Summary: The primary supply emission structure of Olympus has the protocol offer new tokens when the market for OHM is at a premium. This proposal suggests the installation of upgraded automated infrastructure for this process.
Proposal: Install the Emissions Manager into the protocol, providing it with minter privileges to allow it to emit new supply. The functionality of the contract is described below:
Description of Smart Contract: The emissions manager operates with two main policy variables, the base emissions rate and the minimum premium, and computes emissions based off of premium (which equals market price / backing price). This occurs every 3 epochs and is triggered by the heart.
When premium is greater than the minimum premium, the protocol will create a Bond Protocol market offering a computed amount of OHM in exchange for new reserves (in the form of USDS). The equation for this emission is: new supply = total supply * base emissions rate * (premium + 100%) / (minimum premium + 100%).
For example:
- total supply of 15m OHM
- base emissions rate of 0.02%
- premium of 200% (price of $30 with backing of $10)
- minimum premium of 100%
new supply = 15m * 0.0002 * (2 + 1) / (1 + 1) = 4,500 OHM.
This calculation and emission occurs once per day given premium is greater than the minimum premium.
The new supply equation creates a linear increase in emissions as premium goes up. It is important to note that implicit in premium rising is a rising price per token. Thus, reserve inflow to satisfy emissions increases exponentially with a rising premium. This ensures that the system scales with the market, increasing and decreasing the impact of its emissions exponentially with free market movement. It should also be understood that any reserve inflows due to the emissions manager will increase backing and thus decrease premium at the same price, allowing the inflow requirement of a given price to decrease exponentially the longer it is sustained.
You can see this dynamic graphically below (ignore the actual numbers and focus on the shape/amplitude of the curves):
Supply vs Premium Curve:
Inflow vs Premium Curve:
Suggested Policy Variables: I will first list how I think about these, and then give suggested initial values.
Minimum Premium: This variable dictates what premium the market must reach before the protocol begins emitting liquidity in the form of new OHM. This is the more arbitrary of the two, but my heuristic is that new supply should be accompanied by tangible benefit to backing. Otherwise, it is simply inflation of supply with no systemic benefit. 100% to me is a simple threshold that satisfies this base consideration.
Base Emissions Rate: This variable dictates the rate at which emissions occur. A too low BER diminishes the growth rate potential of the network at premium and may also allow for undue volatility in the market as the protocol fails to provide adequate supplementary liquidity. On the other hand, a too high BER would act as a suppressant against more significant premiums, which diminishes the ability for backing to grow. My suggestion is to set it at 0.02%, which was the average rate during 2021 (I derived this from historical data and you can see it here).
Motivation: Ensure the system is ready to grow treasury, backing, and supply upon an increase in demand for OHM sufficient to push higher premiums.
Timeline: Discuss now, move to OIP and OCG when applicable. Code entered an audit on Monday 4 November with an expected end date of Monday 11 November. A pull request for the code can be found here.
