Summary
Proposal to launch the Olympus protocol’s Convertible Deposits feature
Background
The protocol treasury currently grows through the following mechanisms:
- Yield earned on the treasury holdings
- Interest from Cooler Loans
- Reserves from reserve bonds
Going forward, it is in the best interests of the protocol to do the following:
- Diversify treasury holdings to reduce the reliance on a single stablecoin (USDS)
- Increase the amount of protocol income in order to increase treasury holdings
Motivation
Since the introduction of the EmissionManager, the protocol has had the functionality to enable reserve bonds (reserve token in, OHM out) automatically when the market price of OHM is the configured percentage above the liquid backing per backed OHM (LBBO).
Convertible Deposits (CDs) improves upon this by providing the ability for the market to participate in no-risk speculation on the future price of OHM in return for a redeemable stablecoin deposit. The protocol is able to earn yield on the deposit in the meantime, which in turn achieves the goal of increasing treasury holdings.
Proposal
Activate and configure the Convertible Deposits feature
Specification
Convertible Deposit Lifecycle
The lifecycle of a convertible deposit is as follows:
- Depositors participate in an auction that sets the price of the deposit asset (e.g. USDS) for OHM, along with their desired deposit amount and deposit period. The deposit is held by a dedicated contract (the
DepositManager), and in return provided a receipt token and Convertible Deposit position.
- Depositors have three options:
- At any time before the conversion expiry date, a position holder can convert their deposit into OHM at the pre-determined price. The deposit is transferred to the protocol treasury as a result, in addition to the yield earned during the interim.
- A position holder can redeem their initial deposit after a mandatory waiting period (equivalent to the deposit period). In the interim, the position holder can borrow against their in-progress redemption. The protocol earns yield on the deposit in the interim, and optionally interest on the borrowed amount.
- Lastly, a position holder can reclaim their initial deposit immediately, but with a discount applied. The discounted amount will be transferred to the protocol treasury.
Auction Mechanism
The EmissionManager determines the parameters of the CD auction, in the same way that reserve bond auctions have been determined: when the market price of OHM reaches a configured percentage above the LBBO value, an auction will be opened.
- The capacity of the auction will be set as the emissions target
- The minimum price of OHM sold in the auction will be calculated as the market price multiplied by the minimum price multiplier
- The size of each tick in the auction will be calculated as the target multiplier by the tick size multiplier
The auction functions in the following manner:
- The auction is made up of "ticks", where each tick is a price and capacity (number of OHM that can be purchased).
- Each bid reduces the tick capacity by the amount of OHM that can be converted
- When a tick’s capacity has been depleted, the capacity is refilled and the tick price is increased by the tick step multiplier
- When the auction target has been reached, each subsequent tick will be half the size of the previous tick. This leads to a rapid increase in price, but allows for emissions if the bidder is willing.
The following chart illustrates the relationship between tick size and price with the following parameters:
- Target: 4200 OHM/day (expected based on premium at 100%)
- Tick size: 150 OHM (based on average buy size in liquidity pools)
- Tick step multiplier: 100.75% (0.75% increase per tick)
The following spreadsheet can be used to illustrate the relationship between tick size, tick step and the ending price.
Auction Configuration
The CD system will be configured with the following parameters:
- Asset:
- Deposit Asset: USDS (deposited into the sUSDS vault)
- Deposit Periods: 1, 2, 3 months
- Auction:
- Tick step multiplier: 100.75% (equivalent to 0.75% increase in price per tick)
- At the time of executing the OCG proposal, no CD auction will be active. This will be left to the EmissionManager to set the auction parameters (if needed), at least 24 hours later.
- Emissions:
- Base emissions rate: 0.02%/day (same as existing EmissionManager)
- Minimum premium: 100% (same as existing EmissionManager)
- Backing: 11.74 USDS/OHM (in line with LBBO reported on the treasury dashboard)
- Restart timeframe: 11 days (same as existing EmissionManager)
- Tick size: 150 OHM
- Minimum price multiplier: 100% (the price of OHM in auctions will not go below the market price)
- Redemption:
- Maximum borrow percentage: 0 (borrowing disabled in initial rollout)
- Annual interest rate: 0 (borrowing disabled in initial rollout)
- Reward percentage for default claimers: 0 (borrowing disabled in initial rollout)
Next Steps
- OIP open for 3 days
- The proposal will be posted to OCG
