Ohmies converted: A Mathematical Approach for OHM Bonding
— By Ibrahim Quabboua
In this blog post, we are going to continue our trip in the blockchain mysteries by passing on the new idea in DeFi proposed by Olympus DAO but not that new in the traditional markets, bonding. Bonding is the process of trading an LP share to the protocol to receive discounted OHM. What you need to make attention to is as follows:
• Maturity time (when you will receive your OHMs)
• Actual price/executive price (ROI) So, an average joe would conclude that OHM is an inflationary token, and he is right. It is not meant to be hodled in wallets, you can either:
1. go and run with your profits, (which Is a weak but less risky move)
2. sell them, buy LP and rebuy OHM bonds
3. Stake them in the protocols.
Options 2 and 3 are the logical play of Olympus DAO.
Bonding makes you buy OHM shares on the silver line, the real price of OHM should be on the blue line, the cost of minting 1 OHM (which is 1 $DAI) is on the orange line.
How does the protocol benefit from bonding:
The difference in price in between the silver and the orange lines.
How does the average Joe benefit from issuing OHM bonds:
The difference between the blue and silver lines. (You get more OHM; you lose some time)
How the bonds are priced:
Executing Price = (RISK free value) / Premium Premium
= 1 + (Debt Ratio * bond control variable) Debt Ratio
= Bonds Outstanding / OHM Supply
The premium is determined by the total debt of the system and a scaling variable. this ties the price of bonds to the number of bonds outstanding, the fewer bonds outstanding, the lower the premium and the higher the discount.
The debt ratio measures the ratio between the outstanding bonds and the ohm supply, if the ratio was too high, it means that the protocol is leveraging more which puts him in a risky position, so the premium will be higher and the executing price become lower to attract more liquidity in order to minimize risk (I wonder if your beloved USA is doing any of this math).
I mentioned earlier in the formula the term risk-free value, which is meant by backing every OHM by 1 DAI. Average joe comes again and concludes that every 5000 OHMS should be backed by 5000 DAI, so what can we do with the rest? Olympus uses the rest of the reserve in yield aggregators to simply gain more profits and distribute them between the DAO community and the stakers. ((∞, ∞), am I right?)
And to create a correlation between the demand of the OHM bonds and the executing price of each bond, a complex mathematical procedure (which I’m not gonna discuss here for the sake of you not living the blog post immediately :p) makes the value of bonds higher with the increase of pool value in a logarithmic way as described in the photo below.
Alternative bonding idea: The average joe is providing his LP tokens and getting the sweet taste of the high APY provided by Olympus. Cool. But there is a big difference between the value of an LP share on the market versus in the eyes of the treasury since it needs to always make sure that every minted OHM is backed and always backed by 1 DAI. so, they issue a calculation for what is called a risk-free value, and by that number, they identify the value of the LP token provided. This example is both explains and defines the process: an LP share with 1 OHM and 900 DAI (market value $1800).
(yup your precious LP is worth this much by the eye of the treasury, we can hear the sound of Janet Yellen screaming in the bathroom now)
The problem that should not be ignored is that the difference between the real value and risk-free value is quite high, and it is inefficient and cannot serve as the main driver of supply growth.
A solution was proposed and currently working, DAI BONDS.
The mechanics are exactly the same: a bonder pays the treasury in exchange for OHM, which vests over a predetermined span of time. The only difference is the bonder pays with DAI instead of OHM-DAI SLP.
And since the bonder is paying in DAI, there is no need to mark down the value to RFV. The protocol can now mint OHM 1:1 with the market value of what we receive. Going back to the previous example where $1800 in assets minted 60 OHMS, here that $1800 mints 1800 OHM.
In simple words, now they are 100% sure that every 1 ohm is backed by 1 DAI. and by that, they can boost supply production, and by that increase stakers wallets with OHM.
That’s how finance works,
That’s how things are done,
That’s why we can proudly say,
In code we trust.