Today we're going to look at DeFi 2.0 and the hype behind Olympus DAO and these crazy yields... are they legit? Ponzi scheme? sustainable? And if so, how do we value these things? That's one question, you won't get from your typical "crypto influencer" but that's what I'm all about, so let's dive into it.
The Liquidity Problem
There is a problem with liquidity in the decentralized world. Off centralized exchanges, liquidity (for the most part) is provided by yield farmers in automated market maker (AMM) protocols, like Uniswap. The problem is that these yield farmers ain't loyal. They just move to the next project that offers higher yields, and puts selling pressure on the native token. It's just something that doesn't add value to blockchain adoption... which is why the potential solution, lies in "DeFi 2.0" by something known as Protocol-Owned Liquidity – which is exactly what it sounds like... the protocol's own their own liquidity.
Olympus DAO is the pioneer of this movement, with its goal of being a decentralized reserve currency. Yes, that's a pretty big ambition, that makes you instantly call "ponzi". Honestly, I wouldn't call it a ponzi. Is the APY sustainable? No, it's not meant to be. Can it be something huge? Potentially. Can it flop? Probably. But, how are we going to decide the odds? That's what we need to solve for, with some of assumptions.
Much like a central bank, each OHM token is backed by a basket of asset that's held it in treasury. It's goal, with this, is not to achieve stability by pegging to a fiat currency like the USD, but by a floating market price based on the assets it is backed by... and eventually the faith in the DAO. It aims to be a crypto-native stable currency.
How does it stabilize? Algorithmically, the protocol issues more OHM if it trades at a price higher than its backed assets, increasing supply... and buys back and burns OHM supply if it trades lower than its backed assets. So, in theory, OHM should never trade below the value of assets in its treasury.
So, that's our starting point for valuation. Right now, the treasury holds over $700M of assets, which can be seen here. The premium over the backing, right now, sits at about 300% and about 1,000% over the risk-free premium. Although that doesn't sound cheap, it's actually the lowest level its been. The best way to think of it is, for every $1 you buy in OHM, you're getting about $0.33 of crypto asset exposure. Sounds, like a stupid deal right? Well, not exactly... because this would essentially be the "book value" of a stock, if we were to perform a fundamental analysis. So, we'll have to also consider future cash flow.
Let's first understand the different revenue streams for Olympus protocol, and then we'll use these to forecast and derive a valuation model.... yes, it'll be a stretch (lol) but it's definitely possible ;)
The way Olympus DAO generates revenues, is by a selling "bonds". At a very basic level, bonders sell assets to the protocol and in return receives OHM at a discounted price. Those assets are now deposited in the treasury, new OHM is minted for 1 DAI (i.e. $1 intrinsic value), and also distributed to OHM Stakers (more on that later).
Right now, these bond revenues, pretty much determine the long-term success of the protocol, imo... which are on he decline, with the market as a whole.
But, we're still talking about about $1-2M per day... which is an insane number, if you think about it. Most (i.e. ~90%) of the revenues are from bonding, however there are other revenues sources such as liquidity mining and Olympus Pro.
If you don't already know, is the process of providing liquidity to pools in decentralized exchanges (DEXs), in exchange for a yield (i.e. trading fee). Since Olympus DAO owns its own liquidity, which was the concept behind DeFi 2.0, the protocol generates the revenues of doing so. Apparently, they own something like 99% of the OHM liquidity traded on DEXs.
Olympus Pro, is essentially a liquidity-as-a-service for third-party protocols, using the Olympus platform. This revenue segment is new, and growing. This is a potential area for Olympus to thrive, imo, as it is the pioneer.
Basically, other projects and protocols can use Olympus Pro, like a marketplace to purchase LP tokens (i.e. issue bonds) and do the exact same thing Olympus is doing, and Pro would serve as a marketplace for anyone looking to purchase tokens at a discounted value.
Sure, other projects can figure out how to own their liquidity themselves, but is it really worth it? Olympus Pro receives a 3.3% on all volume, in the bonded token... which goes into the Treasury.
There are other competitors to this type of service, each with their pros and cons, like Tokemak, and Ondo Finance with its partnership with Fei. I think legacy AMMs like Uniswap, might even start implementing some of these services the more successful they become. Like anything in crypto, it's really hard to say how it plays out, because of how fast everything improves... but it's clear this will play some role in the future of DeFi.
Revenues are mostly paid out to stakers through time, with these crazy high APYs. I won't cover staking calculations in detail, because (a) it's very complicated; and (b) it's not what I'm trying to calculate today. There's tons of calculators that you can find and put together on this. But, the main calculation that is of relevance, for our purposes, of calculating an intrinsic value, is the runway – which is the number of days that the current APY can be sustained with zero revenues. That can be found here.
Essentially, staking helps you maintain your share of the market cap, instead of being diluted when new OHMs are issued. But, it's all relative to OHM. It won't help you in the case of a market sell-off or prices dropping.
That's where the (3,3) meme you may have seen is relevant. Everyone benefits, when they are staking, specifically the price.
How the f*** are we going to value this thing?
Well, for one, we'd start with the treasury assets – which can be found here.
At the moment, each OHM has a total backing of $60 per OHM. The price of OHM has 350% premium over that backing. That backing also has crypto assets, which can be found in the dashboard liked above, which fluctuate. So the risk-free assets are your base.
The total backing here, excludes OHM, so it's a fair calculation imo. I would assume that the price of these assets would appreciate if we hold a 5-year time horizon. But, we'll assume them constant for the purpose of this calculation. So, we're at $60.
Now, we'd have to estimate the future cash flow of their revenues – bonding, liquidity mining, and Olympus Pro. We'll ignore the fact that they can generate new streams of revenue as the team constantly develops. I've seen the Discord, and these guys are working hard for this... it may end up being a lost endeavor, but the team is trying for sure. OK, so right now, they're generating about $1-2m per day on average, which is a lot lower than they were. If we assume this level to be constant, and discount those cash flows on a one-year basis, we get an intrinsic value of $90.00... again, about a 300% premium.
If we assume they can consistently generate $1m of revenue for 5 years, then we're fairly valued at about $250 per OHM.
I mean, we're not trying be value investors here, but the point I'm trying to make here is two-fold. (1) There is actually legitimate use case for OHM, and the team is working hard at a big dream of being the decentralized reserve currency; and (2) we can actually use our fundamental calculations in the world of crypto and DeFi – though this was probably the toughest example to prove this with... which is why I want to do this with other DAOs and value coins fundamentally.
The world of crypto is still so new, and evolving... it'd honestly be a shame not to be involved in it in some way. I hope I can share my journey as an investor in it, and potentially see where else it can take us.
Thanks for reading!