A Wonderland of 85000% Returns

Hey there! Welcome back to the IGIN newsletter. Today we are going to explore one of the most explosive spaces in the DeFi realm this year, the OlympusDAO model. Why is it so big? Because some of these projects are offering annual percentage yields of 7000%, 85000%, 350000%, and some even in the millions. 

It sounds to good to be true in a lot of ways, but it's also an offer that many people would find hard to pass up. So I must warn you, DO YOUR OWN RESEARCH. 

I will do my best to explain how it all works in this letter, but I won't be able to outline all of the risks. So if you read this and want to get involved, make sure you do your due diligence. This letter is not financial advise yada yada yada. 

But I won't lie — I find this space extremely exciting. After reading this, you might start thinking the same...

So let's talk about it:

• An intro to DeFi. How to decentralize finance.

• The OlympusDAO Model. Crypto as pudding.

• Forks. No. Not the utensil. 

• Takeaways. Communities creating wealth.

An intro to DeFi.

Last summer was coined "DeFi Summer" after an explosion of new decentralized financial services were created. Yet, most of the world still has no idea how any of this works.

That's understandable. Many of these projects can be very tricky to understand, and they operate with wildly different incentives than what we are used to seeing.

All of us have been raised in the traditional finance ecosystem — cash, banks, <2% APY, etc.

The more recent wave of fintech (financial technology) has begun to improve on some of these traditional financial services — think Robinhood, Square, Paypal, etc.

The financial services industry is HUGE.

Global investment in fintech has surpassed $91.5 billion in 2021 alone. Money makes money I guess.

However, all of those services live in the realm of web2.

So, a new financial system had to be created for web3 — DeFi.

DeFi is the wonderful, magical, and confusing ecosystem that takes cryptocurrency from a novelty in which you own tokens just to own them, and turns it into a full blown revolution of how money might work for us in the future.

This space has already grown to be quite large in the last few years, and just about every project could use a full newsletter to fully understand them. So for now, we'll stick to the basics.

A few of the building blocks of DeFi 

• Wallets — used to store your crypto assets

• Exchanges/Swaps — used to buy crypto assets and/or swap assets

• Pools — allows you to provide liquidity in return for crypto rewards

Just to give you a taste of how this all works, we'll take a look at how liquidity pools harness the power of DeFi. Imagine you had $1000 that you were thinking of putting into a savings account. In a year, you might earn around 2% on that money. So $20. Not a great return.

How about we take a look at TraderJoe, a DeFi app for the Avalanche crypto network. Through one of their liquidity pools, they offer 58% APR. 

If I took my $1000, I could split it and buy $500 of each coin above, AVAX and USDC, and provide that to the liquidity pool. This liquidity is what allows other users to swap their coins. Every time someone performs a swap between these two coins, a percentage of the transaction fee goes back to you, the liquidity provider. That's how these high rates are achieved. At the end of the year, I would have 58% APR paid out in AVAX by simply allowing the exchange to use my liquidity. Assets generating assets.

So, now that you have a taste for how this new wave of financial services can make you money, let's take a look at a hugely popular model in the DeFi landscape that has appeared this year.

The OlympusDAO Model

If you recall from our last newsletter, a DAO is a group of individuals that cooperate in order to create value. OlympusDAO has been doing this hand over fist since starting in May this year. However, the economics of this can be a bit tricky to understand for the uninitiated. Let's simplify it...

The Economics (as an Analogy)

In the spirit of making this fun, I'm going to teach you the economics of this with an analogy about... pudding.

Let's imagine a world in which snacks are currency. Amongst the thousands of new snack foods coming on to the market, the system needs one snack to act as both a store-of-value and a medium-of-exchange. 

A group of smart individuals decides to turn a brand new snack, pudding, into this desired currency (because who doesn't love a good cup of pudding).

So the first thing that must be done is to build the National Pudding Reserve (we'll call it NPR), which is where all of the pudding in the world will be created. However, to ensure this pudding holds value, the NPR must fill its vaults with other snack foods that can back the value of the pudding. They decide on a snack with a stable price to back every pudding cup created. This "backing snack" will be a Snicker's bar — these will hypothetically always be worth $1.

The NPR first creates an initial supply of about 70,000 pudding cups. They distribute a large portion of these to the early adopters who buy in at the time of launch, and they distribute the rest to markets where you can swap other snacks for pudding. This allows new people to get involved by purchasing pudding.

This is where the economics get interesting. The NPR announces that anyone who owns pudding cups can lock up their pudding in the NPR vaults. In exchange, the NPR will give you an equal amount of empty pudding cups that you can cash in for full pudding cups at any time. We will call this process staking (which is the actual web3 term). 

Why would you do this? Well, in return for locking up your pudding in the reserve, the NPR will send you extra empty pudding cups every 8 hours (this is called a rebase). The amount that they send is based on the amount that you already own. So while staking your pudding, the amount of pudding cups you own will grow exponentially. These percentages being offered seem insane. The current pudding APY is over 7000% — meaning at the current rate, if you started with 100 cups, in a year you will have 7000 cups.

How can the NPR pull off these returns for stakers? They use another system for participants called bonding. How does this work? 

The NPR is the only one able to produce pudding. So how does any new supply enter into the market? Bonding.

This is when the stable-snack returns in the story. People who want to participate via bonding sell their Snicker's bars to the NPR for the promise of getting pudding cups at a discounted rate after a 5-day period. This benefits the bond purchaser because they get discounted pudding cups compared to the market price, and it benefits the NPR because they now store value in their treasury in the form of Snicker's bars.

The trick here is that it costs much less than a $1 Snicker's bar to create each new pudding cup. The profit earned here is then distributed to pudding stakers as a rebase. Additionally, as people buy pudding bonds, the NPR's treasury vault fills up with excess Snicker's. This gives them a runway period, which allows them to sustain the high APY for an extended period of time.

So what's the catch?

Well there are a few things to consider. Once the NPR launched their pudding project, the price of pudding grew substantially. Even though the NPR only promises to back each pudding by a single $1 snickers bar, the price might grow to a hypothetical price of $400 per pudding cup. Let's imagine you bought one of these $400 cups. 

Over time, as more pudding is produced, the increase in supply will inevitably cause the pudding price to go back down. However, the power of compounding pudding (aka. compounding interest) saves us here. Let's say that the price of pudding drops to $2 per cup in a year. 

Recall that you receive new empty pudding cups every 8 hours. With the NPR's high pudding returns, you are gaining cups at about a 2% compounding pudding rate daily. So in a year, your single $400 pudding cup will transform into about 1377 pudding cups worth $2 each. That's a delicious $2354 profit.

The NPR will always ensure the price of pudding stays at or above the price of a Snicker's bar. If the price of pudding were to slip below, the NPR would use it's reserve currency to buy up pudding and destroy it. Less supply will lead to the price returning to above 1 Snicker's. Hypothetically, you can assume that the price of pudding would always equal a snickers bar + a premium (determined by the market). 

As the Snicker's reserves increases, the NPR is also able to bring on other snack assets to back the pudding supply. This is good because it counteracts inflation. Although the Snicker price is pegged at $1 forever, you lose purchasing power every year with inflation if you were to hold your wealth in Snicker's. At any given time, the treasury might actually back each pudding cup with hundreds of dollars worth of snack's even though it originally only promised a single Snicker's.

So what does that leave us with? 

Pudding — a free-floating priced reserve currency backed by other snacks. Because of the mechanics of the market and the NPR, the pudding, ideally, will hold on to its purchasing power regardless of market volatility. 

Wrap my Pudding

Not so fast. You can't make all this money without paying some taxes. 

Unfortunately, every time you receive a rebase (a pudding payout), that is considered a taxable event. If you recall from earlier, that is every 8 hours...

So the NPR decided to introduce wrapped-staked-pudding. 

In our analogy, let's say you had 150 staked/empty pudding cups. If you wrap these, you give up your empty cups ,and in return, you receive an equivalent value in "wrapped-staked-pudding".

For simplicity's sake, lets say this quantity equals 1.

From now on, instead of receiving more empty cups every 8 hours, you simply hold onto the non-changing quantity of wrapped cups. However, these cups will increase in value at the same rate as before. Therefore, you will only have to pay taxes when you unwrap and unstake your pudding. (Nice! You made it through the most confusing part, so it's all smooth sailing from here)

Let's bring this back to crypto.

So you get it now right? It's just some simple pudding economics. 

Now, let's see if we can make sense of this as tokenomics (crypto economics). 

So in order to participate in the OlympusDAO, you purchase their native token, an OHM from a DeFi swap, such as Uniswap. Then you stake your OHM in the Olympus protocol (a protocol is simply the code that runs the DAO). You can then wrap your OHM, and the value of that will increase at the listed APY every 8 hours. 

While writing this, the yearly APY sat at a solid 7357%. The APY has ranged between 7000-8000% for about two months now. The current runway is 314 days, meaning the protocol can ensure the rebase rate for that entire period of time before the treasury has been depleted (while still leaving enough to back each coin). However, it is likely that the percentage rate will change over time to ensure the longevity of the protocol.

Staking is a simple, long-term strategy. If you wanted to be a more involved investor, you could purchase bonds at listed discount rates in exchange for providing the treasury with other crypto assets. After receiving the discounted OHM, you could either sell them for a profit on an exchange, or stake them to gain additional staking rewards.

What is (3,3)?

One last thing. If you do happen to fall down this rabbit hole, you will start seeing "(3,3)" or different variations of that all over the place. For our pudding example, we would use (🍮,🍮) and just imagine that emoji is what pudding looks like.

The idea behind (3,3) references an idea in game theory. Basically, staking(+3) and bonding(+1) both benefit the health of the overall ecosystem. Selling(-1) hurts the ecosystem. So as a part of the pudding ecosystem, it is best for my own assets ,and the NPR in general, if everyone is staking and locking up their pudding. 

The (🍮,🍮) symbols act as a community building and meme element to this movement. The more people who see it, the stronger the community feels. This feedback loop leads to more people buying in and doing things that benefit the ecosystem.

Olympus Forks (no, not the utensil)

Many of these DeFi projects and DAO's build their code as open source. This means that anyone can look through the code, and more importantly, anyone can copy it. 

This has resulted in many developers ~forking~ projects. In effect, this just means copying the base code. This happens all over the web3 ecosystem. And this can be very good for  users. With more options for us, protocols must innovate to keep their edge in the market. 

After the success of OlympusDAO, there have been hundreds of attempted forks of the project. Some are good projects. Some are not. So remember to research before you get hypnotized by some astronomically high APYs. However, here are two very interesting forks that appear to have some good traction.

Wonderland

*Since originally writing this, a lot has changed in the DeFi world. In particular, a lot has happened for Wonderland. It has caused quite a lot of panic and has been a rollercoaster of a few weeks for the protocol. Did I see this coming? Not at all. So this is just my reminder to really dig deep and research any projects before you jump in. There is inherent risk in much of the DeFi space. Much of this is still experimentation while building these new financial systems. I still love DeFi, but please be aware of the risks. (1/27/22)*

Ahh... we have finally made it to the Wonderland of 85000% APY. Created by an extremely impressive web3 developer named Daniele Sestagalli, Wonderland is just one of many extremely innovative projects in the DeFi space that he has put together over the past few years. 

Wonderland functions with the same mechanics as OlympusDAO, however rather than focusing on simply building a currency for general use, the team wants to focus on integrating their currency, $TIME, into the gaming ecosystem. Also, with Olympus running on the Ethereum blockchain, which can be ultra-expensive to use, Wonderland pivoted to the Avalanche blockchain, which is much more reasonable for the average investor to afford fees.

Not only is the APY impressive, Daniele is impressive. He has a strong vision for the team with gaming. The intersection of gaming and web3 is going to be huge in the future in my opinion. And with over $700 million in the Wonderland treasury, this project has proven itself as a strong Olympus fork. 

KlimaDAO

For anyone who cares about the environment (I hope that's all of you), KlimaDAO is once again proving that web3 can work for the greater good. 

Rather than using a stable coin (the Snicker's from our earlier example) to back each $KLIMA token, each is backed by "1 tonne of verified, tokenized carbon reduction or removal". By locking up these carbon offset credits in their vault, they are decreasing the supply, which in turn increases the cost for businesses looking to offset their carbon production. This will force businesses to reduce their carbon footprint for the sake of their profits. 

So not only do the stakers win through returns, the planet wins too. (🌳,🌳)

Takeaways.

1. Community: One of the first questions many sceptics go to is whether or not this is all a ponzi scheme.

Wonderlands founder Daniele's answer:  "well... i guess"

It depends on your perspective.

• Does this model only work if a large enough community buys in? Yes.

• Has a large enough community bought into some of these projects to turn them into a sustainable model? Yes

However, if we think back to our discussion of DAO's from the ConstitutionDAO newsletter, a DAO creates value for its participants if the participants create value for it.

So the true takeaway from this — community is everything in the future of the internet. In a world where protocols can be easily copied, a strong community is the difference between a quality project and a project destined to fail.

2. Building Blocks: Speaking of copying things, the ability for protocols to be forked is actually one of the most exciting parts about this new space. With every big innovation, such as Olympus, it lays the building blocks for new projects that can do things better or do things differently without having to build from the ground up. The speed of innovation in the space is wildly quick compared to traditional businesses.

3. WAGMI: Crypto has gone through many bear markets in the past, and it is surely going to go through more in the future. However, those that have fully bought in to the ecosystem like to use the phrase "wagmi",which means "we are all gonna make it".

If things go south in the crypto markets for a few months, it is important to not focus exclusively on short term returns. Many web3 projects are truly focused on building a better world. So even through the rough spots, the community of web3 is confident that we're going in the right direction. 

If you decide to get involved with any web3 projects, regardless of the returns, the most important thing you can do is buy into the community. Because if the web3 communities believe we are on the path to success...we're all gonna make it.

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-Levi