Increase Olympus buyback floor from 1 DAI

liam3

There is an apparent weakness in the 'OHM backed' narrative supporting price and I would like to start a formal discussion around reinforcing this by increasing the floor buyback rate from 1 DAI.

While RFV per OHM steadily increases, sentiment for a new buyer or shook 3,3 holder is the doubt that: is it really backed, if it can go down to $1?

The parameter that reinforces the ‘OHM is backed narrative’ is the floor buyback rate, which is currently set at 1 DAI per OHM. While the RFV “backing” per OHM is much higher, it is not enough to have this implicit backing of RFV per OHM. What is required is an explicit backing reinforced through the buyback policy.

It is my conviction that Olympus should consider increasing the buyback level of the protocol by some amount to strengthen the signal that ‘OHM is backed’.

Code is law and the only RFV per OHM for the 3,3 holder is the protocol buyback price. It is not clear at which price level the OHM is backed narrative will support price, but we are yet to meet that floor from my perspective.

I would like to formalize a discussion around increasing the floor buyback and get thoughts from the community and policy team as to this course of action and at what level this could be set if a viable alternative. Has this been considered?

JaLa

liam3

Thanks for the thoughtful post. This has been brought up many times and considered. Just want to agree with Brian that this would be extremely value destructive to the protocol at this time.

Also, the protocol buys back OHM all the time if you think about it - it owns almost all of its liquidity so when someone sells ohm its the protocol on the other side of the trade. The best way strengthen this is to enhance liquidity - not increase the floor and kill our premium and runway. Furthermore, the policy team and protocol are constantly thinking about ways to introduce stability mechanisms as the protocol matures, further strengthening the premium.

Zeus riffs on these ideas in his episode of the Goodwill Yunting Podcast.

vira

liam3

I would just like to reinforce JaLa's and Brian's position.

It's sometimes easy to forget that the protocol owns over 99% of the market liquidity -- that makes the protocol itself a market participant because the SLP/UNI v2 contract values reduce as the price of OHM goes down. Liquidity itself is an investment into reduced volatility as well as a revenue stream. Keep in mind that liquidity bonds have been heavily prioritized over naked bonds in the past several weeks which is reflects the positioning of the protocol.

The buyback mechanism has two important sides:
- there is a market participant, who in this case the protocol itself, who is willing to buy any number of OHM at the price of $1
- because of this mechanism, the protocol is able to sell OHM at a premium via bonds which directly translates into protocol revenue, increasing runway & RFV. The profits from the bond sales are distributed to stakers via proxy, the proxy being here sOHM

The supposed benefits of this change:
- Ohmies feel 'safer', knowing that the price can only drop 99.29% (2USD) instead of 99.64% (1USD), or 98.21% (5USD)

The supposed negatives of this change:
- The revenue from bond sales decreases proportionally to the increase of the buyback price
- The treasury mints OHM at a higher cost, proportional to the increase of the buyback price, taking a toll on the runway (you guessed it, proportional to the increase of the buyback price)
and without sounding too catastrophic, the protocol would be obliterated shortly. 🙂

coinstrategy

liam3

I agree. Ohm backed by 1 Dai is like a dollar being backed by the paper it's printed on.

asincuka

In my perspective, the buyback on 1 DAI will just be a theory because OHM price will never touch that low. Why? Because our RFV already grows massively and our RFV/OHM right now is sitting on ~29-30$.

The ideal scenario in my mind is when OHM price drop massively below RFV/OHM due to massive supply expansion (That's why we need OIP-18 too) or whales dump and create a significant margin on it like OHM price below 20-30% of RFV/OHM, some malicious whales can do coordinated buy and making a proposal to liquidate the treasury and distribute them to OHM holder which is kinda like arbitrage with more effort through the DAO.

In conclusion, I think we need to revisit the framework on OHM buyback, which I think can be tweaked into pegging the RFV/OHM value, to stabilize and faster recovery when the price is dumping below the threshold and also avoiding the scenario i mention.

plutus

asincuka

Or perhaps just raise the algorithmic floor to some higher number, like $5 or $10? I'm skeptical of getting too close to the actual current RFV, because that number changes over time. I fully support liam3 's suggestion and encourage the debate.

liam3

plutus - I agree not pegging to RFV but adjusting conservatively. I am keen to raise this again to get a more direct discussion going with the policy team for support. I will raise visibility for this on twitter and from within the discord to understand if this has been discussed or perhaps join a policy session to raise this.

Kalash

liam3

What about 10% of rfv (or 20% - both arbitrary non-math based numbers) so it's not too close… but it also can't drop like rfv (so it could go above the threshold % stated in a high volatility situation, but would provide a stable base for recovery back to a healthy rfv/backed ratio)?

Kalash

liam3

Brian33

Raising the backing during the bootstrapping phase would massively hinder the supply expansion of the protocol.

If we changed the buyback to 10 dollars for example, we would only be able to mint 1/10th the amount of ohm's we can today (a 1000 dollar bond would mint 100 rather than 1000 OHM), reducing our runway massively as well.

I would consider raising the backing once we reach a sizeable supply (one where we could realistically see OHM to be used as a currency) imo.

liam3

Brian33

thanks for taking the time to reply

is there somewhere I can read more about the buyback mechanic? I've looked into the gitbook but am unclear as to whether this is a component of the BCV or DCV?

when you are measuring supply what metrics are you measuring growth by?

Brian33

liam3

Hey Liam, the buyback component is independent of the BCV, it is its own lever.

as for supply, we measure the growth rate of the total supply and see how fast that grows vs. revenue. Supply grows exponentially, while revenue usually grows linearly.

I'd advise against increasing the backing; it's not a lever we should be adjusting while in the bootstrapping phase. While I agree it does add stability, increasing price stability for sacrificing supply growth now will hinder the health of the protocol in the future

liam3

vira - message received re obliteration - appreciate the breakdown of benefits vs negatives

Brian33

JaLa

thank you all for taking the time to explain these details of the protocol - it is clear that when proposing this idea I was (and to a lesser extent still am) ignorant of the implications one parameter change has on the other factors.

thedamnswan

While long-term OHM is aimed at stability, currently it is very much a risk-on asset (it does tend to have a low beta to the market though). For comfortability you can look at the RFV per OHM (a quasi quick-ratio that simply shows how many times the protocol COULD pay back each OHM). Currently this ratio sits around 28.4x and 22.9x (fully diluted). While this may not protect a sudden wipe out, it could provide a cushion should a structural shift occur that resulted in a full liquidation - this would obviously have to be voted on as I don't believe this is built into the smart contracts currently.

Someone please correct me if I am utterly wrong here