OIP-15: Add ETH to the Treasury

Dropkickdarren

hippopotamus later down the track we could view 1 ETH as equal to 1 OHM, effectively allowing us to then mint OHM 🧐

occam

This would completely change the risk profile of OHM and would be a betrayal of the Olympus protocol's original promise that 1 OHM is always backed by 1 DAI. If ETH backing is indeed the end game, why not launch a separate OETH token that's like OHM in all ways, but is backed by ETH instead of DAI. (For example, Alchemix has alUSD and alETH). That way the Olympus protocol's ETH reserves would count toward the RFV (of OETH). This would be simple, and governance minimized, and would give users a choice (between OETH and OHM).

Dropkickdarren

occam I like your thinking!

occam

On second thought, perhaps OHM could become a governance token, with a claim on the DAO's holdings and the token that's currently OHM could become ODAI. Just brainstorming here...

occam

BrianPeace

I would be more inclined to share your opinion if the proposal were to put BTC on the balance sheet, because I don't see any synergies between BTC and Ohm.

By "balance sheet", do you mean the protocol treasury, or the DAO treasury, because I think there may be some conflation between the two going on. I have no issue with some small fraction of the DAO treasury being converted to ETH, though we should have a discussion about how to do that (hopefully one not as dragged out as the one on Sushi's forum https://forum.sushi.com/t/sushi-phantom-troupe-strategic-raise/4554).

BrianPeace

occam Sorry if I was unclear. I believe OIP-15 is in regard to the bonding of ETH to the protocol treasury. That's what I was referring to. Perhaps you could clarify something for me too: When you call ETH a speculative asset, what metrics do you use to determine if something is speculative? Volatility? Risk profile? Something else? If the proposal were to actively trade ETH rather than DCA into it and hold it long term, then I would agree that would be speculative activity. Though since I consider ETH to be a safe and productive asset, I make a distinction between it's volatility and it's risk profile.

Aigur

shadow

I am piping up a little bit about this in the Discord. I am not that active unless I think something is a mistake.

IMO, adding ETH to the treasury at this point is a mistake. Market-buying ETH is a pure beta strategy. During this expansionary phase we should be pursuing alpha strategies for the treasury via partnerships that bring both revenue and stability to the treasury. Buying ETH at market does neither.

BrianPeace

Aigur Glad to see you getting involved. Even if we have differing opinions, thoughtful discussions are healthy for the ecosystem. Regarding alpha and beta: Historically ETH has a pretty impressive alpha. Of course past performance is no indication of future returns, but in my estimation ETH is perhaps the most productive asset in all of crypto, and even more value will accrue to it after EIP-1559 and the ETH2 merge. As for beta, since the proposal is to DCA into the position, hold it for the long-term, and not mint against it, beta is not a something I give much thought to. When I plan to DCA into an asset that I have no intention of selling, volatility is a very small factor in my calculations.

occam

BrianPeace

Though since I consider ETH to be a safe and productive asset, I make a distinction between it's volatility and it's risk profile.

It's a good distinction. I too expect ETH to be volatile in the short run and to perform well over the long run. But there are many ways you and I could be wrong. ETH's long term performance is by no means guaranteed. While I'm comfortable with my current level of ETH exposure, I don't feel the need to take on more through my OHM holdings.

The way I see it, we are buying the ETH with newly minted OHM, and it only costs us $1 to mint new OHM. Since OHM is trading at a significant premium to RFV, then we are buy ETH at a steep discount.

The protocol will pay upward of 15,000% APY on each OHM issued to bond ETH (assuming the OHM gets staked). This high APY comes from the dilution of everyone's OHM holdings and there's no benefit in increased RFV or liquidity. I wouldn't call this a steep discount

Seems weird that so many OHM holders would welcome ongoing dilution and a shortening of OHM's runway to get ETH exposure through the protocol treasury. Achieving such exposure would be costly and seems orthogonal to the protocol's purpose/flywheel.

Aigur

BrianPeace

Thanks for the thoughtful reply. I personally like ETH as an asset, and agree that EIP1559 will benefit holders, and particularly stakers of ETH2 (but it's unclear how it will benefit OHM if we're constantly selling our gains every time ETH exceeds a 5% treasury allocation).

When I refer to alpha and beta I am referring specifically to the strategy the DAO uses in the construction of the treasury, not the performance of the treasury assets themselves. I think the alpha we offer is the Treasury Service we can offer to DeFi. I do not think we need to chase alpha with our treasury asset selections. We are not a crypto hedge fund (unless we decide to be one). We currently don't have hedge fund managers running our treasury nor do we have the risk management tools in place to run portfolio positions that incorporate highly volatile assets. If that is the exposure we're looking for, we should buy a synthetic stock or synthetic index for a real-world fund that actively manages crypto assets.

IMO, our value proposition is TaaS, and for the time being we should be focused on building out our stablecoin reserves, finding ways to maximise our stablecoin returns (including the LP earnings on our pools) and finding partners that need our services (that is where our alpha and the OHM premium comes from). Our value proposition is the liquidity we offer through bonding and protocol-controlled value. We are a diamond-handed HODLer and LPer of targeted stablecoins.

On a related note, if we do start offering ETH bonds (which seems likely, since I seem to have a minority view), then IMO we should be staking it with Lido and letting it compound (as we've done with xSUSHI) not selling down our ETH stake every time ETH outperforms our stablecoin portfolio and exceeds 5% of the treasury balance. Let winners run- ETH vol translated to OHM vol is the price of chasing alpha. At minimum we should let the allocation float within a range, e.g. 5%-10%. Once we make a decision to include a treasury asset, we should not compromise our strategy as a long-term HODLer and LPer of those assets unless there is a fundamental shift in the asset that justifies a change in strategy.

e-gons

@occam raises some good questions about how the diversification into non-stables aligns with the mission to be a decentralized currency. There is a balance between purchasing power preservation and stability.

I am personally ok with the trade-offs involved with adding some appreciating assets to the treasury. The benefit is we maintain purchasing power, and the tradeoff is more volatility in market value. I don't envision Olympus replacing pegged currencies for day-to-day transactions, so I am ok with more volatility in exchange for greater long-term purchasing power. And ETH is operational capital, so it is logical to keep some on hand.

While I am generally supportive, I am curious, @shadow : What % of the portfolio will be in stables vs. appreciating assets like ETH in the steady-state? Whatever the number, what was the calculus behind why 75% vs. 80% vs. 95%? Said another way, why is 5% the right number for ETH, and how will you think about position size for the next non-pegged treasury asset?

BrianPeace

Aigur Perhaps I overlooked it, but I don't remember seeing anything in the proposal about selling ETH. The 5% target is for boding. ETH boding will only be allowed when the value of ETH in the treasury is below 5% of RFV. My understanding and hope is that we don't sell any ETH.

I also wanted to address one of your original points about market buying ETH. The way I see it, we are buying the ETH with newly minted OHM, and it only costs us $1 to mint new OHM. Since OHM is trading at a significant premium to RFV, then we are buy ETH at a steep discount.

The last point I wanted to make is about OHM's market premium to RFV. One thing that will help OHM to continue to trade above its RFV is if the intrinsic value of the treasury is notably higher than the RFV. The long term market value of OHM would then hopefully fall somewhere between RFV and IV. If RFV/OHM reaches 1 then yield dries up. As long as it's trading above 1, then for every dollar of RFV the treasury brings in from LPs, bonds, etc. we accrue more value to stakeholders through yield and the ability to bond assets at a discount to the market rate of those assets. Bonders get discounted OHM, the protocol gets discounted assets, value accrues to all participants, and the flywheel continues.

Aigur

BrianPeace shadow

I misunderstood the ETH allocation point, reading the proposal as if ETH would be constantly rebalanced to 5% of RFV over a 45-60 rolling average holding period.

"Target 5% of Treasury risk free value (RFV) being ETH
Example: If Treasury RFV is 19 million, we would aim to accumulate $950,000 of ETH
Reach this target over a period of 45-60 days (bonds are not exact science, so we define a range)"

I am glad that at at this point we will not be actively trading or trying to dynamically re-balance Treasury assets through sales.

Regarding purchasing ETH as a means to 'achieve our vision'. This is could be said about any asset we add to the treasury. I think we should be more explicit. Why ETH? To be clear, I don't think its necessarily good or bad for the protocol to add ETH, I just want to understand why we're doing this. I care about the rationale because it speaks to the future.

There is nothing explicitly in the documentation about buying any particular asset class or token for the treasury, so the Olympus forum is the correct venue for these discussions. Treasury allocation decisions should be thoroughly presented and thoroughly tested/debated, keeping in mind that 'reserve currency' status is the project objective, not merely decentralised asset accumulation. I think the question we should always be able to answer is: how does this asset allocation get us closer to DeFi's 'reserve currency' status?

So, how does ETH (as a volatile 'ultra-hard-money' deflationary asset) get us closer to DeFi's 'reserve currency' status?

cabanaboy1977

shadow definitely for this. One thing I'm not understanding is if ETH is being giving a value of 0 and not being minted against (which I think is a good thing) what are we giving people for the some buying a bond with ETH? I assume we give them OHM still? Where does it come from? I'm assuming it come out of 1 of the OHM that should be minted from DAI, right?

kschan

cabanaboy1977 The OHM minted will come from the revenue of other bonds.

kschan

pipoctopus You will deposit ETH in exchange for OHM. As the treasury accumulates ETH, each OHM will be backed by a % of ETH in addition to other assets in the treasury.

pipoctopus

kschan but how will the OHM be minted if ETH doesn't mint OHM?

BrianPeace

You make reasonable points. I guess we are in somewhat different boats with regard to our desired asset allocations. You mentioned:

occam While I'm comfortable with my current level of ETH exposure, I don't feel the need to take on more through my OHM holdings.

Whereas I, on the other hand, feel underexposed to both ETH and OHM (maybe I'm late to the party). So adding ETH to the treasury suits me well as it allows me to gain exposure to two assets I want more exposure to. Regarding:

occam shortening of OHM's runway to get ETH exposure through the protocol treasury.

My hope is that in the long-run adding ETH will increase OHM's runway by increasing the treasury's intrinsic value well above it's RFV, and thus giving the market a reason to continue giving OHM a premium over it's RFV for a long time. This hope is of course based on my bullishness toward ETH, but I think the potential benefits of holding ETH if it appreciates substantially will outweigh the costs of obtaining it.

kschan

pipoctopus The RFV per OHM now is about $22 (check the dune dashboard here), while each OHM is only needed to be backed by $1. This means our treasury has extra fund to mint OHM without relying on the revenue from ETH bond.

pipoctopus

kschan ah understood 👌 so I assume that ETH bonds will dry up once that RFV has been assigned to OHM issuance?

shadow

Too many replies for me to directly quote, but I'll try and answer the concerns expressed.

Olympus's vision from the start has been to become a currency backed by a basket of decentralized assets. That is part of our value proposition, and it has been from the start. This is not something the Policy team just thought of one day, this has been the plan for us since the very beginning. @occam there is no betrayal of Olympus's promises, because this was one of the promises. Maybe you don't agree, and that's fine, but if you read through the documentation you would see things are going according to plan (much better than planned actually).

Selling ETH is not part of the plan, because we are aligned with its ecosystem and it will open up partnership opportunities for us in the future. Living on Ethereum, while not holding ETH has its opportunity costs, so while it was beneficial to start of with stables, adding ETH now opens up a new chapter for Olympus.

@Aigur We are not trying to diversify the portfolio of OHM holders through our Treasury, you can do that better for yourself. We are also not trying to be a hedge fund, we aren't chasing alpha through trading ETH, we are using it to achieve our vision. We also won't be selling our ETH if it exceeds the target, as you can read in the proposal.

@e-gons Short-term, we chose a conservative target as we don't want to make big sudden adjustments to the protocol. We will continuously track the effect this move has, as we do with all the other bonds and assets. Long-term, it is an ongoing discussion within the Policy team, you are welcome to bring about any suggestions you have.

A lot of the other questions have been answered, if something was missed, feel free to tag me.

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