• Proposal
  • OIP-127: OHM Lending Markets Pilot Programme

Summary

The proposed pilot programme is the first foray of Olympus in DeFi lending markets and aims to introduce and promote OHM as a borrowable asset. More specifically, through this programme the protocol would mint up to 200k OHM and lend it out (in tranches) on Silo and Euler to test demand and interest rate models.

Motivation

Up to this point most integrations of OHM/gOHM in lending markets have focused on the collateral-side. With the recent changes through RBS and the resulting price stability and low volatility, OHM/gOHM are becoming preferred collateral assets to use - as the recent listings on Silo Finance and Fraxlend have shown. At the same time, it is important for the protocol to also start focusing on the lending-side of the market and to promote OHM as a good borrowable asset as well.

There are a few different reasons why. For borrowers it diversifies options to borrow “stable-ish” assets beyond just USD stablecoins. For traders and speculators it provides the option to hedge or short OHM, both of which are not easily doable today. While this may seem like a downside, shorting or hedging allows for more natural market dynamics and price discovery, and helps to prevent unsustainable premiums. For Ohmies lending markets also adds additional utility in that they can lend out OHM to interested parties on various lending platforms.

More importantly though - from the protocol’s perspective - is that lending markets allow for more efficient scaling of OHM as well as diversifying the assets that back circulating OHM. Rather than being exclusively backed by treasury assets, OHM minted into credit markets would be backed by a basket of collateral assets (or rather, a claim on those assets). As a result, the OHM supply could theoretically grow without increasing the treasury assets and/or diluting liquid backing of the floating supply.

Finally, Olympus will also be earning OHM-denominated yield on OHM that is lent out, creating a new income stream for the protocol.

Pilot details

Contracts

Minted OHM for lending markets will be supplied through a lending AMO that is currently under development (and will go into audit afterwards). Depending on the timeline of the contract deployment, this OIP also allows for seeding the initial OHM lending markets through a multisig in order to start these pilot markets as soon as possible. After deploying the lending AMO contracts the multisig would unwind its position, while the lending AMO scales into them.

Pilot markets

For this pilot Euler and Silo Finance were selected as the initial lending markets. Both have the option of OHM as a borrowable asset and we’ve worked with both teams to set an interest rate model that makes sense for the protocol.

Euler currently has a TVL of $189m and has been audited by several firms including Halborn, Solidified and ZK Labs, Certora and Sherlock. Collateral assets on Euler (i.e. assets that OHM can be borrowed against) are stablecoins such as USDC, DAI, and USDT, ETH and liquid staking derivatives such as stETH and wstETH, and WBTC. For more information on Euler please see here.

Silo Finance is a newer lending market and focuses on isolated lending pools. It currently has a TVL of $22m and has been audited by Certora, ABDK, and Quantstamp. Collateral assets on Silo are ETH and XAI, their stablecoin (currently backed by USDC and ETH). For more information on Silo please see here.

Capacity

The maximum OHM minted through the pilot programme is 200k. These funds will not be lent out all at once but instead will be added to the pilot lending markets in tranches, both to see the scaling of demand as well as to manage interest rates (see below). Note that any OHM minted but not borrowed will not increase the circulating supply. Only after a borrower deposits collateral and borrows OHM will this be considered part of the circulating OHM supply.

Interest rates

Managing the OHM interest rates in these pilot lending markets will be key. If interest rates are low, it would incentivize users to borrow OHM and stake it, netting the difference between those two rates. If interest rates are high, it obviously discourages people from borrowing OHM in the first place. Through the pilot programme and lending AMO the protocol could add or withdraw liquidity in order to keep the interest rates at a level where it is both profitable for the protocol as well as interesting for the borrower.

Euler and Silo both have different interest rate models. The Euler OHM market will have a base interest rate of 5% (at 0% utilization) with a kink interest rate of 20% before increasing exponentially. The Silo interest rate model is still being finalized and works differently than Euler, but at an “optimal utilization” of the market the rate would be close to today’s staking rate.

Metrics to track

Throughout this pilot programme, the protocol will be tracking key performance metrics. Indicators of success for this pilot would be:

  • Consistent demand, measured by the # of borrowed OHM, as we scale into the markets over time
  • Interest rates that are close to or above the staking rate
  • Healthy mix of user actions (e.g. is borrowed OHM used for shorting, staking, bonding, et cetera)

On top of that we will also track utilization rates, changes in circulating OHM backing (i.e. the ratio PCV-backed vs. collateral-backed OHM), and gross interest rate income for the treasury.

Depending on the performance of these pilot markets another OIP can be created to scale the capacity or to add additional lending markets.

Voting

The polling period begins now and will end on Tuesday (10th of January). Afterwards, this OIP will be added to Snapshot for a final vote.

Approve deployment of the OHM lending markets pilot programme?

Very well thought out plan here. Thanks for all the hard work on trying to cement OHM in the ecosystem.

Great to see the team is focused on developing utility for OHM. Full support and Great work partnership team!

  • Roc likes this.

Any particular reason(s) to mint new OHM as opposed to using the OHM acquired via inverse bonds?

    Joel33 The lending AMO contract would have the ability to mint OHM directly up to a certain cap. So minting is preferable since its more automated and more scalable than shuffling funds around and assigning it to a specific lending contract manually.

      0xFelix Ah ok, that makes sense thanks.

      I do then wonder if it would be optimal to manually burn an equal amount of “inverse bonded OHM” to what gets minted in a way to offset that additional minting and reduce the overall amount of freshly minted OHM.

      The burns could be done on a 3, 6 or 12 month basis to make it easier from an operations standpoint.

        This is an easy-yes for me - needed utility and a low-risk trial with a comparison measure. Nice work team!

        • Roc likes this.

        Great proposal. OHM is overdue for lending pathways. Additional utility that signifies OHM as a stable asset will be a positive integration for the protocol.

        This is a very interesting and I believe necessary direction for OlympusDAO and OHM. One question: Why uses external lending markets and not directly develop a fully olympusDAO-owned lending market (essentially a CDP such as MakerDAO or Abracabra)? This would avoid dependencies on other lending protocols for OlympusDAO credit market (complete ownership of experience and parameters) and allow it to get the full lending fees instead of sharing it with lending protocols.

          zergrusher Whilst i see the immediate economic appeal of a DAO-owned lending market… long term we want OHM to be the reserve currency of defi and a 3rd party ecosystem to be developed around it so that it achieves scale and infiltrates everywhere n'est-ce pas? We could develop a fully fledged 1st party ecosystem but then we'd 1) just be trading with hardcore OHMies 2) lose focus on the base mechanics that make it different.

          Joel33 To be honest, burning inverse bonded supply wouldn't really impact anything since it's not counted as part of the circulating/floating supply. So, setting aside the legal risks/implications, it would not alter anything in the calculations for liquid backing, market cap, et cetera

          zergrusher Yeah that's an interesting thought that I've also entertained. For now though, using third party lending markets is much quicker to deploy than building an in house lending market, which would require a significant amount of dev resources. It also allows us to test the different models, interest rates, user behaviour, et cetera. On the long-term it might be interesting for the protocol to develop something in house (or get others to build it for the protocol, as a sort of "commercial bank").

          Also, as Thomas mentioned, the goal of OHM should be to be ubiquitous throughout DeFi and to build things in collaboration with other protocols vs. building everything in house.

            While I agree with the goal of OHM to be ubiquitous throughout DeFi and about using third party lending market as a pilot and testbed, I still think that over the long term, OlympusDAO should build its own CDP lending market.

            Because it minted OHM and thus credit making I believe it is important that this OHM creation is handled by smart contracts owned by OlympusDAO and not dependent on third-party protocols. Having an OlympusDAO-owned CDP would also start updating OlympusDAO toward a fully-fledged decentralized sovereign worldwide bank.

            I do not think that having its own lending market (as a CDP) would only appeal to hardcore OHM fans if presented correctly.

            I am also strongly in favor of using third-party lending market but I would do with normal OHM tokens (meaning already backed, not minted) like any other token on those markets.

            Again to summarize I support this as a testbed but I believe once data are gathered, OlympusDAO should work toward its own CDP solution. This would turn it into something unique in DeFi, the first unpegged decentralized stablecoin with backing that can be borrowed.

              zergrusher sorry about this, approved now. We get a lot of spam posts so one of the words above got caught in a filter

              zergrusher Thanks for sharing those thoughts! I do agree with you it's worthwhile to look into CDP style lending as a protocol on the mid/long-term - there are a lot of benefits to the protocol and users for sure. Even if we were to do that though, in my mind I still see third party lending markets and CDP style lending co-existing together. A good example of this is probably MakerDAO where both CDP lending and the D3M were operating side by side, since the latter is much more scalable.

              In any case, I think that a lot of that discussion will be dependent on the performance of these initial lending market pilots. And hopefully through this programme we'll be able to prove that there is consistent demand to borrow OHM (which would make it easier to allocate dev resources on future lending/CDP ideas).

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