How To Unleash The Hidden Potential Of OlympusDAO & Other Reserve Currencies

OlympusDAO was definitely the dApp of the year in 2021, offering its users astronomical yield and building a decentralized treasury while doing so. At its peak, $OHM was valued at ~$1,400 and its market capitalization hit an all-time high of $4.4B in November. Olympus was the torchbearer for the adoption of protocol-owned liquidity (POL) and was the flag bearer of the glorious “DeFi 2.0” movement.

Despite the ~90% fall in price and negative sentiment around rebasing reserve currencies, they still have immense potential, some of which will be explored in this article.

The original (3,3) model gave too much freedom to the participants of the protocol and the model had a dangerous amount of dependency on coordination, hence causing the phenomena of the tragedy of the commons.

vLABS has a few suggestions to reserve currencies on how they could build a safer and more sustainable model, using VESQ and $VSQ, a reserve currency on the Polygon PoS chain, as a case study.

Vesq can rebrand itself as a treasury DAO aiming to be the largest community owned MATIC and ETH position in the world. The treasury and protocol will be governed by the $VSQ token, with a predominant MATIC treasury actively earning yield and shared with long term $VSQ holders.

To ensure it can create sustainable yield on its MATIC and ETH positions, it will hold not only these assets, but also actively generate yield across various DeFi protocols which are governed by VSQ holders. This enables $VSQ to wield large influence across multiple ecosystems, earn high yield on MATIC and ETH, and become a community-owned LaaS (Liquidity as a Service).

VESQ will grow to become the people’s MATIC whale with the intention of supporting the Polygon community and ecosystem. Its activities would not be limited to just the Polygon PoS chain, but all Ethereum L2s and ZK Solutions.

High-Level Overview

Part 1: Inspiration Taken From CitadelDAO

In the original model, a user could stake $VSQ for $sVSQ which would rebase in order to prevent dilution of the token holder. The user could exit at any point of time and sell $VSQ in the open market. One could definitely argue that the incentives for bad actors, who could severely hurt long-term stakers and users of the protocol, highly outweighed the counter incentives.

One way to counter this would be to create a minimum lock period with a time-decaying boosted yield which rewards users that are willing to lock their $VSQ for longer periods of time and deprecating the current sVSQ staking contract.

The user would have 4 options to lock their tokens to get a non-transferable version of $VSQ called $veVSQ:

3 Months — 0.25 veVSQ
6 Months — 0.50 veVSQ
9 Months — 0.75 veVSQ
12 Months — 1 veVSQ

The share of protocol revenue earned by the veVSQ holder would be determined by the formula below:

  1. Earn $VSQ emissions
  2. Earn a portion of bonds in the form of the respective bond currency paid out every quarter
  3. Earn farming revenue from treasury funds
  4. Collect bribes for directing treasury funds to various protocols
  5. Governance power for future decisions

The revised emission schedule will be more dynamic and sustainable. It is inspired by the tokenomics of CitadelDAO which is designed in such a way that token inflation is directed towards accumulating treasury through the issuance of bonds when the market capitalization of $VSQ is high to take advantage of price. This helps to increase the treasury and floor price of $VSQ.

When markets are bad and if the price of $VSQ takes a beating, the emissions are diverted away from bonds and given to the token holders as there is a surplus of treasury backing the price of $VSQ acquired during the bull market.

The emissions would span across 4 years with ~98m $VSQ being released making the total supply 100m. Emissions would be high at the beginning, in order to build a sizable treasury, and would eventually taper off so the Vesq treasury can continue to grow in a sustainable manner without hurting the price of $VSQ.

$VSQ’s New Emission Schedule
  1. DAO treasury: 15% of emissions would directly go into the treasury which would be split into LP and operational funds at 10% and 5% respectively.
  2. Token Inflation: Remaining 85% will be dynamically split amongst (a) emissions to veVSQ holders, and (b) emissions to bond sales to acquire treasury assets

The new inflation rate would be a function of the below factors:
(1) the percent of supply that is staked and;
(2) the ratio between the market cap and treasury value.

The new proposed tokenomics is inspired by CitadelDAO and the key parameters in the emission split equation are:

  1. Current Market Cap relative to Treasury (MT)
  2. % of current token supply staked (S%)
  3. Low Target MT (ltMT) — The lower bound of the target MT ratio range.
  4. High Target MT (htMT) — The upper bound of the target MT ratio range.
  5. Max MT (xMT) — MT at which stakers & lockers receive 0 emissions
  6. Min MT (nMT) — MT at which stakers & lockers receive 100% of emissions

Low Target MT (ltMT) — 1.1
High Target MT (htMT) — 1.5
Max MT (xMT) — 3
Min MT (nMT) — 0.5

if MT > ltMT and MT < htMT then % emissions allocated = % supply locked

if MT > htMT then % emissions allocated = %S — min(1, ((MT — htMT) / (xMT — htMT))) * %S

if MT < ltMT then % emissions allocated = %S + (min(1, ((MT — ltMT) / (nMT — ltMT))) * (1-%S))

Below is a screenshot of the distribution of $VSQ inflation between veVSQ stakers and the issuance of $VSQ for bonds.

MT Ratio & Bond:veVSQ Emissions

From the above ratio, one can observe that when the MT moves closer to 3 (xMT), the emission of $VSQ to veVSQ holders moves closer to 0 and vice versa as the MT ratio moves in the opposite direction towards 0.5 (nMT). Thus, when market cap is much higher than treasury value, Vesq would take advantage of the situation to capture a huge amount of treasury by giving out more $VSQ to bonds.

Emissions allocated to issuing bonds will be sent to a bonds contract (one contract per bonding asset) at an interval of 3 times per day (8 hours and will be distributed as $VSQ). The goal of the Funding contract is to create a hands-off mechanism for $VSQ to be exchanged for any asset that VESQ wants to acquire for its treasury.

The four key variables in the discount manager are

(1) Top Up Rate — the amount of money for top up is an increasing function of the MT ratio
(2) Discount Adjustment variable — 0.5% (Assumption)
(3) Minimum Balance variable — 1000 (Just for this example)
(4) Maximum Discount. — 20% (Assumption)

As mentioned above, the funding contract for a given asset will be topped up with $VSQ approximately 3 times daily. When the funding contract for a given asset is topped up, the Discount Adjustment variable will set the percent at which the discount should be adjusted.

Acquisition Asset: MATIC
Discount Adjustment: 0.5%
Minimum Balance: 1000
Current Discount: 11%
Maximum Discount: 20%

Current Discount = +0.005 (0.11 + 0.005 = 0.115)
New discount = 11.5%

Current Discount = -0.005 (0.11–0.005 = 0.105)
New discount = 10.5%

veVSQ stakers also continuously receive 10% of the tokens for which bonds were issued for, like MATIC and ETH, and this compensates for the lack of $VSQ emissions when the MT ratio is extremely high in a bull market.

Part 2: Inspiration taken from Sifu Vision

At the end of each quarter, $VSQ holders can burn their tokens in exchange for an equivalent $$$ amount of treasury.

At the end of each quarter, a veVSQ holder may not be able to exit their position if their lock-in period does not permit it. However, a rage quit mechanism will be available for veVSQ lockers who want to exit early.

As a penalty for early redemption, 50% of the staked $VSQ would be slashed and the early redeemer would only get the remaining 50% tokens. The slashed 50% would be redistributed on a prorata basis within the next quarter amongst all the veVSQ stakers.

The above suggestions are for phase 1 of rebranding. More information about phase 2 will be released soon.

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