OlympusDAO held so much promise when it exploded on the DeFi scene in 2021.
The project set out to do nothing less than provide a new decentralized infrastructure for finance, and even better, it would be community-driven. At its heart, OlympusDAO offered a solution to one of the thorniest problems in DeFi — providing sustainable liquidity for projects’ native tokens.
DeFi degens loved what they saw. Within four weeks of its introduction in March, OlympusDAO’s token, OHM, skyrocketed to $1,415 and its market capitalization hit an all-time high of $4.4B in November. This wasn’t just another hot crypto play that drew speculators. Olympus was heralded for its breakthrough protocol-owned liquidity (POL) model, and it became the standard-bearer of the “DeFi 2.0” movement and a brave new era in open finance.
Now Olympus is being rocked by doubts. OHM has cratered 93% since its high on Oct. 24r and is trading at about $97 in mid-day trading New York time, CoinGecko data shows. In comparison, ETH has skidded about 30% in that period.
There’s a raft of theories why Olympus has lost investors’ confidence, but it seems clear that the project’s Byzantine complexity and unorthodox mechanics are fueling the outrage. Irate investors this week have branded Olympus a Ponzi scheme that is using its liquidity protocols to enrich early entrants at the expense of latecomers. Jordi Alexander, the CIO at digital asset trading firm, Selini Capital, characterized Olympus as a “syndicate” in a well-circulated piece on Medium entitled “The God’sFather,” a play on Zeus and the classic Mafia film.
Alexander posited that the protocol is essentially a primitive Ponzi dressed up as an effort to make OHM achieve the ill-defined status of “decentralized reserve currency,” as Olympus’ home page puts it.
“I do think the founders created the whole thing driven by the idea of making a profit,” Alexander told The Defiant. “I don’t think it was ever an outright scam, I think they believed that the game theory mechanic could lead it to keep growing forever and maybe become a real significant part of the financial system.”
Alexander’s article shows how a scheme can emerge when two hypothetical cavemen put one gold coin each into a treasury and get two “PapyrusCoins” out. With one Papyrus coin able to be redeemed for only one gold coin, the scam is set.
“The cavemen line up to get rich,” Alexander writes. “With 100 gold coins in the bucket now, and 200 PapyrusCoins out there, both cavemen can each grab a musical chair to double.”
Alexander’s article also leveled criticism at the mechanics behind pOHM, a token given to investors in a private funding round in order to cover audits, development and legal costs, according to Olympus’ article about the token.
In a nutshell, pOHM doesn’t get diluted as new OHM enters the supply through a mechanic called “rebasing,” according to Alexander. “They do get 11.8% of the rebases,” he said. “That is, while the other OHM gets diluted by the new ones printed, the pOHM does NOT get diluted so they always have 11.8% even as the thing grows.”
Alexander said his article forced people on the Olympus team to admit changes needed to be made to pOHM’s design.
On Jan. 17, Darren Lau, who runs a Telegram channel on crypto with 35,000 subscribers, put the question of whether OHM is a Ponzi to his followers on Twitter. The poll garnered over 3,000 respondents showing 67.2% of them voting “yes,” that OHM is a Ponzi.
But the real scandal that’s whipsawing Olympus is the liquidation of $150M worth of OHM in the last 30 days as the rapidly declining price tripped collateral triggers. That left a lot of borrowers feeling pretty raw because they had leveraged their staked tokens with the expectation of maximizing their yield.
Olympus’s defenders counter that the project is not a scam and is an innovative financial model that embraces core DeFi values. “Ponzis are fraudulent. Olympus is transparent and open-source,” Isfandiyar Shaheen, an OlympusDAO community member, told The Defiant.
Shaheen, the founder and CEO of NetEquity Networks, an internet infrastructure company, has taught financial modelling and worked in private equity. Olympus’ cash flows caught his eye and after doing an analysis, as well as vetting the founder, Shaheen decided to make a long term investment in OHM last year.
“Ponzis have incoming funds and outgoing funds in the same currency. Olympus takes in dollar coins and crypto assets, pays out OHM, a currency it controls,” he said. Shaheen believes in Olympus so much that he started Wagmi Labs, a C-Corp which helps family offices and institutions invest in the protocol’s ecosystem.
At the same time, Zeus, Olympus’ pseudonymous founder, and others have remained active on Twitter. Zeus even converted a doubter through DMs, while also pointing out that in a way, all that’s backing Bitcoin is the electricity needed to mine it.
“Bitcoin is clearly nothing more than an energy market fund,” the founder wrote, sarcastically employing what he views as the line of argument against Olympus to criticize BTC. “With buzzwords like ‘digital gold’ and an illusion of scarcity, it has led investors to hand over $25B+ of electricity through a process called ‘mining’.”
Zeus did not immediately respond to The Defiant’s request for comment.
The OlympusDAO fracas captures the urgent debate roiling DeFi as it morphs from something exotic and new into a mature system serving institutions and consumers. On the one hand. projects such as Olympus show the creativity and innovation at work in decentralized finance. Olympus’ use of its treasury, for instance, has been praised by supporters as a breakthrough in DeFi design.
On the other hand, the hype around the project attracted a stampede of investors and appears to have set expectations way too high. For all its efforts to make community and transparency core features, Olympus’ complexity has sparked frustration and allegations as investors reckon with the costs of its practices.
When Zeus formed Olympus in March, the founder started with a simple premise: the project was designed as a solution to the problem of mercenary capital. This refers to liquidity provided to decentralized exchanges (DEXs) in exchange for token rewards, which is withdrawn as soon as rewards end.
This left many DeFi projects high and dry as yield farmers would dump their tokens and pull their liquidity once a rewards program ended.
Olympus took a different path by actually acquiring liquidity through its bonding mechanism instead of renting it through token rewards. The mechanism offers the project’s OHM token at a discount in exchange for tokens, including liquidity provider (LP) tokens (e.g. ones which represent deposits in OHM-DAI pool).
Moreover, Olympus spawned the legendary 3,3 meme, shorthand for game-theoretic cooperation. In the context of the project, it entailed the choice to stake the OHM token to receive the eye-popping six-digit APY available at the project’s start. The protocol mints new OHM tokens when new bonds are created, and the majority of those tokens are paid out to stakers.
Olympus started slowly, with under 15,000 wallets holding the OHM token in mid-September, five months after launch, according to a Dune Analytics dashboard. OHM holders would skyrocket along with the token’s price in the fall, however, hitting 75,000 holders on Nov. 23, the day the project peaked at a $4.36B market cap.
The number of OHM holders has leveled out in the high 80,000s since December.
A key strength of Olympus is how it uses its treasury, worth $587M as of Jan. 20, according to the project’s dashboard. Olympus built this treasury almost entirely by selling OHM through its bonding program.
Crucially, the treasury backs OHM. So while Bitcoin relies on belief to back it, Olympus leans on assets, albeit digital ones. This supports the idea that OHM is backed, not pegged, as the project’s docs emphasize. Olympus’ documentation says the protocol will buy back OHM if it ever trades below the value of one DAI, a stablecoin pegged to the USD.
The question then arises, of why OHM should trade above its treasury’s value? If it represents the assets the project acquired, why has it traded at massive premiums relative to its pro-rata claim on the treasury?
Olympus actually has two metrics for its treasury, one called the risk free value (RFV), which consists of stablecoins and the project says will be guaranteed to back OHM, and the other includes other assets like ETH and BTRFLY, the token of [REDACTED] an Olympus subDAO.
Against the general treasury, OHM is still trading at a 125% premium after its crash, according to a Dune Analytics dashboard. That premium peaked at a whopping 1,118% on Oct. 13, the same day OHM hit its six-month high of $1,334, according to CoinGecko.
This makes sense. Token price is detached from the treasury, and as people buy the token the price goes up, while the treasury doesn’t necessarily follow. After OHM’s crash, it’s at its highest level of backing ever against the general treasury at 41%, according to the same dashboard.
Is any premium at all justifiable? Ryan Watkins, former analyst at Messari, thinks so.
“The premium to its treasury value could be justified due to the cash flows the project produces,” Watkins told The Defiant. “OlympusDAO generates revenue both from putting its treasury to work (liquidity provisioning, lending, etc.), as well as from its Olympus Pro product it sells to other DAOs.”
Olympus Pro is Olympus’ most important product. Pro launched in September and has since onboarded 40 partners and generated over $2M in revenue for the project’s treasury, according to a Jan. 13 post by the team. The product offers projects an alternative to liquidity mining through the same bonding mechanism which Olympus uses, allowing protocols to acquire target assets, including LP tokens.
Watkins sees the revenue the project generates as viable business activity. “As valuation for growth-stage organizations is typically done, OlympusDAO should be worth some multiple of its future cash flows,” the analyst said.
Watkins added that another theory for OHM’s premium lies in its potential to become money. In aiming to become a “decentralized reserve currency,” Olympus is aiming for OHM to eventually become a global unit-of-account and medium-of-exchange currency as outlined in its documentation.
Though valuing money is a difficult proposition. “Money has no intrinsic value and what is monetary premium versus speculative value is incredibly difficult to differentiate between,” Watkins said.
Olympus also has a fervent group of supporters and contributors, which Scoopy Trooples, founder of self-repaying loan protocol Alchemix, called the “largest active community of any project [he has] ever witnessed.”.
The Rise and Fall of (9,9)
The problem they confront is evident with the debate around the $150M in OHM liquidations in the last 30 days. As OHM’s price kept rising, ingenious degens decided to take the (3,3) strategy to the next level, and (9,9) was born.
This strategy entails depositing one’s staked OHM tokens in Rari Capital’s Fuse pool, borrowing stablecoins, and using the proceeds to buy and stake more OHM. The resulting leveraged position maximises a user’s yield, but bears the risk of being liquidated if the price of OHM falls. Which is exactly what happened this month as borrowers’ OHM collateral was liquidated to cover their outstanding loans.
In the aftermath, Zeus said the Olympus community should actively discourage the practice on the Jan. 17 call. A particularly large, $13M sale of OHM triggered a slew of liquidations on Rari Capital’s Fuse pools on Jan. 17.
Debate Rages On
In all, OHM’s extended crash, its liquidations, and the damning posts about the mechanics behind the asset have unleashed an amazing amount of energy and discussion around Olympus. Whether the project enters the halls of crypto lore as a scam on the order of Bitconnect or becomes a reliable currency as a unit-of-account and medium-of-exchange remains to be seen.
Olympus could end up as something else entirely. In a way, it’s a project with a token and a treasury generating revenue, which has some people saying it’s essentially a hedge fund.
But you can’t short the project on ambition. Bitcoin and Ethereum themselves are still winning over skeptics who doubt they’re bona fide assets. Maybe OHM is undergoing that process now.
If nothing else, the project has amassed major amounts of community engagement — the Jan. 17 community call maintained well over 1,000 participants for almost its entire duration. Of course, the point of Ponzi schemes also is to garner a lot of engagement too.
Regardless, OHM’s fall is drawing bargain hunters.
Cuban, a popular pseudonymous trader, shared that he was buying the token for the first time on Jan. 16 on Twitter. Shaheen of Wagmi Labs, also says buying OHM with a lower premium is less risky than when it was 1,000% in October. Shaheen conceded that speculation may have driven the price so, but added a caveat: “Speculation always fuels innovation. This is meaningful, relevant innovation. I’m sold on that.”