Thanks for putting this together. I’m still thinking through this and paths forward but wanted to share my thoughts sooner to drive discussion forward. Perfect is the enemy of good; some of these thoughts aren’t fully formed, I appreciate it if you point out any weakness in my logic.
The biggest unknown to me is why would a DeFi user want to hold such an asset? Competing on incrementally better features against incumbents is an uphill battle for attention. Is newOHM just an incrementally better product or is it a zero-to-one innovation? If we can answer this question with conviction, then demand (and thereby pmf) for this asset should be much clearer.
For this reason, I’d like to first explore why a DeFi user would choose newOHM over other options.
The setup: Assume, for the sake of simplicity, a new asset called newOHM that is fully ETH-backed. This asset uses RBS mechanics to dampen ETH’s volatility and it reduces ETH’s volatility by 75%, in USD terms. This means that, in USD terms, when ETH drops 10%, newOHM drops 2.5%. When ETH goes up 10%, newOHM goes up 2.5%.
I see 3 competitive offerings that a DeFi user must evaluate before selecting this new asset: USDC, index tokens and Liquid Staking Token (LST). Let’s explore why newOHM is superior to each.
1. Why newOHM is superior to USDC
USDC is probably the easiest. The target customer is a DeFi user who feels uneasy holding USDC for either regulatory risk or financial risk related to USDC’s parent company, Circle. Alternatives such as USDT, DAI & FRAX are no better. While this user is long-term bullish ETH, they still want a stable-ish asset to keep their onchain net worth in.
newOHM addresses this key pain point: a floating asset that is independent of sovereign monetary policy and free from de-peg risks. Its volatility is less than ETH so it’s “stable-ish” to the user. The yield generated from LST preserves purchasing power in ways the USD cannot.
An important consideration arises: what is a Maximum Acceptable Volatility that makes this product appealing to the target customer? If newOHM inherits 90% of ETH’s volatility, I doubt users will accept the increased smart contract risk to rotate into newOHM. Is 50% sufficient? 25%? 10%? On the flipside, how feasible are RBS mechanics under these conditions; tighten the range too much and the resulting system may have no equilibrium (drains treasury to 0).
2. Why newOHM is superior to an index token
An index token is a token that targets a specific volatility of ETH. For instance, if you want to achieve 25% of ETH’s volatility, you could create an index vault that consists of 25% ETH and 75% USDC. Why is newOHM superior?
While this index token has a similar target volatility as newOHM, it lacks the value accrual that comes with RBS mechanics. In particular, newOHM stabilizes against OHM using RBS which effectively is a series of price auctions that grow/deplete treasury. So while the average volatility is equivalent to that of an index token, RBS mechanism yields higher returns (in ETH terms) that an index token cannot compete with.
newOHM, therefore, outcompetes index tokens on yield, which is a major demand driver. Consider that TVL of both frxETH and swETH has grown tremendously because of marginally better yields (5% versus 3.8% for stETH).
3. Why newOHM is superior to an LST
Perhaps the most challenging counter-argument is why I would hold newOHM instead of [enter your favorite LST]. There are two reasons as I see it: 1. RBS yield and 2. Good collateral.
RBS yield - because newOHM will have a monetary premium/discount, RBS mechanics capture this discrepancy into newOHM’s backing. If newOHM is then backed by LSTs, the additional backing increase coupled with LST yield creates the highest yielding asset while remaining less volatile than ETH. As I mentioned above, ETH staking yield is a major demand driver for DeFi users, even if it’s a few bps higher.
An important consideration here: RBS simulations will need to run to confirm this. In addition, the liquidity profile between OHM-ETH and OHM-stables needs to be balanced to minimize toxic flow while allowing for efficient arbitrage.
Good collateral - given that newOHM is less volatile, it becomes a much better collateral to borrow against. As DeFi users seek to maximize capital efficiency, newOHM offers same capital efficiency as ETH but with lower liquidation risk.
An important consideration here: crvUSD recently launched with a novel liquidation mechanism referred to as “soft liquidations”. Does this reduce the value proposition that newOHM is a better collateral?
RBS yield as main differentiation
Philosophical and regulatory reasons aside, I see additional yield derived from RBS mechanics as the main demand driver for newOHM. The amount of yield generated from RBS to the extent that RBS functions sustainably is still an open question, however. If we agree with this conclusion, then features like good collateral, LSD diversification and BLV further strengthen newOHM’s appeal as an asset worth holding (but still believe that RBS yield remains the core differentiating feature).
Below I’d like to explore additional ideas that may strengthen newOHM’s appeal.
Idea: newOHM as a basket of LSTs
Your proposal mentions a basket of LSTs yet such products have seen limited adoption. Case in point: Index Coop’s dsETH is an LST aggregator; it only has $1.5M in TVL.
Why would we succeed where they failed? If the answer is that RBS provides a yield boost, I can see the case for that. Just want to make sure I’m not missing any other compounding effects. I would also ask whether being a basket of LSTs is better than becoming our own LST (see below).
Idea: newOHM as its own LST
I’ve already laid out why newOHM is superior to LSTs above. Becoming our own LST allows us to squeeze more yield and, potentially, redirecting extra fees toward future emissions. Infrastructure for becoming a staker already exists (https://www.geode.fi/ - kudos to indigo for pointing this out).
Idea: OHM as liquidity rails for all LSTs
Most LSTs today are solving the dual problem of validation AND liquidity where liquidity is incentivized through governance tokens. Case in point: LDO’s price hasn’t changed since Jul 2021 yet its market cap has grown 38x (due to emissions to subsidize liquidity). Every LST provider has the same playbook; this includes frxETH (benefits from CVX power) and swETH (currently running an incentive program).
It’s worth asking whether there should exist liquidity infrastructure that LSTs can plug into with little to no incentives. This would enable LSTs to truly focus on what they’re best at: validator security, decentralization and scale. Token emissions could be redirected from liquidity incentives to creating a healthy validator base.
In their place, newOHM becomes the liquidity rails with deep liquidity and efficient routing to all LSTs. A cool consequence is that the Impermanent Loss profile will be similar to that of stETH-ETH (kudos to Oighty for pointing this out), allowing newOHM holders to earn additional yield on top of the RBS+staking yield.
Whether this is an extension of BLV or a completely new product is TBD.
Idea: Asset with native leverage and shorting
Cooler Loans makes more sense to me with a fully ETH-backed treasury. When you’re bullish ETH, you borrow ETH against backing and leverage into more ETH. When you’re bearish ETH, you borrow ETH and short it. This is a native lending facility baked into the asset, requiring no oracles or other dependencies. I’m not sure what the value add here is but I haven’t seen any asset do this. Worth exploring imo.
I’ll leave by saying that aligning Olympus deeper with the ETH ecosystem is a net benefit as it opens new avenues for monetization & utility of newOHM. While the current focus is on LST, it’s worth exploring how Olympus mechanics can work to make various components of the consensus layer more efficient. This can include MEV, Proposer space, Builder space, L2 settlement and integrations such as Eigenlayer. Olympus’ increased presence and engagement on Arbitrum (110K OHM bridged!) should not be ignored, either.
A comment on token design
Given where Cooler Loans proposal is at, I don’t see how an ETH-backed future can co-exist with a fully consolidated treasury in DAI (at least this is my current thinking; curious to hear other takes). One way forward would be to create a new protocol with newOHM (need new name) and allow users to participate by exchanging their OHM for newOHM. Innovative bootstrapping mechanisms (e.g. reserve bonds) can be explored. Implicit in this is that those who take out a Cooler Loans must repay to participate in this new future.
