while still being priced below the proportional share of the backing represented by that OHM, when inverse bonds are priced in this range, they can burn the OHM you use to ‘purchase’ the backing with the bond, and in doing so increase the total backing per OHM.
You are of course incentivized as a seller to use the inverse bond instead of selling into the market, because you can get the premium over the market price.
Several important things to remember about inverse bonds: their quantity is capped, they are released at the behest of the ‘policy team’, they offer a premium over the market price of OHM, they try to increase the backing per OHM by burning the repurchased OHM.
How does staking OHM work?
On Friday March 4th, 2022, as I write this you can currently receive an ‘APY’ of over 900% if you stake your OHM. This number has been as higher than 17,000% in the past.
I know many reading the numbers are immediately answering the titular question with a resounding, “YES”, but before we get excited, it’s valuable to understand the oddities of how staking works for OHM.
Namely, the numbers do not mean what you expect them to mean. If you stake $100 worth of OHM you will almost certainly not have $1,000 worth of OHM at the end of the year. What the staking APY represents is how much of the new supply of OHM you capture.
Effectively by staking you help ensure that your relative portion of the market cap does not change. If you have 1% of the OHM supply, and you stake it for a year, you should expect to still have ~1% (likely slightly more because not all OHM is staked) of the total supply of OHM.
It is conceivable that your $100 of staked OHM will end up worth $1,000, but that requires the market cap of OHM to increase by roughly a factor of ten.
What does it mean that OHM rebases?
Three times a day the Olympus DAO protocol issues more OHM which is then primarily distributed to stakers. The supply of OHM is meant to continually increase unless the price of OHM falls to or below 1 DAI at which point no more can be minted, or if price falls below 'liquid backing' then Inverse Bonds may be used to reduce the supply.