Hi guys, this is not an OIP or anything I am planning to make into one. But given the debate around OIP-76, I put together some thoughts on how a redemption mechanism through "inverse bonds" might work. Adding that below.
Google Doc Link: https://docs.google.com/document/d/1wddKCYeC0leNBC_t-tEKzyNyZkBYGPHlfL9a26RLgxg/edit?usp=sharing
This document details one potential structure under which the inverse bonds discussed in OIP-76 could be implemented. This document is not an OIP or formal proposal, but rather just a suggested framework which the policy team can use however it sees fit. Please note that I am assuming in this document when a person “bonds” their $OHM under this mechanism to redeem it for the backing, they lose that $OHM and it is burnt forever and removed from circulation. Not merely ‘added to liquidity’ but completely removed from circulation. If that is not true, this system will not work.
When considering the implementation of a redemption mechanism, we must first consider what KPIs an ideal redemption mechanism would achieve. When constructing this example implementation I focused on the following:
RFV per OHM should consistently increase, and never decrease, regardless of how many or how few redemptions there are.
Total Treasury Value should consistently increase and never decrease, regardless of how many or how few redemptions there are.
The redemption mechanism should enable, if need be, up to the entire supply of circulating tokens to be redeemed for their backing without issue.
The above criteria should be able to be met even if there was 0 demand for regular (non-inverse) bonds and accordingly no bond revenue.
(Notes: Total Treasury Value excludes liquidity where OHM is a pair token. TTV should never decrease as a result of inverse bond issuance. It is possible for the treasury value to decrease for reasons completely unrelated to inverse bond issuance such as an exploit draining the treasury or the value of the assets in the treasury going down.)
If redemption is to be achieved through inverse bonding, these points can all be achieved with a very simple rule: Place a limit on Daily Allowed Redemptions (DAR) such that the total amount of DAR is always less than Daily Treasury Growth. Put simply DAR < DTG. Olympus now has several revenue streams completely independent from bonding. Per Wartull Olympus’ annualized revenues (excluding bonding) are:
$20,000,000 from Olympus Pro.
$75,000,000 from LP fees.
$110,000,000 from Yield Farming and Staking.
$50,000,000 from Fee Sharing Agreements.
$255,000,000 annualized revenue in sum.
This is approximately $698,000 in revenues a day. Given bear market sentiments and possible inaccuracies in the data lets cut that down by 75% to daily revenues of $174,500. Assuming 100% of revenues go towards growing the treasury, and further assuming that DAR < DTG, this would allow for a maximum of $173,499 of redemptions per day.
With a circulating supply of approximately 8,850,000 $OHM as of the time of my writing this and a risk free treasury value of approximately $232,500,000, in rough numbers this equates to an RFV per $OHM of $26 (actual backing is much higher, this is just RFV which I am using as "redeemable backing" for this document). At that rate given the earlier stated upper limit for potential DAR, this would allow for the redemption of 304 $OHM per day at full backing, while still maintaining an increasing RFV and Total Treasury Value or an annualized potential redemption of 110,960 $OHM (Note that this assumes the treasury does not grow at all. If DTG > DAR, in fact the amount of DAR or annualized allowed redemptions will both consistently increase as well in nominal terms).
The obvious issue here is that at this pace, assuming circulating OHM supply stays flat, it would take about 80 years to fully redeem all OHM. There might be more demand for redemption on any given day than would be allowed while keeping redemptions less than treasury growth. Accordingly, bonds would have to be issued with later and later dates for redemption. However, this is how most bond markets work, where duration is a key element of bond price and yield. In treasuries for example, what you typically expect to see is that the longer the duration of your treasury bond, the higher the yield + principle is collected upon the maturity of that bond.
In essence with an inverse bond, the yield + principle collected upon maturity is however much backing can be claimed upon the maturity of that bond.
What I would propose is the issuance of varying dates of inverse bonds or “redemption bonds”, where the longest duration bonds are issued at complete parity to full backing (I.E. if there is $26 of backing per $OHM these bonds when matured allow their owner to collect the $26 in full) with decreasing redemption amounts the earlier that the bond matures. This creates a yield curve for inverse bonds, where the bonds would trade at premiums or discounts to each other based on the market’s perceptions of duration risk, just like any other bond market.
Each day, a portion of revenues that is some amount less than all revenues, would be set aside to provide backing for inverse bond redemptions. These could be issued with any given timeframes, but one example set of time periods might be 10 day, 20 day, and 40 day bonds. For a simple hypothetical suppose the backing per OHM was $1 and the treasury made $10 in revenue a day. Of that $10, $1 is set aside to grow the overall treasury, leaving $9 for inverse bond funding. $3 of the remaining funds were set to create 3 full backing 40 day inverse bonds (with $1 claimable at maturity each, the full backing). Another $3 of the remaining funds were used to create 6 half backing 20 day bonds (with $0.50 claimable at maturity each, half the backing). And the last $3 were used to create 12 quarter backing 10 day bonds (with $0.25 claimable at maturity each, a quarter of the backing).
Under this system users could have complete confidence that they would be able to redeem their $OHM for a portion of the treasury. They would be able to choose the time and dates that work best for them based on their desired risk profile and time sensitivity. And they would be able to do so while having confidence that the Olympus treasury and the backing per token will continue to grow regardless of market conditions or desire for redemption.
In fact under this system you could theoretically issue these even if OHM wasn’t trading below backing. There’s no reason new inverse bonds couldn’t be issued every day, with new bonds being issued as the ones that hit their maturity dates are exercised (or perhaps not exercised and allowed to instead collect the original OHM deposited).
Regardless of whether this system was seen only as a tool to be used when price dips below backing, or at all times, so long as revenue streams independent of non-inverse bonds exist, new inverse bonds can be issued while allowing for consistent treasury and RFV growth.