Limitations of Defi's Treasury-Backed Protocols
With the benefit of hindsight, we perform a analysis of Olympus and Syncus DAO's attempts at building treasury-backed currency (TBC) protocols. We then designed BlackRockFund to solve their shortfalls
An analysis of $OHM:
Although providing a solution short of its goals, Syncus has pinpointed the critical problems of OHM:
OlympusDAOOlympusDAO emerged as a groundbreaking project in DeFi, aiming to create a decentralised reserve currency protocol with its native token, OHM. The concept was to offer a digital currency, not directly pegged to fiat currency but backed by a basket of hard assets like DAI and ETH in the treasury.
Olympus had a couple of obstacles in growing their reserve-backed currency: How to increase the total amount of OHM tokens while making sure each one is backed by the treasury, and how to distribute these tokens. The founder, Zeus, devised an innovative solution: Olympus would distribute new tokens to stakers as the treasury grew, offering a high APY from the treasury’s surplus to make sure each token was backed by exactly $1. For instance, if there were 100 OHMs worth $1 each, and the treasury had $200, the extra $100 would be distributed to stakers as OHM, resulting in a 100% APY. Using this APY, the protocol could garner attention to the token. However, as the APY depends on the treasury’s surplus, the treasury would need a way to grow, raising the question for Olympus and its forks: “How do we grow the treasury?”
BondsOlympus opted for bonds. OHM often traded at a premium above its real value due to the demand for the APY. Bonds allowed direct OHM purchases from the protocol with the premium acting as a profit for the treasury, which was distributed as yield to stakers. However, to incentivise bonding over market purchases, bond discounts were introduced. Now you could purchase bonds at a discount and sell them on the market. This would cause the price to crash as bonds could always be bought for cheaper and sold on the open market, therefore, a locking period was implemented.
As a consequence to all this, a flywheel effect occurred: Sell bonds to grow treasury -> Higher yield -> More demand -> Bonds earn a higher premium -> Sell bonds to grow treasury, and so on.*
The problem was that Olympus’ staking was so profitable that the demand for bonds was low. Why bond when you can just stake? Ironically, staking necessitates bonding, thus bonding discounts increase until people are willing to bond. Although a locked period prevents instant arbitrage, it still leads to price suppression, albeit stealthily. More importantly, the value extracted through the price suppression was taken from holders and given to bonders. Zeus explains how this mechanism stunted Olympus' growth and created an unstable protocol and ultimately brought about their downfall.
Yet, Olympus was stuck giving this discount to bonders to keep the yield going because of the fact that the only demand for OHM in the beginning came from the APY. Most users did not realise that bonds were extracting value from them, essentially acting as hidden tax. Most of the forks did not even understand the intricacies behind their protocols.
Syncus DAO approach to solve the limitations:
“SYNC will fully capture the value of the attention the token garners, creating a flywheel effect similar to that of OlympusDAO, only this time it is a more sustainable one:
High yield -> More demand -> Volume -> Treasury growth -> More yield -> More demand.
While Olympus’s flywheel effect halts at more demand, as this does not equate to more demand for bonds, Syncus continues as a more demand automatically means the treasury grows. This makes it far more effective than Olympus' systems –which at its height had $4 billion in market capitalization– to guarantee that each token has actual worth. To put it simply, we employ taxation revenue to replace Olympus’ bonds in order to ensure that the treasury develops sustainably and does not artificially lower the token price to let third parties extract value.”
However, this is just a temporary solution that leads to short term upside.
We have identified 3 limitations with this approach:
Sell tax: is not as effective to grow treasury as bonds. To ensure long term growth, we need to consistently grow our treasury and use it to earn yields/ generate revenue that brings more intrinsic value to the token.
Inflation: Over a long period, inflation will still remain a problem as Syncus acknowledges to use a “high APY” to drive the flywheel. Sell tax will not solve this problem if there’s not enough sell
Cannot attract new investors: During the periods where price falls, new investors are less attracted to bid as they are scared away from the sell tax
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