OlympusDAO: DeFi Elysium or Ponzi Tartarus?

Decentralised autonomous organisations (DAO’s) have stormed the crypto markets in 2021, being a central point of focus for the expansion into the second generation of decentralised finance (DeFi). DAO’s are a member-owned community without any form of centralised leadership, such as CEO, CFO etc. Compared to the traditional organisation, DAO’s are democratised – voting is required by members for any change – and all activity is fully public and available on the blockchain. They have their own treasury, which can’t be used without community approval. Usually, they take on the form of either charities, freelance networks, or venture capital.

OlympusDAO (OHM) falls under the venture capital area. OHM hopes to solve two main issues currently plaguing DeFi. The first issue is overreliance on stablecoins. Stablecoins like Tether (USDT), USDC and UST, are cryptocurrencies pegged to the United States Dollar and are easier to use in Crypto, due to the costly transfers back to fiat currency. The main problem with this is that they have been cryptic on their actual holdings, with it not being proven whether they are back up one for one. The worst-case scenario, if this is found not to be the case, would be a whole Crypto market crash. This is because majority exchanges use USDT for futures trading and most spot. The second issue is liquidity pool issues within DeFi. In summary, when a new DeFi protocol begins, larger liquidity providers are attracted due to the large yields. As enough liquidity becomes available, the large providers exit as the yields fall, leaving the remaining provides with worthless tokens and no liquidity to exit.

OHM seeks to solve those issues, instead relying on non-pegged stable coins (DAI, FRAX, LUSD). One difference is that each OHM is backed, not pegged, by at least 1 stable coin, in theory meaning its intrinsic value can never be below $1 and can increase in value indefinity past this point. To solve the liquidity issue, the protocol uses bonding mechanisms, to generate revenue, and high staking rewards to provide incentives for investors. Bond sales generate profit for the protocol and the treasury uses these profits to mint OHM and distribute to stakeholders. It is built on a game theory principle: if both agents stake, the best outcome is achieved, and if both sell, the worst outcome is achieved. The current APY for staked OHM is 3,491% (in comparison the UK national interest rate is 0.25% APY).

Through the success of the OlympusDAO model (by forking OHM), multiple copycats have emerged as well. Many are offering even more ludicrous staking rewards. RomeDAO (an APYRPG), is offering 97,544.44% APY. They promise a Roman-style campaign, where each sROME (stake RomeDAO liquidity token) can be used in a strategy video game style conquest, which promises future NFT rewards. Another is Wonderland ($TIME), which is the same as OHM, except it is built on the avalanche network in comparison to Ethereum. Wonderland tries to attract investors with another high APY of 84,383.4%. These two however, are examples of DAOs, which haven’t rug pulled or failed. as there have been many promising millions, even billions of APY, which have left wide-eyed investors emptied handed.

So, is OlympusDAO and its DeFi 2.0 a Ponzi scheme? From the information available, its “more investors mean more money for the rest of us”, is the exact definition of a Ponzi. Moreover, further future issues of OHM could develop from 4 of its 7 multisig (multisignature, refers to requiring more than one signature to approve a transaction) wallets controlling all the treasury transactions, meaning the treasury is centralised. This theoretically means that those 4 individuals could rug pull OHM at any point, crashing not only OHM but all the forks in the process.

Investing into DeFi is always risky, highly speculative, and potentially very profitable. Despite the profitability, OlympusDAO, is to be treated with extreme caution, as despite its admitted locked value of 2,000,000,000 USD and its continual existence for over a year now, its inherent flaws make it Ponzi-like.

By Sam Buchan

Sector Head: Sophia Li

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