• General
  • Use Price Floor As Tool For Monetary Policy

Summary

The protocol can back 1 OHM with 1 DAI. The protocol might as well back 1 OHM with 10 DAI, or 100 DAI, or 1000 DAI, depending on the amount of RFV [0] in our treasury. The only caveat is that the protocol backed price floor for OHM is in reflexive relationship with the reward rate we grant to OHM stakers. The hypothesis here is that a higher price floor provides more economical security and a more reliable trading range.

Motivation

Two fundamental components of OlympusDAO [1] are its protocol and its treasury. Our treasury provides RFV as economical security, on top of which all success on mount Olympus is built. The protocol acts as buyer of last resort below the level of a predetermined price floor. This price floor right now is 1 DAI per OHM. The reason why the protocol can buy back OHM below price floor is because we have DAI for each OHM in circulation. Since OHM trades at a premium, we take way more DAI in than we need for backing OHM. This surplus is used for supply inflation, and the OHM minted using the premium paid for it is distributed to stakers based on a configured reward rate. Now we can already back 1 OHM in circulation with round about 100 DAI. Regardless, the price floor is just still configured to be 1 DAI. What we therefore just do not do so far is to activate the buyer of last resort at a higher level. This proposal suggest to realize the price floor to be a tool of our monetary policy. This tool could enable the buyer of last resort at higher levels and thus provide more economical security over time while keeping supply inflation at manageable levels.

Considerations

Since energy cannot be destroyed, it is always conserved, regardless of a system's ability to capture it for its own purpose. Energy conservation in the OlympusDAO protocol is reflected in parts within the reflexive relationship between price floor and reward rate. There is only this much RFV we can use at a time. How this usage of value might look like can be described by space time compression. Within a long time period, a low price floor and a high reward rate can be guaranteed. Within a short time period, a high price floor and a low reward rate can be guaranteed.

For the amount of premium taken in upon bond purchases, the protocol is able to mint fewer OHM the higher the price floor is. Given a price floor of 1 DAI per OHM and a bond price of 500 DAI per OHM, the treasury can mint 499 OHM in addition to the 1 OHM being purchased by the bonder. Conversely, given a price floor of 100 DAI per OHM and a bond price of 500 DAI per OHM, the treasury can mint 4 OHM in addition to 1 OHM being purchased by the bonder.

Now there have been ideas thrown around to lower the reward rate (APY) for stakers. And people ask why and what for, for good reasons. Considering the aforementioned reflexivity between price floor and reward rate we can argue that a lower reward rate could be justified if a higher price floor is given in return. The goal of this proposal is to demonstrate the potential of the protocol's mechanism design to bring more economical stability to the system and its participating members [2]. While operating at a price floor of 1 DAI per OHM the spot price for OHM reached ATHs way beyond 1000 DAI. I want to make the hypothesis that an ever increasing price floor yields ever increasing ATHs. Given a low floor price, the higher the premium paid for OHM, the more volatility and uncertainty will be in the market. OHM is a free floating algorithmic currency. The question might be if you want to trade between 1 and 1500 DAI or 900 and 1100 DAI. I am of the opinion that the latter provides a more promising outlook for the future.

As I see it, the protocol's mechanics work properly in a more or less balanced relationship between sales and bonds. The nature of sales is to use capital for creating buy pressure in the market. Number go up. The nature of bonds is to use capital for creating sell pressure in the market. Number go down. As of time of writing there is an imbalance between capital sources used for bonds and sales. The comparatively little capital flowing into sales does rarely match the capital flowing into bonds, because most capital for bonds is recycled by stakers. That means most capital for bonds comes out of the market, where it in fact should be captured. That means (4, 4) is good for the treasury, but bad for the price of OHM. In fact it appears that the delta taken from the price reduction in the market is just put into the treasury as RFV. And so there is nothing but ponzinomics to lift the price of OHM up again after bonding, simply because we do not activate the buyer of last resort until we fall down to 1 OHM trading below 1 DAI. This proposal aims to activate the buyer of last resort in close relationship to bonds, in order to help the weaker sales side of the market.

Price floor and reward rate depend on RFV. The amount of RFV the treasury can provide depends on revenue streams we deploy. More RFV means more energy in the system, means higher price floor and higher reward rate with respect to their reflexive relationship. There are different sources of revenue the protocol can deploy in the future. I envision OlympusDAO to be THE decentral bank branching off into free market competing hedge funds deploying their own revenue strategies in order to cycle back profit into our common treasury. First branching initiatives already started with our cross chain efforts. As of time of writing we have two revenue streams already in place. First, the vision driven premium captured by bond purchases, and second, the SLP fees earned from our POL.

In finance there is a concept called reversion to the mean. The idea of mean reversion is that an asset price fluctuates around its fair or intrinsic value. And while asset prices rely on capital inflow the state of OHM right now is slow growth due to high uncertainty in an economical sense. Raising the price floor would inevitable force the mean upwards, since the protocol acts as buyer of last resort using the premium already paid for OHM. Therefore activating the buyer of last resort at ever increasing levels, at the cost of runway, would drive economical security upwards regardless. Thus making the system more attractive to cause more external capital to flow in. This dynamic forces the OHM price to inevitably go up over time, regardless of market conditions. We would not have to wait for demand to appear. We could create demand simply because of the arbitrage opportunities created by price floor and price ceiling. This mechanic right now does just not work because the price floor and price ceiling are too far apart. See difference between "1 and 1500 DAI" and "900 and 1100 DAI".

If you made it to this point, I want to argue that it should become apparent how all the puzzle pieces fit together: sales and bonds, cross-chain expansion and revenue creation, price floor and reward rate. Now, I do not intend to force any decision or vote with this proposal. What I want to achieve here in the first place is to spark a fire out there in the dark. Imagine any whale dumping happening on ever higher prices. Imagine ever higher lows. Imagine having 1 Bitcoin and Bitcoin having a treasury that gives you 100.000 DAI whenever you ask for it. Imagine OHM being the ever capital attracting black hole. Imagine being this early. Don't take my word for it. Dream big for yourself ohmie.

  • [0] For relevant acronyms please consult the glossary in our documentation.
  • [1] Another fundamental component of OlympusDAO is the titanium reinforced nano graphene community. I love all my ohmies.
  • [2] Members of the system may be current and future ohmies as well as future integrations.

    xh3b4sd

    I personally am all for rising price floor, since current premium over the reserves is just extremely high and thus the price is perceived as having a lot of downside, with only mighty will of (3, 3) keeping it up.

    However in case we expect price floor to rise 100x to narrow the current premium, I'd also consider putting another vote to change denomination of OHM to reach digits much closer unit parity with DAI, to make OHM more useful as a UOA currency. E.g. denominating the unit count of OHM by 100x as well. Ofc only if this can be easily done on protocol level. I am not sure about technical feasibility.

    Alternatively, we need to come up with names of smaller OHM units.

    For example metric system
    0.1 OHM = dOHM (deciOHM)
    0.01 OHM = cOHM (centiOHM)
    0.001 OHM = mOHM (miliOHM)
    etc.

    Or have something more funky, e.g. 0.001 OHM = 1 ZEUS

      Coud there are 4 projects on coingecko that use SAT but bitcoin still uses sats as a UOA.

      I disagree with this proposal and with the idea of breaking down OHM into smaller units. In my opinion raising the price floor by reworking the backing to >1 DAI per OHM is not very 3,3. The main reason for this is that it completely obliterates our runway, arguably our most valuable asset.

      A far more sensible approach would be to keep the backing the same while lowering the APY. Lowering the APY is actually kind of a beautiful thing. Firstly, lowering the APY doesn't inherently impact the value/future value of your OHM (lowering the APY doesn't mean you will receive fewer OHM, it just means it will take longer to distribute than if APY were at 100k%). Secondly, lowering the APY extends the runway, which is beneficial from an optics/new protocol user perspective. Thirdly, and I think most importantly, lowering the APY means that at any given moment we are minting fewer OHM per treasury DAI, thus resulting in more treasury DAI (risk free OHM) per circulating OHM, which actually helps to establish a higher price floor.

      Wartull it was. I used an anology to explain my reasoning behind a suggestion to the proposal. On that note I do not think we should raise the floor and instead we should lower apy. This will maximize the value of the DAO and the ability it has to invest in growing the protocol.

      Another day, another excellent Ohmie proposal.

      with that being said, I preach caution and patience. Let us see what v.2.0 rolls out. As with the ability of the protocol to allow the users to have the ability to earn yield on their OHM and partially their sOHM this would give OHM a new use case/ buying pressure.

      sacrificing runway now would fail to achieve the intended target of an algo currency. Having an ever rising floor would further fuel ponzinomics. Where is the use case of OHM.

      Demand needs to be created, monetary policy has been great, we need to attarct new Ohmies to join. Plus, it is imperative that we add use cases like what is happening with Rari Capital ($RGT).

      down the road we could have a Bancor partnership where OHM can be paired with BNT (defeats the purpose of “backing” but allows the token to be used as intend “algo coin” to be paired with other coins.

      Price should float and like how we attracted the first 100 users we will bring in the next 100,000. Patience is a virtue and with our exciting and giga brained community we are growing at a rapid pace. People tend to forget that we are a relatively young protocol.

      Being patient now does not mean being passive, we should always engage in these discussion. But as for me, I want to wait a bit more until v2.0 rolls out to see how it can attarct new players to the market.

      If 2.0 just enriches the lives of current Ohmies (by earning on their OHM and partially on their sOHM) without the acquisition of new Ohmies then I yield to the above proposal and a new floor would need to be set.

      but as for now I say “let’s cross the bridge when we get there”

      Thank you again Ohmies for a wonderful read

        Really well thought through. I’m wholeheartedly in favor of this. Seeing as a vast majority of ohmies bought above $1, there is a serious risk of downside, even with the 100k+ APY. The point of OHM is to have an algorithmically stable currency. Generally, these have tried to maintain a $1 price, but that price could just as easily be $1000 and still achieve all the goals we have for OHM.

        4 days later

        xh3b4sd The comparatively little capital flowing into sales does rarely match the capital flowing into bonds, because most capital for bonds is recycled by stakers. That means most capital for bonds comes out of the market, where it in fact should be captured. That means (4, 4) is good for the treasury, but bad for the price of OHM. In fact it appears that the delta taken from the price reduction in the market is just put into the treasury as RFV. And so there is nothing but ponzinomics to lift the price of OHM up again after bonding, simply because we do not activate the buyer of last resort until we fall down to 1 OHM trading below 1 DAI.

        Thank you for articulating this so clearly. I have seen it and I expected that the main political discourse would be around which curve to use and how to support it using multiple assets in the treasury. It seems intuitive to have the APY inversely connected to movement of the price floor and use bonds and other interactive mechanisms to create incentives that smoothens out the curve if we need to. This would be the "central bank" style tool we could utilize to control the velocity of our supply growth as we move towards an equilibrium close to market price.

        Edit: I'd like to add that the ponzinomics aren't really a ponzi since the sOHM is distributed equitably among the stakers.

        A higher price floor would also be useful in case of a future implementation with RariCapital.
        This tool effectively reduce downside volatility which would be perfect to avoid big liquidations.

        I support this idea for the reasons suggested by the poster, and would appreciate their thoughts on how the floor will be set, which I imagine would be automated, responsive to system conditions, and therefore generally predictable?

        It seems intuitive that to maximize policy flexibility the floor might also need to reduce from time-to-time (as the APY also moves up-and-down). However, a drop in explicit backing might have a deleterious impact on expectations, driving the OHM price into a high-vol drop. Do you imagine the floor will only go up? If so, does this risk painting us into a policy corner at some future date where OHM is characterized by high treasury backing and low APY, with no way to move either?

        I do believe that a higher level of treasury backing creates a more intuitive and conservative store of value for new or prospective OHMies. Six digit APYs are difficult to comprehend for almost anyone trying to come to grips with Olympus for the first time, whereas increasing the DAI that backs each OHM at rate which exceeds the rate of inflation (which is a bugbear for any fiat-pegged stable-coin) will provide a more comprehensible narrative for value storage and purchasing stability.

        Effective treasury management is our next big task. It will make or break OHM in the long run and could provide another mechanism to escape a highly-backed, low-APY policy corner if we ever found ourselves in one.

        6 days later

        I want to thank everyone who engaged in here, on Discord and on Twitter. The proposal IMO was already a huge success because it achieved what it intended to do. We planted the seeds for the future. The overwhelming majority of feedback about realizing the price floor as tool for monetary policy was constructive and positive. A lot of amazing debates got initiated already and I think ideas for future plans got bolstered.

        Raising the price floor implies reducing runway as of now. I have hoped to have made this very clear in the proposal above. Following some conversations I was not always sure if all consequences of this tool were fully understood. The proposal does not mean to make us raise the price floor right now just like that. That would never work out for the system. I think what is most important is to tune the engine, the protocol, and beef up the treasury, so that we maintain a healthy backing above price floor. Over time I would like to make the treasury more productive and maybe set aside access reserves that can be particularly used for only increasing the backing without diluting runway. But that is deep down into the future, because all of these developments take a lot of time.

        We are now way more clear on reducing APY to stop bleeding rewards and to increase sustainability for the protocol. Because right now our backing is effectively diluted every day. So we are totally moving into the right direction with e.g. OIP-9 and everything else we do right now. See partnerships and pool bootstrapping.

        I think changing quantities or divisibility of OHM is a separate subject and I did not intent to suggest anything like having to deal with smaller units of a token. I personally do not understand the problem domain of unit bias here. So I would leave that to another proposal and to people who are more into that topic than me.

        23 days later

        I resonate with the risks of ponzi ism when selling staked ohm and re entering the system with minted Dai.
        But I also think awaiting the outcome of the gradual reduction on interest rates over the next 3 weeks
        to enable sustainable level of runoff .
        I think if you create a monetary system that works well it will attract the ventures/capital and patience creats it own value.

        a month later
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