The algorithmic stablecoin sector has recently gained momentum, with Basis working on its V2 launch and FEI capturing attention. Today, we delve into OHM's innovative approach to algorithmic stablecoins. For newcomers, foundational concepts are covered in previous articles like Stablecoins: The Holy Grail of Crypto and Algorithmic Stablecoin Duo: Basis.
OHM's Stabilization Mechanism
OHM, developed by Olympus DAO, diverges from traditional models like Basis and Fei by employing a single-token system. Unlike dual-token structures (stablecoin + governance token), OHM serves both purposes while leveraging Protocol Controlled Value (PCV)—similar to FEI—to manage treasury reserves. This facilitates mechanisms like minting/burning and bonds to stabilize OHM’s peg, currently to DAI (though future iterations may target other indices).
Treasury-Backed Value
Olympus maintains a treasury funded initially by OHM issuance. As protocol revenue grows, assets like DAI are deployed across lending platforms (Maker, Compound, Aave) to generate yield, bolstering OHM’s intrinsic value.
Minting and Burning Dynamics
OHM’s peg to DAI is enforced through:
- Inflation: When OHM > 1 DAI, new OHM is minted and sold.
- Deflation: When OHM < 1 DAI, OHM is bought back and burned.
Protocol benefits from both scenarios, distributing 90% of profits to stakers and 10% to the treasury.
Key Equations:
- Minting:
epochMint = (TWAP - IV) × supply × ICV × Discount - Burning:
epochBurn = (TWAP - IV) × supply × DCV × Discount
Variables:
- TWAP: Time-weighted average price.
- IV: Intrinsic value (1 DAI).
- ICV/DCV: Governance-adjusted controls for inflation/deflation rates.
- Discount: Incentivizes arbitrage (e.g., 3% discount for buyers).
Example: If TWAP = 20 DAI, supply = 20M, and ICV = 0.0001, 38,000 OHM are minted per epoch. Users purchase at a discount (e.g., 20.37 DAI vs. market price 21 DAI), with excess orders routed to Sushiswap.
Bond Mechanism
Olympus introduces a unique bond system where users trade OHM/DAI LP tokens for discounted OHM after a vesting period. This:
- Boosts liquidity by incentivizing LP provision.
- Grows treasury reserves via LP yield.
Pricing Formula:
Bond Price = RFV / Premium
- RFV (Risk-free value): Derived from LP pool metrics.
- Premium: Adjusts with debt ratio (
debtRatio = bondsOutstanding / ohmSupply), modulating discounts.
Outcome: Higher OHM prices accelerate liquidity growth, creating a positive feedback loop ideal for bootstrapping.
Innovative "IDO" Launch
Olympus skipped conventional airdrops/farming for a Discord-based IDO:
- Early members purchased 73% of genesis OHM at $4/OHM (total: 50,000 OHM).
- Remaining 27% seeded Sushiswap liquidity.
- Result: Maximum 141 OHM per participant (initial $564 investment peaked at ~260x returns).
Note: OHM’s current high price (~$400) reflects delayed minting/burning activation. Eventually, arbitrage will drive it toward 1 DAI.
Treasury Management
The treasury:
- Holds DAI and OHM/DAI LP tokens, valued conservatively.
- Allocates 90% of minted OHM to stakers, 10% to DAO.
- Plans to diversify into yield-bearing assets (BTC, ETH, FEI).
FAQ Section
Q1: How does OHM maintain its peg?
A: Through algorithmic minting/burning and bond mechanisms that adjust supply based on market price.
Q2: Why buy bonds?
A: Bonds offer discounted OHM in exchange for LP tokens, enhancing liquidity while rewarding holders.
Q3: Is OHM’s high price sustainable?
A: No. As stabilization mechanisms activate, OHM will trend toward 1 DAI, with stakers earning newly minted tokens.
Q4: What’s the role of the treasury?
A: It backs OHM’s value and generates yield via DeFi integrations, ensuring long-term stability.
Q5: How was OHM launched?
A: Via a Discord-based IDO prioritizing community fairness over speculative whales.
Disclaimer: Algorithmic stablecoins are highly volatile. Thoroughly understand mechanisms before participating.