Justifying the Use of the Treasury RFV to Bound the Total OHM Supply

occam

The treasury RFV is thought to be an upper bound on the total supply of OHM. From what I've seen in the documentation, the RFV of the treasury is calculated under the assumption that it will always be the case that 1 OHM has a value greater than or equal to 1 DAI.

I’ve long been puzzled by this assumption. For the sake of argument, suppose that the total supply of OHM equals the RFV of the treasury and the value of OHM is exactly 1 DAI, then each OHM in the treasury OHM/DAI LP can only be converted to OHM for less than 1 DAI. So why would this OHM be valued at 1 DAI?

Recently, I did an analysis that values the OHM in the treasury LP at exactly zero and was pleased to learn that the upper bound on the total OHM supply is … the treasury RFV!

https://hackmd.io/RY9_NvKkQlOdIN-BVX0fqQ

This is a cleaner derivation of the upper bound on the total OHM supply than anything I’ve seen so far. If you’re wondering how this result was obtained when the treasury LP OHM is valued at zero, the intuitive explanation is that valuing such OHM at zero also means it no longer must be backed, which frees up “capacity” to back non-treasury OHM.

plutus

occam And, from this it follows that, when excess backing disappears from the treasury over time, the limiting factor on supply growth becomes income.

occam

plutus

Seems to me that the ultimate limiting factor is price. All else being equal, higher price => lower value of O_tlp => greater backing capacity.

The other advantage of a high price is lower inflation in the OHM supply per DAI bonded.

In general, the higher the price, the fewer the constraints on policy makers. So maintaining a high price (significantly greater than RFV/OHM) should be an explicit policy goal, IMO.

plutus

occam This may be simply a matter of semantics. New Ohm can't be minted unless there is >$1 of RFV backing each Ohm already minted, so I would describe that as RFV being the limiting factor. However, higher price does make minting Ohm more profitable, and therefore easier to maintain the necessary surplus RFV so, tomato/to-mah-to?

To date, market forces have always assigned a significant premium over RFV to the price of Ohm, but I think it reasonable to expect that premium to shrink dramatically as RFV/Ohm approaches $1. The challenge then will become convincing potential bond purchasers that the APY is still sufficient to keep the overwhelming majority of Ohm-holders staked, so as to avoid a "bank run" scenario during the term of that bond. Given all this, my take is that (post expansion phase), non-bonding revenue will be the primary driver of value, so it becomes imperative that we broaden and deepen those sources of income now (which is already happening). As we exit the expansion phase, I expect Ohm will come to be valued much like a traditional public company, with the market premium measured as a simple price/earnings multiple, and supply will continue to grow slowly, more or less in-line with revenue growth.