Note: this was written back in December and remained a draft until now. Obviously coupon’s did not continue to work.
Those familiar with Empty Set Dollar may notice some strong similarities to Olympus. Both projects alter supply around a $1 price point. However, the mechanisms behind the two projects vary considerably. In this post, I will compare attributes of both to help users understand how we are similar and where we differ. Let’s get into it!
ESD vs OHM
Put simply, the main difference is that ESD regulates supply via debt (liabilities) while OHM regulates supply via equity (assets). We will explore what this means for the two main states of both networks: expansion and contraction.
Note: I will use bonders/stakers and bonding/staking somewhat interchangeably in this article. Bonding refers to the ESD equivalent of OHM staking.
This is where most of the similarities lie. In both projects, a price above $1.00 signals to the protocol that there is excess demand, spurring the creation of new supply. For ESD, this occurs by directly distributing (most of) that new supply to bonders, while OHM sells tokens directly to the market, and uses the profits from those sales to mint additional OHM for stakers.
The fact that ESD distributes new supply directly to bonders may make ESD more profitable (on paper) for some participants. However, it leaves it liable to the same downward spiral risks as elastic supply currencies like Ampleforth and Based. Markets often move based on momentum; when price moves up, participants are more likely to buy and less likely to sell, with the inverse true when price moves down. For ESD, this means although supply is increasing during expansionary phases, it is uncertain how much of that new supply actually makes it to the market. More likely, bonders will continue to hold and grow their ESD holdings until momentum shifts to the downside. At this point a large amount of the new supply hits the market, accelerating the new downward momentum. AMPL and BASED face similar issues.
For OHM, a good portion of the new supply minted reaches the market immediately. This occurs via market operations, which raise funds to back the new tokens sold. This ensures that there is truly enough market demand to sustain expansion, and not merely a lack of supply. This mitigates the risk of supply shocks on the market, and distributes profits more sustainably and fairly than ESD or AMPL.
Profit fairness is a significant issue for AMPL and somewhat of an issue for ESD. Both of these projects rely entirely on third party actions (guided by incentive structures) to manifest desired price behavior. Although this can be successful (depending on the quality of the incentive design), it allows most of the gains to be extracted from the protocol by the most sophisticated actors. While ESD may not hurt “dumb money” like AMPL and BASED do with negative rebases, this remains an issue from a long term perspective. Olympus sells new supply itself, ensuring that the profits from market operations are shared by all stakers, regardless of their sophistication or market activity. We believe this is more fair and better suited to an actual currency system as it minimizes value drain.
Here’s where the real difference’s lie. ESD handles contractions by issuing a second asset, called a coupon, which users can exchange for ESD. The coupon entitles the user who bought it to more ESD than they previously held, and can be redeemed once ESD’s price is back above $1.00. In contrast, Olympus uses reserves to buy back and burn supply when price is below $1.00.
The coupons are a clever system. ESD’s history so far has proved that they do work; when a contractionary period begins, ESD holders will exchange their ESD for coupons as intended. However, they introduce risks for both the coupon holder and the protocol.
On the holder side, there is expiration risk. Coupons can only be redeemed when ESD trades for more than $1.00, but they also have an expiration date (90 epochs after creation or ~30 days). This means that if ESD does not return to an expansionary phase within a month of the purchase of a coupon, the coupon holders’ investment drops to zero.
On the protocol side, there is leverage risk. As part of the design of ESD, debt (coupons) cannot exceed 35% of ESD supply. While it has not occurred yet, this has the potential to put the protocol in a difficult situation. Once the 35% threshold is reached, the protocol cannot contribute more buying pressure to the market. The only way to solve this is 1) by driving more demand through external means or 2) by allowing outstanding coupons to expire worthless. However, this comes at the expense of all coupon holders for the period.
Olympus experiences neither of these risks. Since all tokens are backed, the protocol has the ability to buy back 100% of supply any time the market price is below $1.00 (though it never does so all at once). This means there’s no expiration risk for token holders, no risk of running out of dry powder for the protocol, and insurance against downward spirals as seen in AMPL and BASED. It also ensures liquidity below $1.00, providing exit security for token holders, which is not the case of ESD (token holders could ultimately be forced to sell at far below $1.00 if liquidity dried up after an expansion, which would deter people from buying bonds and potentially break the peg.)
ESD is a clever and exciting system by any metric. However, the debt system it is built upon introduces risks to both the protocol and market participants. Additionally, the mechanism by which it regulates price disproportionately benefits active and sophisticated traders over passive token holders.
Olympus seeks to improve upon these drawbacks. The reserve system upon which OHM are issued removes the possibility of debt spirals and ensures buying pressure always exists when tokens are undervalued. It also centralizes issuance on the protocol level to ensure even distribution of profits. While this may remove profit potential for some individuals, we believe it creates a more fair model for a sustainable currency system.