What is OlympusDAO? What is Ponzi Scheme? Is OlympusDAO a Ponzi Scheme?
1. Mechanisms of Tokenomics
1.1 What is Tokenomics
It is believed that the first use of the term “Tokenomics” was by Chris Dixon. Tokenomics describe the math and incentives governing crypto assets. It includes everything about the mechanics of how the asset works and the psychological or behavioural forces that could affect its long-term value (Eliason, 2021). The main challenge with Tokenomics is creating an incentive structure while making many interconnected assumptions (Kampakis, 2022). Tokenomics concludes all elements that make the specific cryptocurrency function uniquely and capture the value of the blockchain. (Stevens, 2022). Meanwhile, the smart contract plays a vital role in Tokenomics for fully executing the mechanism without an irrational human decision. It is baked into a particular cryptocurrency’s computer code by its founding developers and sets the protocol mechanism and Tokenomics.
1.2 Nature of cryptocurrency: Ponzi economics
According to Investor.gov, a Ponzi scheme is “an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise that their scheme will generate high returns with little to no risk” (Investor.gov, 2022). Also, Ponzi schemes have no real underlying business generating revenue, and the funds of later contributors are just paying off the earlier contributors through a constant flow of new money (Eliason, 2022).
Cryptocurrency projects are like Ponzi schemes because new investors are attracted to invest funds for the promised high reward. As more people invest, the project’s value increases, attracting more funding and forming a circle of reflexivity. For example, Bitcoin is the most discussed target of a Ponzi scheme. Bitcoin is intangible and has no intrinsic value but only depends on what others see as valuable.
Blockchain protocols and their tokens are deemed Ponzi schemes for the following reasons.
1. The team makes up the policies (Tokenomics).
2. The currencies and tokens have no intrinsic value.
3. They provide unparallel high returns.
4. The new traders decide the price of the tokens.
1.3 What is Tokenomics Audit
Tokenomics audit is the idea that an auditor assesses a project’s viability while suggesting potential improvements. The ultimate goal is to provide an independent view of whether a token economy is viable or not by checking whether the projects could reach the following goals (Kampakis, 2022).
1. Reach the price stability
2. Create a store of wealth
3. Ensure real-world utility of the token
“The goal of the Tokenomics audit is to convince an informed but sceptical reader that the properties and claims of a project are true, given the current and foreseeable conditions in the world” (Kampakis, 2022).
Tokenomics Audit is an overall fundamental analysis of a crypto project. As Kampakis said in his paper, Tokenomics audit is the open-ended definition; talking about the innovation of the protocol, the mechanism of the Tokenomics and the factors that influence the price.
2. Pillars of Tokenomics
2.1 Supply and Demand
The supply and demand rule is the most natural and essential part of influencing the token’s price: The supply grows faster than demand, and the price will fall. Three key categories of supply (BTC, 2022):
1. Circulating supply is the number of tokens on the market now.
2. Max supply is the maximum number of coins in the protocol.
3. Total supply is the number of coins locked in, issued, and burned.
If the circulating supply is way lower than the Max total supply, then the investor must be aware of the risk of dilution. We cannot tell the token’s success only by the price because supply and demand can manipulate the price. MarketCap could be the ideal protocol for Tokenomics measurement
The token’s incentives and utilities influence the demand, and the application is the key. For a real-world example, the US dollars. People worldwide want to hold and use USD because of its broad applicability, such as value carrying, medium of transaction, and charging unit. Value carrying is about foreign exchange reserves, and about 60% of the foreign exchange reserve of countries around the world are in US dollars (IMF, 2021). Around 90% of all Forex trading in the foreign exchange OTC market involves the US dollar (Eagle, 2021). In terms of charging units, the world imports and exports crude oil, gold, materials, and metals in USD. Behind these three factors is that people trust the US government. Trust is the only solution to illiquidity, which is why Tokenomics fails.
2.2 Applicability
The project designers must build the applicability as broad as possible for users to use their tokens. For example, Pancake Swap, one of the most popular DeFi projects on BSC, provides the application for $BNB (BSC’s native token). Not only for the transaction fee, but most of the transaction pairs adopt $BNB as the transaction unit. As a result, people must buy and hold enough $BNB if they want to participate in the Pancake Swap, and the application can support the $BNB price.
2.3 Distribution
Distribution is about token allocations and vesting periods. The ideal distribution is all tokens are spread evenly, and no single address or group takes many tokens (BTC, 2022). It is expectable that the price will plunge after the vesting period, or the whale will dump all its tokens. However, most famous protocols or projects are backed by VCs, such as Avalanche, Solana, and Phantom; they are all investment portfolios from A16Z. VCs will take a high percentage (3%-10%) of the token through ICO (Initial Coin offerings), liquidity mining, and staking in the early stage of the protocol.
2.4 Reflexivity and Death Spiral
One of the most critical metrics for DeFi protocols is TVL (Total value locked), which includes all coins deposited in all functions such as staking, lending and liquidity pools. Investors assess TVL and MarketCap to evaluate whether the DeFi project is valued appropriately (George, 2022). To increase TVL, the teams always attract more LPs (liquidity providers) through high APY. Meanwhile, the increased TVL will push up the APY because more people trade on this token, and the protocols earn the commission fee; a higher price will attract more miners. Market makers do not have a better solution to stabilize the price, leading to a surge or crush. If the whales dump the tokens, the price will fall, leading to lower APY, and LPs will move out their assets to other protocols, creating the death spiral. The crush of $TerraUSD is a good example.
$LUNA backs $TerraUSD, both tokens from Terra ecosystem. The value of $LUNA comes from the demand of $TerraUSD, which can be deposited into the Anchor Protocol with a 20% risk-free interest rate. However, when the bear market comes and $LUNA fall, the promised 20% yield is broken. $TerraUSD holders fear the break of its $1 peg and dump, more $LUNA is minted, leading to the price fall, and then people lose trust that $LUNA and back $TerraUSD. Little external forces (such as $ETH and $DAI) stop the death spiral because of no application for people to hold $LUNA when they do not hold $TerraUSD.
3. What are OlympusDAO and $OHM
3.1 Introduction
Olympus is building $OHM, a community-owned, decentralized and censorship-resistant reserve currency asset-backed (1 $ DAI, a Stablecoin, backs each $OHM) and replacing $USD in Web3. The Olympus treasury contains different assets to back reserve currency, mainly stable coins and ETH. $1 value serves as a floor price to the value of $OHM. Olympus builds its Non-pegged Stablecoins with the exact arbitrage mechanism as Algorithmic Stablecoins like $TerraUSD. When the trading price of $OHM is lower than 1 $DAI, OlympusDAO will buy back and destroy $OHM coins to reduce the market circulation. Conversely, when the $OHM price is higher than 1 $DAI, OlympusDAO will mint new $OHM coins to the stakers to increase market circulation. Finally, the floor price, intrinsic value, of $OHM will equal 1 $DAI (OlympusDAO, 2022).
3.2 DeFi 2.0
OlympusDAO creates new mechanisms, protocol-owned liquidity (POL), bond structure and high-reward staking to control the supply and demand of $OHM. These new designs are deemed DeFi 2.0 because it solves the DeFi 1.0 problems that the protocols’ Tokenomics are not sustainable (problem of mercenary capital). In DeFi 1.0. the protocols attract the Liquidity Provider (LPs), Yield farmers, by paying extra money and high staking reward through yield farming and liquidity mining to increase protocol liquidity. However, the LPs sell and dump the tokens, pulling their liquidity out once they receive the extra money when the reward decreases, creating an inflationary ecosystem, and decreasing the token price.
3.3 Protocol Controlled Value (PCV)(Treasury) and Protocol Owned Liquidity (POL)
The treasury represents all assets owned and controlled by the OlympusDAO protocol, known as Protocol Control Value (PCV) (OlympusDAO,2022). Treasury consists of Risk-free value (FRV), Stablecoins, and volatile assets such as $ETH and $BTC. PCV is the same concept as TVL in DeFi 1.0; both describe how much money is in the protocol.
However, due to the feature of POL, Olympus’s bond mechanism controls most of the liquidity (+98%). OlympusDAO will purchase $OHM worth less than 1 $DAI indefinitely until no more $OHM can be purchased, similar to the treasury stock buy-back. Compared to “lending liquidity” in DeFi 1.0, POL has the following advantages:
1. Olympus doesn’t pay the high reward for the liquidity provider for renting liquidity.
2. Olympus is sustainable and earns the most considerable portion of the liquidity pool transaction fees (LP fees), one of Olympus’ revenue channels to accumulate funds.
3. Prevent reflexivity when LP liquidity mining falls.
4. Olympus assures the market that liquidity will consistently be implemented to facilitate transactions.
3.4 Runway and Risk-free value (RFV)
The runway is a concept of how long OlympusDAO can keep distributing $OHM. PCV decides the runway of the high APY. RFV means how much treasury value back $OHM. The price of the $OHM can be broken down into 1 $DAI (cost), the treasury-backed asset (RFV) and the market premium.
High APY attracts more investors to buy and stake the tokens, earning more premiums for OlympusDAO for providing higher APY and extending the runway because of reflexivity. OlympusDAO hopes to distribute all OHM tokens to every staker until $OHM is indefinitely closer to $1 eventually.
3.5 Staking and Bonding
OlympusDAO distributes newly issued $OHM to two groups of people: those who stake $OHM and those who buy $OHM bonds. OlympusDAO reduces the market liquidity of $OHM by rewarding long-term holders and attracting investors to stake. The APY of staking $OHM reached 8,235%, three times a day for compound rebase. The DAO will adjust the reward depending on the Treasury and RFV. *It raises to the power of 1,095 because a rebase happens three times daily. (For compound interest rate) (Source: OlympusDAO Doc)
Another way to get $OHM is to buy $OHM bonds, and the bonding mechanism is how OlympusDAO acquire liquidity. Bonding is the source of the treasury revenue, around 5% -10% discount but vesting for seven days. If the MarketCap is larger than the treasury, the inflation and the high APY will go on by distributing the tokens to the stakers.
Using the example of $OHM-$WETH paring, the investors can purchase it at a discount of 5.41%. It can increase OlympusDAO’s revenue and increase reserve assets for minting and distributing more $OHMs for stakers. Treasury becomes more extensive only through the new investors buying the bond. More $OHMs generated by the staking will not increase the treasury asset; on the contrary, it will dilute the value of each $OHMs.
3.6 Game Theory and Meme (3,3)
Based on the game theory, if everyone cooperates in Olympus, all the players can create the most significant profit together. In Olympus, the player can take one action from the following three options: 1. Staking (+2), 2. Bonding (+1), and 3. Selling (-2) (Olympus, 2022). The success of Olympus can be attributed to this phenomenal Meme of (3,3).
4. The debate that OlympusDAO is a Ponzi scheme
4.1 Assumption
· All the initiatives and policies on the Official Doc (Smart Contract, Olympus Medium and Website) will be executed and not be revised or cancelled.
As $OHM plunged from an all-time high, $1,320, to $12, the debate of whether OlympusDAO is a Ponzi scheme has never been settled. Five significant arguments are at the centre of the debate.
1. No demand for $OHM to become a decentralized reserve currency (Alexander, 2022).
2. OlympusDAO skims the overpayments using dilution (Alexander, 2022).
3. OlympusDAO can’t be self-sustained, and it makes profits from new investors and users (TOMLIN, 2022).
4. The ‘backing value’ behind $OHM is volatile (TOMLIN, 2022).
5. OlympusDAO provides fake APY, and POL doesn’t deserve the premium (TheBlockchainGuy, 2022).
4.2 No demand
The demand problem could be discussed from the applicability. Currently, Olympus is building its ecosystem, helping more startups by establishing Olympus Incubator. These startups will create more applications for $OHM (OlympusDAO, 2022). Olympus Incubator is an initiative to help foster the Olympus economy, such as early usage of a protocol by Ohmies and early funding (OlympusDAO). For example, 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 (Fernau, 2022).
Furthermore, Olympus deploys more applications by Olympus Pro. Olympus Pro is a product that provides liquidity as a service and marketplace to earn commission fees through bonding mechanisms. By purchasing Bonds through Olympus Pro, protocols can accumulate liquidity to secure longevity and price stability through Olympus Pro’s services. It allows onboarded protocols to acquire target assets, including LP tokens (Alexander, 2022). Finally, most of the demand comes from investors who believe $OHM will become the reserve currency or want to earn a high APY.
4.3 Anti-Dilution
The Olympus Doc indicates that the share of founders and team would never be diluted below 11.8%.
However, OlympusDAO received funding from VCs before it launched, and it is common for a startup to sign a contract for the lock-up period and guaranteed interest with VCs in the term sheets. Also, the distribution of $OHM is fair; the community takes 88.2%, the team for 7.8%, and investors for 3% (Olympus, 2022)
4.4 Exploit new investors
By mentioning profits from new investors, we can break down the innovative part of OlympusDAO’s Tokenomics. The POL mechanism changes the business model of liquidity mining. Initially, the yield farmers and liquidity miners pay for the DEX or CEX commission fees for buying the tokens. Now Olympus take back all liquidity and earn the commission fees. It is an improvement to redirect the revenue from $OHM investors. Moreover, it would be natural for the buyers to pay for $OHM if they see $OHM as a product instead of financial assets.
4.5 $OHM premium
Talking back to the self-sustained revenue and whether this business model deserves a premium. OlympusDAO is a real decentralized company with a decent revenue stream. From the point of Watkins, “As valuation for growth-stage organizations is evaluated, OlympusDAO should be worth some multiple of its future cash flows,” Apart from the bonding revenue going into the treasury, we can see the commission fee, liquidity provisioning, lending, and Olympus Pro as the recurring revenue.
Paying for the premium for investing in its profitability in the future is also common in the traditional world. When investors buy the stock, they invest not only in the book asset or the company but also in its operation, profitability, and future revenue.
Furthermore, to justify the current price of $OHM, we can use PS-ratio to check the valuation range. The selected comparables share the following similarities with OlympusDAO.
1. Protocols must be deployed on Ethereum.
2. It must be Defi protocols.
3. The TVL and MarketCap should not be below $50M.
4. The followings are the selected comparables and their PS ratio.
a. Yearn. Finance (Yield Aggregator), 8.8X
b. IdleFinance (Yield Aggregator), 9.4X
c. Alchemix (Synthetics), 10X
d. Aave (Lending), 10.8X
e. Average: 7.8X
Currently, OlympusDAO’s PS ratio is 10.68X, which is reasonable for an Ethereum DeFi protocol with credibility (+50M TVL).
Another $ OHM’s premium lies in its potential to become money, and it can take advantage of seigniorage. However, it is challenging to differentiate the monetary premium (seigniorage) versus speculative value because money has no intrinsic value (DeFiant, 2022). The argument that OlympusDAO provides fake, fluctuating APY is well explained in the chapter of Runway and RFV.
4.6 Volatile treasury-backed assets
Because of reflexivity, it is common to crush the crypto project due to illiquidity risk in the bear market. The depeg risk is due to illiquidity and untrust, leading to the bank run. From the example of $TerraUSD, we can see that this business model is not yet proven. Terra relies on market arbitrage, the cash from VCs and $BTC to back Terra. However, it was crushed due to its 5% depeg and the unsustainable high reward of the Anchor Protocol that people lost trust in. The LPs pulled out of the liquidity, creating the death spiral. From previous cases, the solution lies in external support. One way to avoid system risk is to reference $DAI, which includes $USDC as their external collaterals so that the system risk will not impact it. As the algorithmic Stablecoin, FRAX faces the same risk as $UST, but they can look for external support such as $DAI or deploy more applications to stop the death spiral.
The depeg of DAI is a system risk because $DAI is backed by $ETH, $WBTC, and $USDC; moreover, it is over-collateral by 150%. Due to the goal of being the reserve currency in Web3.0, Olympus cannot choose $USDT or other real-world assets backed by Stablecoins to be treasury.
5. Risks of investing in OlympusDAO
The biggest concerns lie in whether the team follows its policy and does not change the regulation secretly. Compared to the OlympusDAO website six months ago, some files and metrics are removed, such as the treasury’s revenue. Moreover, according to the Discord conversation between @CryptoWealth and OlmypusDAO team, the policies are inconsistent with the official Doc revealed from the subsequent lawsuit.
An early Olympus investor alleges that he cannot convert their $pOHM to $OHM because his account was censored. He was cheated out of millions of OHM tokens when key smart contracts were rendered inoperable (Kessler, 2022). This lawsuit was filed in US District Court on 14th Apr 2022 and brought out the risk that OlympusDAO could not be decentralized because it changed code from V1 to V2, and even the communications team was not aware of that.
The team uses the growth of treasury as a value proposition that $OHM is valuable, but no authority, no representative value, and no legal right (smart contract does not contain the buy-back code) for investors to redeem the treasury assets (liquidation right). OlympusDAO could be a scandal if the team secretly changes the smart contracts and policy. Investors thought they bought an asset-backed currency with a smart contract automatically executed when $OHM fell below $1. Nevertheless, it could be a scandal that OlympusDAO has zero backing” while the website calls it an “asset-backed reserve currency”.
Furthermore, it is possible for this pseudonymous team to rug pull the treasury asset if four out of eight people with treasury contract multi-signature agree to sign transactions. Although pseudonymity of a project’s core contributors is not uncommon in the world of DAOs, the team can uncover its names to increase its credibility.
6. Conclusion
Going through the Tokenomics Audit, OlympusDAO is not a Ponzi Scheme. Ponzi is fraudulent, but OlympusDAO is transparent, open-source, and governed by over 22,000+ active DAO members. Moreover, OlympusDAO has an underlying asset (treasury) and revenue stream as a company (DAO); it is an innovation for DeFi 2.0. First, this Tokenomics indicates that $OHM will be close but not below 1$DAI, reaching price stability. Also, OlympusDAO’s goal is to distribute all $OHM to stakers through bonding and staking mechanisms, steadily increasing the supply and treasury. Furthermore, people believe $OHM can store value because of the treasury. It is expectable that $OHM could be the real-world utility of token as the POL increase dramatically.
Nevertheless, it could be another story for VC investment. From an investment point of view, only two suggestions for VC: 1. Is this a good “Ponzi economy”? 2. Do VCs invest early enough? Olympus has good Tokenomics that will reach price stability and create a store of wealth, but the issue lies in the founder’s due diligence. The biggest concerns of OlympusDAO are whether the team will follow its policies of buying back or providing redemption for the investors if $OHM falls below $1; whether it changed the code without public voting.
