Decentralized Reserve Currencies And What’s Up With (3,3)
The decentralized reserve currency of OlympusDAO has gained massive popularity amongst the DeFi community and is a driving force behind the DeFi2.0 movement. And, as imitation is the highest form of flattery, has spawned dozens of forks on different chains. Wonderland on Avalanche, by Daniele Sestagalli, has proven to be the most successful by far. In fact, at the time of writing (December 8., 2021), it has a treasury balance of $756,054,356 — more than the OlympusDAO treasury. Crypto Twitter has been amass with tweets to the tune of “Good morning, (3,3)”, alluding to some game-theoretic principles, fuelled by APY at and above 10,000%.
Authors: Maximilian Bruckner, Christian Viehof
OlympusDAO: A decentralized reserve currency
Olympus’ pseudo-anonymous founder Zeus has described the protocol as “at the bare minimum, … one of the most interesting economic experiments in recent history” So, what is this experiment?
In the old days (up until 1971), the US Dollar used to be backed by a gold reserve held in the Fed’s treasury. The days of the Dollar as a reserve currency are long gone, as most of the world’s currencies have left the gold standard and are now fiat money. Olympus is trying to create a new kind of reserve currency, backed by a treasury that is governed by a DAO — hence, a decentralized reserve currency in the form of OHM (figure 1). The OHM token at the core of the Olympus protocol is backed by a basket of assets (different tokens including stablecoins, LP-tokens, and native cryptocurrencies) locked into the Olympus treasury. The value of these assets is supposed to give OHM an intrinsic value that the token cannot fall below. Price-based buying and selling help create a floating, market-driven price. The goal of the OlympusDAO is to build a policy-controlled currency system and create, thanks to its reserve system, a true store of value.
The argument is that, through its game-theoretic dynamics and treasury, OHM will remain stable or increase in value, unlike fiat currency which is vulnerable to inflationary policies, or cryptocurrencies which are vulnerable to market crashes or manipulation. OHM also plans to be backed by at least 1 Dai = 1 OHM. Think of it this way: pegged means 1 OHM = 1 DAI, backed means 1 OHM >= 1 DAI. To take it straight from their documentation:
“By focusing on supply growth rather than price appreciation, OlympusDAO hopes that OHM can function as a currency that is able to hold its purchasing power regardless of market volatility. Similar to the idea of the gold standard, OHM provides free-floating value its users can always fall back on, simply because of the fractional treasury reserves OHM draws its intrinsic value from.” — OlympusDAO Documentation
Bonding, staking, and “good morning, (3,3)”
The OlympusDAO system is based on three key actions that participants can take: bonding, staking, and selling.
Bonding: The process of selling assets to the Olympus treasury in exchange for discounted OHM tokens after a five-day vesting period. This is how new OHM is minted. Bonding is beneficial to the system.
Staking: Locking in your OHM to the protocol, in exchange for receiving compounding interest in the form of new OHM tokens. By “locking in” your share of the total supply, you can avoid dilution. This is seen as most beneficial to the system.
Selling: No explanation needed here: You sell your OHM tokens at their current market price. This is considered to be detrimental to the system.
Figure 2 shows how the bonding process creates new OHM, which is distributed to the purchaser of the bond as well as OHM stakers.
When a participant decides to purchase 1 OHM via bond at the current price (floating at 501 DAI, so 500DAI above the planned backing value), the protocol mints 501 OHM. 1 OHM is given to the bonder after their vesting period ends. The remaining 500 OHM are split between the OlympusDAO Wallet and the stakers, to ensure that their share of the supply does not dilute.
So why is staking best for the system, and where does (3,3) come from? The idea here is based on game theory. Both staking and bonding are beneficial to the ecosystem. Staking is the primary value accrual strategy of Olympus. Stakers earn rebase rewards, which come from the proceeds of bond sales. Bonding is the secondary value accrual strategy. Through it, Olympus can acquire its own liquidity (bonds can be purchased with LP-Tokens) and fill its treasury. The game theory so often quoted by “OHMies” comes from the idea that if everyone cooperated in the form of staking, it would generate the greatest gain for everyone. Staking is considered as (+2), since it causes a price movement through the initial purchase of OHM at market price, and increases TVL of the protocol. Bonding is a (+1), as it does not cause a price movement but benefits the protocol through increasing the treasury balance and generating rebase rewards for stakers. Selling is detrimental to everyone (-2) as it causes downward price movement and has no positive impact on treasury or TVL.
OlympusDAO documentation states that if both actors act in a beneficial way, then the actor causing a price movement also gets half of the benefit. If both actions are contradictory, the bad actor receives half of the benefit while the good actor gets half of the downside. If both actions are detrimental (both are selling) both get half the downside.
Figure 3 visualise this. If both actors stake (+2) , we each act beneficial and receive half of the benefit on top (+1), so the outcome is the best possible for both actors and the protocol at (3,3) = (6). If one stakes (+2) and the other bonds (+1), we also have a beneficial outcome for the protocol. If both sell, we have a downside for both actors and the protocol, as they forgo rebase rewards and cause a downward price movement.
Wether or not this is all just a big ponzi scheme is something we’ll leave to the market to decide. So far, both OlympusDAO and some of the forks (for example Wondlerand and KlimaDAO) have been doing very well, amassing strong communities and keeping high APYs throughout. As Zeus himself said, this is “one of the most interesting economic experiments in recent history”.
Classifying $OHM (ITIN: DRXJ-STCD-3) according to the ITC
Considering Olympus’ mission to create a reserve currency (currency being the keyword here), OHM is classified as an Unpegged Payment Token. You can find the TOKENBASE entry of OHM here: https://itin.itsa.global/DRXJSTCD3
Economic Purpose (EEP): The OHM token is listed as an Unpegged Payment Token (EEP21UP) due to its design as a decentralized reserve currency.
Industry Type (EIN): The issuer behind the OHM Token is the OlympusDAO, active in the field of Payment Services and Infrastructure (EIN06PS).
Technological Setup (TTS): OHM is an Ethereum ERC-20 Standard Token (TTS42ET01), running on the Ethereum blockchain.
Legal Claim (LLC): OHM does not entitle its holder to any legal claim or rights against the issuing organization, therefore it is listed as a No-Claim Token (LLC31).
Issuer Type (LIT): The dimension “Issuer Type” provides information on the nature of the issuer of the token. OHM is built by the OlympusDAO (which has no legal entity), but issued automatically by the protocol. Hence, its Issuer Type is Application Layer Protocol (LIT62AL).
Regulatory Framework (EU) (REU): OHM qualifies as an Other In-Scope Crypto Asset (REU51ZZ) according to the definition provided in Article 3 (5) of Regulation Proposal COM/2020/593 final. OHM is not an e-money token, nor an asset-referenced token, as it does not purport to keep a stable value — instead, it keeps a free-floating market value at or above a certain minimum value determined by the current value of assets in its treasury. The dimension “Regulatory Status EU” provides information on the potential classification of a token according to the European Commission’s proposal for a Regulation on Markets in Crypto Assets (MiCA, Regulation Proposal COM/2020/593 final).
The International Token Standardization Association (ITSA) e.V.
The International Token Standardization Association (ITSA) e.V. is a not-for-profit association of German law that aims at promoting the development and implementation of comprehensive market standards for the identification, classification, and analysis of DLT- and blockchain-based cryptographic tokens. As an independent industry membership body, ITSA unites over 100 international associated founding members from various interest groups. In order to increase transparency and safety on global token markets, ITSA currently develops and implements the International Token Identification Number (ITIN) as a market standard for the identification of cryptographic tokens, the International Token Classification (ITC) as a standard framework for the classification of cryptographic tokens according to their inherent characteristics. ITSA then adds the identified and classified token to the world’s largest register for tokens in our Tokenbase.
- The International Token Identification Number (ITIN) is a 9-digit alphanumeric technical identifier for both fungible and non-fungible DLT-based tokens. Thanks to its underlying Uniform Token Locator (UTL), ITIN presents a unique and fork-resilient identification of tokens. The ITIN also allows for the connecting and matching of other media and data to the token, such as legal contracts or price data, and increases safety and operational transparency when handling these tokens.
- The International Token Classification (ITC) is a multi-dimensional, expandable framework for the classification of tokens. Current dimensions include technological, economic, legal, and regulatory dimensions with multiple sub-dimensions. By mid-2021, there will be at least two new dimensions added, including a tax dimension. So far, our classification framework has been applied to 99% of the token market according to market capitalization of classified tokens.
- ITSA’s Tokenbase currently holds data on over 4000 tokens. Tokenbase is a holistic database for the analysis of tokens and combines our identification and classification data with market and blockchain data from external providers. Third-party data of several partners is already integrated, and API access is also in development.
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Maximilian Bruckner is Executive Director at the International Token Standardization Association (ITSA) e.V. and Project Manager at the Frankfurt School Blockchain Center. He has a strong international background with significant time spent in Spain, South Africa, and Canada. Currently pursuing studies at the Frankfurt School of Finance and Management, you can contact him via email@example.com and connect on LinkedIn if you would like to further discuss ITSA e.V. or have any other open questions.
Christian Viehof is an Executive Director at the International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database including a classification framework and unique token identifiers and locators. He completed his Bachelor in Economics at the University of Bonn, the Hong Kong University and the London School of Economics and Political Science with a focus on Behavioral Economics and Finance. Currently pursuing his Master of Finance at the Frankfurt School of Finance and Management, you can contact him via firstname.lastname@example.org and connect with him on Linkedin, if you would like to further discuss ITSA e.V. or have any open questions.