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What is an OHM Fork - OlympusDAO, Bonding Liquidity and ‘Ponzi’ Tokens

Crypto has been taken by storm once again by a new wave of DeFi forks introducing protocol owned liquidity - some label them as Ponzi's. Is it a misnomer?

The Rise of DeFi 2.0 and OHM Forks - OlympusDAO the Poster Child

OlympusDAO (OHM) has introduced a solution to a recent issue that surfaced in ‘renting’ liquidity in Decentralized Finance (DeFi). We take an in depth look into the essential considerations through this piece and on our DeFi Direct channel.

This model utilizes bonding mechanisms which, in short, allow the protocol to own its liquidity and build a treasury.

“Olympus is building a community-owned decentralized financial infrastructure to bring more stability and transparency for the world” according to their boiler plate on the landing page of their website

The phenomenon known as renting is often encountered in traditional Decentralized Exchanges (DEX) such as SushiSwap. Through traditional yield farming incentives, platform tokens face massive inflationary pressure. This can prove to be inefficient when we see liquidity as unreliable and moving from protocol to protocol - this is known as mercenary liquidity.

OHM Landing Page

OHM has been crowned as DeFi 2.0’s poster child -- bringing rise to more capital efficient DeFi products. I believe that is a terrible term. People have coined the new capital efficient products such as OlympusDAO, Tokemak, Rari Capital, Frax, Alchemix and Abracadabra Money as DeFi 2.0 

They are incredibly innovative but this does not warrant a whole new class of DeFi - this is a whole other discussion.

Yields That (Won't) Buy You 10 Lambos

So before we get too technical. Wen lambo ser? In all seriousness those who have been following OHM forks have seen some tremendous yields.

Exhibit A of 10%+ Yield  on SnowBank DAO

There are hundreds of OHM forks turning up with these yields. If something is too good to be true it probably is. Many OHM forks are struggling to catch traffic as the saturation grows in the market. 

It's not all doom and gloom. Early adopters are up massive multiples on some of the most prominent protocols such as OHM TIME, SB, and IN to name a few. In September, OlympusDAO had an already hefty market cap at 400m but it continued to rally over 1000% to a market cap of over 4B.

How Does OlympusDAO (OHM) Work?

OlympusDAO acts as a reserve currency that is backed by stable coins, crypto assets, and its own liquidity according to the docs. OHM incorporates game theory and economics to create a store of value with perpetual liquidity.

It is a pioneer in the liquidity mining space transitioning from mercenary liquidity to protocol owned liquidity. It achieves this via offering a bonding service which builds permanent liquidity alongside a ‘community’ treasury. 

The crazy high yields are achieved as there is rampant speculation on the value of these protocols. The protocol is able to distribute inflation to its users to encourage the OHM price back to the intrinsic value (backed price).

For example, the backed value of an OHM token is about $172 (via treasury assets) and the token is trading at $907 during press. Since so many speculators are driving the price up the protocol is able to mint tokens and distribute them to bonders and stakers.

Graphic From OlympusDAO Website

Why is Bonding Important?

This system allows users to deposit LP’s or single assets in return for OHM tokens at a discounted rate. The protocol keeps the LP tokens to ensure ample liquidity and adds any single assets to the OlympusDAO treasury. 

This works two fold, ensuring there is always ample liquidity and building up an intrinsic value for the protocol. 

The idea of protocol owned liquidity is that the project will always grant users the option to buy and sell freely. As for the single assets deposited, they provide a ‘floor’ price for the OHM token. 

Most OHM forks are trading at much higher premiums - resulting in insane yields.

What is The ( ‘3’ , ‘3’ ) Craze

This is where the game theory steps in, specifically the prisoner’s dilemma. The 3,3 specifically refers to the most optimal payoff in a prisoner’s dilemma. This is evaluated using a payoff matrix to apply game theory scenarios.

“The prisoner's dilemma is a paradox in decision analysis in which two individuals acting in their own self-interests do not produce the optimal outcome” as best described by Investopedia.

Bonding is thought to be (1,1) and fairly beneficial for the projects. The (3,3) by users staking implies the max benefit for the protocol according to OlympusDAO.

Of course the other scenarios which include selling have a negative effect on everyone. The classic prisoners dilemma. Alpha Only, a DeFi YouTuber, does a good job at pointing out some holes in staking for the individual user.

‘Ponzi’ OHM Forks vs. Innovation

This has proliferated into the same craze that every yield bearing DeFi protocol has. Tons of forks and across the many Layer-1 DeFi networks.

The market cap of OHM forks is around 7B according to CoinGecko. Lets not forget projects are popping up on a daily basis. A community based OHM Fork spreadsheet has tracked a total of 100 OHM forks, 19 of which have been rugpulls. Alpha Only pointed out 20 OHM forks on Avalanche in his recent video.

In the coming weeks who knows how many of these will launch. It is truly a bit reminiscent of the food craze that was seen when devs were forking SushiSwap in a frenzy. We can now see OHM forks popping up on the major L1 networks: Avalanche, Binance Smart Chain, Solana, and Cronos to name a few.

So what does this mean? It's hard to argue with the market and these tokens have been performing quite well. OlympusDAO is one of the second highest valued DeFi protocols right behind UniSwap. The trend is always your friend until it isn't. In short the forks have been performing quite well.

The shift from rented liquidity to protocol owned liquidity is massive for the longevity for DeFi. It truly offers innovation, but that has quickly run dry as projects saturate the space. Another key aspect to understand is that these projects are fairly new and completely backed by digital assets, introducing many layers of risk.

Recent forks really reward those who have their ear to the ground. Being able to catch the tokens on launch or even jumping through hoops to get on a whitelist is where most opportunities are found. This nature has sent DeFi users into a Ponzi craze.

“One interesting thing about ponzis in crypto is how the community has changed the meaning of the word from something that is pejorative to something that is still pejorative but not off limits from a trading perspective. In a sense, crypto people seek out ponzis. It’s weird” it was best put Frank Chaparro, News Director at The Block.

I'll leave you guys with some evidence from that under the SEC’s current definition we may be dealing with Ponzi’s. Especially as innovation goes stale in the numerous forks, anything ring true here?

Many Ponzi schemes share common characteristics. Look for these warning signs:

  • High returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.
  • Overly consistent returns. Investments tend to go up and down over time. Be skeptical about an investment that regularly generates positive returns regardless of overall market conditions.
  • Unregistered investments. Ponzi schemes typically involve investments that are not registered with the SEC or with state regulators. Registration is important because it provides investors with access to information about the company’s management, products, services, and finances.
  • Unlicensed sellers. Federal and state securities laws require investment professionals and firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
  • Secretive, complex strategies. Avoid investments if you don’t understand them or can’t get complete information about them.
  • Issues with paperwork. Account statement errors may be a sign that funds are not being invested as promised.

Difficulty receiving payments. Be suspicious if you don’t receive a payment or have difficulty cashing out. Ponzi scheme promoters sometimes try to prevent participants from cashing out by offering even higher returns for staying put.

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