OlympusDAO Explained Like You’re 5

12 min readDec 26, 2021

Once upon a time, the 12 ancient Greek gods resided on Mount Olympus and enjoyed a life of prosperity and wisdom. They relished in philosophy and poetry while eating grapes and playing harp music.

Zeus, Hera, Poseidon, Aphrodite, and friends even conjured up some theories around money. There was some mention of a stable, durable currency. And some (liquidity) pools. With money swimming in them.

But one day, Mount Olympus was hit by an epic snowstorm that wreaked havoc on the otherwise cloudless abode of the gods.

Zeus came up with a plan.

What is OlympusDAO?

OlympusDAO seeks to create a decentralized reserve currency, OHM, that is backed by a basket of tokens such as DAI, FRAX, and LUSD.

The protocol also has a treasury that uses economic incentives to manage the supply and price of the OHM token.

A Prelude: The World’s Reserve Currency and The Fed

Before we dive into OlympusDAO, let’s start with some background on the world’s most influential economic institution, the Federal Reserve Bank of the United States. If you’d like to head straight to the defi part, feel free to skip this section.

The Federal Reserve System is a network of regional, central banks across America. They are governed by the Federal Reserve Board which is known as The Fed. It is also arguably the most powerful economic institution in the world because it directly influences the total supply of the US dollar. Their secret weapon — their ultimate lever — is interest rates.

Each of these regional, central banks is a nationally chartered bank in America. The other commercial, private banks in America are required by law to keep a percentage of their funds in their regional reserve bank. Pre-COVID, it was around 6–10%. So the more money in your typical commercial bank (think Citibank), the more money in the regional reserve bank. The commercial bank receives shares in the regional reserve bank, which pays dividends.

What’s the Fed doing with all this money? Most of it goes to the US Treasury, while a small part is used to pay out interest to commercial banks for holding on to part of their funds. And to cover expenses like the ink and paper to print cash (jk).

In 2017, the Fed sent $80B to the Treasury, while only paying out $14B to its banks as interest.

But if the Fed wants to increase the money supply, they can lower the reserve requirements for banks, which allows banks to lend more money and increases the overall supply of money in the economy. If the Fed wants to decrease the money supply, it can raise the reserve requirements.

The Fed also influences the US dollar by performing open market operations such as purchasing bonds and securities in the market, thereby pushing money out into the market. Or by issuing bonds (IOUs) to remove money from the market.

For example, a treasury bond is an IOU by the US government that has an interest rate paid every 6 months. The greater the demand for these, the lower the interest rate. The lower the demand, the higher the interest rate.

If the Fed wants to remove money from the economy, it sells bonds to take cash from the market into its reserves.

If it wants to inject $1B into the economy, it can buy treasury bonds in the market by paying for bonds with cash!

*By JHerbstman — Own work, The Joe I. Herbstman Memorial Collection of American Finance, Public Domain,* *https://commons.wikimedia.org/w/index.php?curid=55835862*

Back to OlympusDAO

OlympusDAO is like an experiment creating a new, “web3 version of the Fed.” By knowing how the Federal Reserve can increase or decrease the money supply, you will have a better sense of Olympus’s mechanics and genius. Olympus also has its treasury, which issues OHM tokens.

Every OHM token is backed by a basket of assets, such as DAI and FRAX, as well as Liquidity Pool tokens (don’t worry if you don’t know what this is yet. We’ll get to it!)

Today, there are approximately 7 million OHMs in circulation. Each OHM is backed by roughly $100 worth of crypto assets.

What is OlympusDAO? — OHM Explained with Animations

Why does it exist?

Problem 1: Most stablecoins are pegged to the dollar

Since cryptocurrencies like Bitcoin and Ether are highly volatile, the crypto ecosystem has adopted stablecoins pegged to the US Dollar. However, USD stablecoins have the risk of being centralized and regulated — especially those backed by fiat money. And since they are in sync with the US dollar, they can still be at risk of depreciation.

If the USD depreciates or has less purchasing power for some reason, then the value of these stablecoins would also decline. OlympusDAO wants to create a currency that can maintain consistent purchasing power.

Solution: A reserve-backed currency that is not pegged to anything. One that can hold its purchasing power regardless of market volatility.

Problem 2: Profiteering liquidity miners

First, a refresher on liquidity pools: When a new token is listed on a decentralized exchange, liquidity pools provide liquidity for traders to swap between that new token and existing tokens. For example, if I launch some CAT tokens and want to list them on an exchange, there has to be a liquidity pool, say CAT-DAI, that will allow traders to get CAT with DAI.

Users who provide liquidity to these pools also get LP tokens that can earn rewards with every trade. Read more

Rewards are proportional to your contribution/ownership in the pool. A lot of traders are going after quick profit-making opportunities by entering liquidity pools the day that they launch, rack up trading fees and rewards tokens, and then exit the liquidity pool and sell their rewards tokens for profit. This can damage the liquidity of the tokens and the protocol behind them.

Solution: A protocol that “owns” its liquidity instead of being subject to hoarding and dumping by liquidity miners. Don’t worry if this sounds confusing. More on this later, in the Bonding section!

The Mechanics

There needs to be at least 1 DAI (or FRAX, LUSD, etc) backing every OHM in the treasury, which means that the minimum (“floor”) price of OHM is $1.

The price of OHM should not fall below 1 DAI.

If 1 OHM < 1 DAI, the protocol will buy back (remove) OHM from the market to reduce its supply, thereby driving up its price. It buys back OHM by making it very appealing for OHM holders to deposit OHM back into the protocol through high interest rates.

If 1 OHM > 1 DAI, the protocol can sell OHM held in the treasury at a discount to increase its supply, thereby bringing down its price.

BUT OlympusDAO is still in growth and issuance mode. So you will find the protocol doing both buying and selling of OHM.

And because OHM does not have to be pegged but rather backed by 1 DAI ($1), it can trade at a market premium. Therefore, today OHM’s price is:

1 OHM = 1 DAI + market premium

Again, because of this market premium, the price of 1 OHM on a given exchange will not necessarily equal 1 DAI. And that’s okay.

At the time of writing, the price of OHM is around $450, which means it costs you this much to purchase 1 OHM on the market.

What’s next? One can participate in the OlympusDAO economy through activities such as staking or bonding.

Bonding

When you bond, you are triggering the creation of OHM by “buying” OHM directly from the protocol but at a discount.

In exchange for OHMs at a discount, you provide assets such as FRAX, DAI, LUSD, or LP tokens from liquidity pools such as OHM-FRAX and OHM-DAI.

Say the current price of OHM is approximately $450.

1 OHM = 450 DAI

When you use 450 DAI to buy 1 OHM on a decentralized exchange new OHMs get minted.

Of those newly minted OHMs:

10% goes to the treasury
90% becomes staking rewards to be paid to others who have staked OHM. This is called a rebase.

It is also possible to deposit Liquidity Provider tokens from pools containing OHM.

To get LP tokens, you just add liquidity pools such as OHM-DAI on Sushiswap by supplying OHM and DAI.

Once you provide liquidity to these pools, you get rewarded with LP tokens. You can then take these LP tokens and deposit them into OlympusDAO in exchange for pure OHM at a discount.

When bonding, you don’t get your OHM right away though! There is a fixed vesting period of 5 days. It pays to be patient, kids :)

Since holders of liquidity pool tokens earn trading fees with every transaction, by owning LP tokens Olympus can also earn trading fees. It currently owns more than 99% of OHM liquidity.

Bonding is a win-win situation because the user receives OHM at a discount, and the treasury is receiving more assets such as DAI and FRAX to back the OHM token. Or it is receiving ownership of its liquidity pool positions through the LP tokens you provide.

Staking (and the 10,000% APY)

When staking, you are removing OHM tokens from the market and giving them back to the protocol.

Unlike bonding, which injects new OHM into the market, you are now removing OHM from circulation and giving it back to Olympus.

In exchange for OHM, you get an equal amount of sOHM (staked OHM) which earns interest, also known as a rebase, every 8 hours (known as an epoch). The compounding effect is extremely powerful — in Olympus and life.

The rebase compounding effect is a key reason why OlympusDAO has a ridiculously high APY (5,000% at the time of writing).

So to summarize, the steps for staking are:

You buy OHM on some centralized or decentralized exchange (AMM)
You go to OlympusDAO to stake your newly purchased OHM
You receive sOHM from OlympusDAO
You sit on your sOHM, earning more sOHM at an annual rate of 5,000% paid out every 8 hours
You can also take your sOHM and lend it out or sell it

So even though you paid and deposited $450 today, you are still going to benefit from the amount of sOHM that will continue to grow in your wallet as new OHMs get printed. You now have an auto-compounding balance! As new OHMs get printed by the protocol through bonding, they will come back to you (and others who staked before you) as a reward.

The current APY is approximately 5,000% which means that if you start with 1 sOHM (staked OHM) today, a year later you will have 1 * 50 = 50 sOHM.

But of course, as more OHM is minted, the price per OHM will also go down. Though the rate at which OHM accrues for you is expected to be faster than the speed of the price decline.

Say that after a year, the price of OHM is as low as $10 instead of today’s $450. You will have 50 OHM in your account, which is now worth 50 * $10 = $500

Game Theory and the (3,3) Meme

In the economic field of game theory, one of the most classic concepts is the prisoner’s dilemma.

Imagine a scenario where 2 crime suspects (prisoners) are being questioned by the FBI — in separate rooms. Each of them has 2 choices: confess their crime, or stay silent and say “it wasn’t me.”

If both of the prisoners remain silent, each of them serves 1 year in prison.

If one of the prisoners confesses, the confessor goes free and the other gets 10 years in prison.

If both prisoners confess to the crime, then both serve 8 years in prison.

If they are being selfish, each prisoner knows they get a higher reward by confessing to the crime. Ideally, you confess and your accomplice doesn’t, and you are set free while they serve 10 years.

Confessing always results in a better payoff for the individual, so it is the dominant strategy.

This is a dilemma because technically, both people staying silent and NOT admitting to the crime yields a better overall outcome. But staying silent is not the rational, dominant choice for the individual.

As Stanford’s Encyclopedia of Philosophy puts it: “A group whose members pursue rational self-interest may all end up worse off than a group whose members act contrary to rational self-interest.”

In OlympusDAO, a payoff matrix with a similar flavor is presented. Every actor has 3 choices:

Stake: If you believe that there will be growth in supply or the price of OHM. Doing so will push the price up and result in a high payoff of +2.
Bond: If you are neutral but don’t anticipate a significant downside to OHM. Bonding does not affect price but bonding provides liquidity and DAI for the treasury. So the payoff is still positive, just not as high. +1.
Sell: If you anticipate a contraction or decrease in supply or price of OHM. This has the effect of pushing the price down, so it has a negative payoff of -1.

Now let’s see this in the context of 2 players:

If both actions are beneficial, both players get 2 PLUS half of the benefit, resulting in 2 + 1 = 3. Hence (3, 3) in a (stake, stake) scenario. Also the best thing for the protocol, since 3 + 3 = 6
If one player stakes (+3) and one player bonds (+1), the protocol gets 4. Still good.
If one person sells and the other stakes/bonds: The one who moves down the price gets half the benefit so half of 2, while the good actor takes half of the -2 downside. Hence (1, -1) in a (sell, stake) scenario. Overall, they zero each other out since 1–1=0.
If both actions are detrimental, both players get -2 AND half of the downside, which is -2–1 = -3. This is also worse for the protocol as -3–3 = -6.

The whole idea behind the (3, 3) meme is that staying for the long term is a choice that results in the highest benefit for everyone.

See this hilarious video explaining “that’s the only way we all get laid” from A Beautiful Mind in Olympus style.

All the above being said, the game theory of Olympus is an adaptation of the Prisoner’s Dilemma, and seems to be more of a “mindset” and principle around cooperation. The numbers and behavior may be impacted by the APY, market conditions, and macro environment.

The Takeaway

Both staking and bonding are ways for the protocol to have “ownership” of OHM and its liquidity. Today, the protocol controls over 91% of the OHM issued, as well as 99% of the OHM liquidity.

Bonds are generally more profitable if you play them correctly. But the difference is that bonds are an active strategy and less consistent. Staking is more passive, where you experience the growth of the network.

OlympusDAO is an algorithmic, economic machine that, just like the Fed, can use mechanisms to manage the supply of OHM. It is creating a currency that is free-floating as it is not pegged to anything else but rather backed by a basket of assets.

Olympus is also the master of its liquidity. This is a legendary experiment that might very well impress the gods on Mount Olympus themselves. But will it get to a point where you can buy your grape juice with OHM? We’ll have to see.

Until then, (🍇 , 🍇)

Sources & Further Reading

Huge thanks to Prabhav Jain, Scott Fitsimones, Marco Guaspari Worms, Justin Brower, Catherine Wu, Sam Clearman for reviewing drafts of this post.