What happened to the once-DeFi star protocol Olympus DAO?

Seeing him raise the Zhu Tower, seeing him feast on guests, seeing his building collapse.

——《桃花扇》

Go2Mars has two hobbies in doing research, one is to search for high-quality and high-potential early alpha projects, looking for high-quality innovation points to position them, which is learning, and the other is to find those outdated projects with the ebb and flow of TVL, and analyze how they “build high-rise buildings”, “feast guests” and finally “collapse buildings”, which is reflection.

The “guest” we are going to talk about today is called Olympus DAO, although its price has not returned to zero, but compared to the highest point of over $1000U in 21 years, it still seems a little down. The ups and downs of 100-fold TVL, what made it brilliant, and what doomed it to plummet?

且听patience慢道来~

Preamble

When delving deeper into OlympusDAO and its native token, OHM, a key perspective is to understand the mechanisms behind it and how they have influenced the historical rise and fall of this token. OHM’s market performance, from its initial rapid value-adding to its subsequent crash, reveals how its unique economic architecture performs in a dynamic market. This article focuses on the initial core mechanics of the Olympus DAO, including its staking, rebase, and bonding strategies, and provides a more comprehensive understanding of how the Olympus DAO works and the challenges and opportunities faced in the crypto market with similar protocols.

Project Introduction

OHM is the native token of the Olympus protocol, its purpose is to become a reserve currency with stable value, we can understand OHM as an algorithmic non-stablecoin, compared to an algorithmic stablecoin whose purpose is to control the price at $1 USD (such as algo stablecoin), or a stablecoin that is directly pegged to the US dollar (such as USDT), Olympus only promises that one OHM will get 1 DAI as a reserve, and there is no upper limit on the price. It aims to achieve stability by maintaining stable purchasing power rather than a fixed exchange value, and seeks to reduce reliance on traditional markets and liquidity providers.

Olympus’ related mechanics

Bonding

Bonding is theoretically a protective measure against the Price Floor, and with Bonding, the protocol increases its reserve assets that support the value of the OHM and provide actual support for the price

Users bind specific assets to OlympusDAO. These assets are locked in the protocol as their reserves. In exchange, users receive OHM tokens. Bonding is actually an ultra-short-term zero-coupon bond, which allows users to obtain OHM at a price below the market price, and the obtained OHM tokens are not issued to users immediately, but are gradually released during the so-called “vesting period”. This design is designed to balance market supply and price stability, and in this way, OlympusDAO increases its asset reserves, helping to maintain the long-term value of OHM and the healthy health of the protocol.

Staking and Rebase

When used in conjunction with staking, the rebase reward is usually distributed to the users of the staking, which means that even if the total supply of the token increases, the supply in circulation may not increase because the new supply is mainly distributed to staking users.

For OlympusDAO, stakers stake their OHM in the protocol, earn sOHM, and earn so-called “rebase rewards” through staking, and if the market value of OHM is higher than the target value, the rebase mechanism increases the amount of OHM, and distributes these increased OHM to the participants of staking, and the APY of these rewards once reached more than 8000%. And the source of these rewards is inseparable from Bonding.

When the bond is sold, since the protocol stipulates that only one DAI is required for one OHM to be endorsed, the purchaser’s contribution reserve minus the amount of OHM issued to the purchaser is considered the protocol’s revenue, and when these revenues are generated, new OHMs are minted based on these revenues, and the protocol then distributes these newly minted OHMs to stakers. For example, if $100 DAI can buy a stablecoin with a market value of $105, the protocol will receive $99 in reserves to issue an additional 99 OHM tokens to the staker, which is designed to protect stakers from the dilution of bond issuances, and is the main value accumulation and anti-dilution strategy of Olympus DAO, which also means that the protocol provides and controls most of the liquidity in the market.

Project Review: Questions about the soul of Olympus DAO

Why can the unit price of OHM with only 1 DAI endorsement climb to more than $1400?

In the simplest terms, a large sell-off of a currency causes its price to fall, while strong demand causes it to rise in relative value. From the perspective of the mechanism of bonding and staking, neither of them belongs to the act of selling, even the rebase that can theoretically increase the supply of OHM and depreciate has become a reward for staking, and because no one sells, it does not have much impact on the price, only more and more people join the staking game of the protocol because of the crazy APY provided by staking, generating a large demand for OHM, and the price continues to rise. In addition, when OHM began to rise, the marketing of the so-called (3,3) game theory strategy also made staking a natural choice for investors and a boost to price climbing.

What caused the collapse of the OHM?

**1. Unsustainable ultra-high APY and selling pressure. **

Ultra-high APYs are a natural attraction factor, but they also bring inflationary pressures, which can lead to outflows and crashes if market sentiment changes or questions about the sustainability of the protocol are raised. The huge sell-off has caused the price of OHM to fall sharply, and according to the experience of the market, once the algorithmic coin has bottomed out from the high, it is difficult to return to the original level without the owner behind it.

2.Revised Game Theory for Olympus

Although there are many assumptions behind the game matrix shown by Olympus, we can still see the clue by simply modifying its parameters while its assumptions remain unchanged, if the bonding people do not participate in staking, the stakers will theoretically get more shares, in this case, it is easy to get a different answer from the official one:

When the equilibrium is no longer staking, investors reduce or stop staking OHM, resulting in a decrease in the total amount of staking in the protocol, and when investors withdraw from staking, the pledged OHM will return to the market and increase the circulating supply, which may exert downward pressure on the price of OHM, and at the same time, a large number of investors choose to withdraw from staking, which may be interpreted by the market as a signal that OHM is not optimistic enough in the future, which will affect the behavior of other investors.

Summary

For designing a Ponzi-like protocol like the Olympus DAO, short-term success basically includes the following strategies:

1. Offering a high APY: This attracted significant capital participation, providing an initial funding boost to the protocol.

**2. Effectively prevent selling pressure by controlling the token supply through relevant mechanisms: **In the case of OlymousDAO, staking reduces the amount of tokens in circulation in the market by locking assets in exchange for high yields. At the same time, Bonding reduces the selling pressure in the market by extending the capital release period.

For participants looking to profit from such an agreement, strategies may include:

**1. Join early in the protocol launch: Identify the potential and risks of the project and participate early in order to achieve higher returns.

**2. Invest with market volatility: Buy at price lows, but be aware that this comes with a higher level of risk, especially depending on the uncertainty of the actions of large market makers.

Overall, the success of such an agreement depends on its ability to balance the promise of high returns to attract investors with its ability to sustain long-term sustainability. Participants need to carefully assess the potential risks and rewards when venturing into such projects.