Defi 2.0

I think most of the people are familiar with defi 1.0. On top of the centralized exchanges like Binance, Coinbase, Bybit and etc., there are decentralized exchanges (DEXes) that allows user to swap their tokens. Unlike the centralized exchange where every buy or sell order needs to be met by another order made by another person, a decentralized exchange make use of liquidity pools provided to carry out this swap. The biggest DEX right now is Uniswap. People pool their tokens in pairs like ETH-USDT and users can swap between the two tokens within the pool by paying a small transaction fee. That transaction fee is rewarded to the people that contributed to the pool.

However, contributors to the pool are subjected to impermanent loss while doing so and one way most DEXs try to incentivize LP providers to stay around is through LP farming. Using Raydium which is a DEX on the Solana chain as an example, you can provide liquidity into the LP and you’ll be given LP tokens that will act as a receipt to your claim within the LP. You can now stake that LP token on Raydium in what they call a Farm to get even higher yields in the form of their native token RAY.

While this may be good for the users as they get way higher yields but it seems to be unsustainable. DEXes are finding it hard to provide utility for their tokens and they end up being sold off or swapped for other tokens which results in a downward trend in their token’s price over a long enough time. As a result, people will keep jumping from one project to another finding for the next higher yielding farm.

Olympus DAO is a project started early this year but really started gaining attention recently. With its success, more and more forks are appearing on every other possible chains like TIME on Avalanche, Spartacus on Fantom and Invictus on Solana.

It is basically a protocol that can provide absurd APY that is surprisingly sustainable. Unlike the traditional LPs where people pool their money, the protocol owns its own liquidity. For the case of Olympus DAO, when you decide to bond with them your stable coin like DAI, the protocol promises you a certain number of OHM tokens that will be released to you linearly over a duration of 5 days. At the time of writing this, OHM is trading at about 850DAI. Which means that when you bond 850DAI for 1 OHM, you are essentially paying a premium (the difference between how much the DAO’s treasury holds to back each OHM token and your trading price) and this premium is used to mint more OHMs that will be distributed to the stakers, hence the insane APY. But if you head over to Olympus DAO now on, you will notice that the bonds are mostly sold out or it is negative. This is a sign that you’re better off just buying OHM tokens from DEXes than to bond.

Something much more interesting is happening on Solana’s Invictus DAO. It may be the same for Olympus DAO when they first started but I wasn’t around back then to confirm this. Invictus DAO is a “fork” of Olympus on the Solana chain. The reason why I say “fork” is because the developers had to program the thing in Rust for it to work on Solana. Invictus DAO started early this month and have been drawing more and more users as the days go.

What makes Invictus so unique is that they have a way higher bond discount percentage than Oympus or any other forks. Ignoring the price action of the underlying token IN, the bond discount promises a higher return than the staking rewards you get in 5 days. Until the documentation is released, I am guessing that this is a way to promote people to bond more IN so that the treasury is able to grow in asset value and back more of the IN’s price (reduce the premium between the trading price and backed value). But if everybody is bonding then staking and eventually selling the IN for profit, who is going to make sure that IN retains or appreciates in value? I am guessing that the discount rate is dynamically adjusted with the price and of IN and the amount bonded. It will come to a point where a sufficient amount of IN is backed by the treasury asset and the discount rates go down so much, people will have to stake to achieve a higher ROI and that will encourage people to swap it directly from Raydium and increase the price of IN. That way, the cycle repeats itself where the treasury needs to start catching up with the value of the total supply and will encourage people to bond and so on but you get my point. Hopefully through such a mechanism, IN can steadily grow its treasury and maybe match with OHM’s someday.



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