Algorithmic stablecoins are regaining momentum in the decentralized finance (DeFi) space, with projects like Basis and Fei drawing renewed interest. Among them, Olympus DAO’s OHM stands out with a unique approach to achieving price stability through innovative mechanisms rooted in protocol-controlled value (PCV), bonding, and dynamic supply adjustments. This article dives into how OHM functions as an algorithmic stablecoin, its distinctive single-token model, and the long-term vision behind its design.
Understanding OHM: A Single-Token Algorithmic Stablecoin
OHM, developed by Olympus DAO, is an algorithmic stablecoin that diverges from traditional dual-token models like Basis or Fei. Unlike those systems—which rely on separate governance and stable tokens—OHM operates as a single-token system. The OHM token serves both as a governance instrument and a value-stable asset, simplifying the economic model while aiming for long-term resilience.
The protocol is governed via a decentralized autonomous organization (DAO), ensuring community-driven decisions over critical parameters such as inflation and deflation controls. At the heart of OHM’s stability mechanism lies Protocol Controlled Value (PCV)—a treasury of assets managed directly by the protocol to back the circulating supply of OHM.
Currently, OHM is soft-pegged to DAI, though future iterations could shift this peg to broader price indices. The PCV treasury, initially funded through OHM’s genesis launch, accumulates DAI and liquidity provider (LP) tokens from the OHM/DAI pool. These reserves are deployed into yield-generating protocols like Maker, Aave, and Compound, generating passive income that strengthens the protocol’s financial foundation.
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Supply Adjustment: Inflation and Deflation Mechanisms
To maintain price equilibrium, Olympus employs automatic supply adjustments based on market conditions. When OHM trades above 1 DAI, the protocol mints and sells new tokens; when it trades below, it buys back and burns OHM using treasury funds.
This mechanism follows two core equations:
- epochMint = (TWAP - IV) × supply × ICV × Discount
- epochBurn = (TWAP - IV) × supply × DCV × Discount
Where:
- TWAP: Time-weighted average price of OHM
- IV: Intrinsic value (currently set at 1 DAI)
- ICV: Inflation Control Variable (governance-adjusted)
- DCV: Deflation Control Variable (governance-adjusted)
- Discount: A rate applied to incentivize arbitrage
Each adjustment occurs per epoch—approximately every 7.5 hours. If TWAP > IV, the protocol mints new OHM for sale. The ICV modulates inflation speed: higher values increase issuance volume, accelerating stabilization during overvaluation.
Conversely, if TWAP < IV, the protocol uses DAI from the treasury to buy back OHM, reducing supply. The DCV governs burn intensity—higher values mean more aggressive contractions.
Any unmet demand due to insufficient treasury reserves is fulfilled via the Sushiswap OHM/DAI pool, albeit without the discount benefit.
For example:
- TWAP = 20 DAI
- IV = 1 DAI
- Supply = 20 million OHM
- ICV = 0.0001
- Discount = 3%
Then:
epochMint = (20 - 1) × 20,000,000 × 0.0001 = 38,000 OHM minted
A user spending 100,000 DAI at a discounted execution price of ~20.37 DAI receives ~4,909 OHM. If demand exceeds minted supply (e.g., 1 million DAI order), excess is routed to Sushiswap at market price.
All profits from these operations are split: 90% to stakers, 10% to the DAO treasury.
Bonding: Strengthening Liquidity and Demand
One of Olympus’ most innovative features is its bonding mechanism, which differs significantly from conventional stablecoin bond systems.
Instead of purchasing bonds with stablecoins when the peg drops, users can acquire discounted OHM by depositing OHM/DAI LP tokens into the protocol. This achieves two goals simultaneously:
- Increases demand for OHM
- Boosts protocol-owned liquidity
Users receive OHM after a vesting period, during which their LP tokens remain usable—they can exit early with penalties if needed. The discount offered depends on:
- RFV (Risk-Free Value): Derived from the constant product formula (√(x×y)) and LP share ratio
- Premium: Increases with outstanding bond volume (debtRatio = bondsOutstanding / ohmSupply)
As more bonds are issued, premium rises and discounts shrink—naturally regulating demand.
For instance:
- Market price: 10 DAI per OHM
- Pool: 1M OHM + 10M DAI
- User holds 5% of LP tokens (worth ~$1M)
- RFV calculated: ~316k OHM
- Premium: 2 → Bond quote: ~158k OHM (~$1.58M value)
This yields a potential 58% return, assuming price stability. Additionally, bonding enhances sOHM rebase yields and strengthens intrinsic value through increased treasury holdings.
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Genesis Launch: The Discord “IDO” Model
Olympus bypassed traditional fundraising methods like public sales or liquidity mining. Instead, it introduced a novel Discord-based IDO ("I" for Invite) model:
- Early access granted exclusively to members who joined before March 3
- 73% of genesis supply offered at $4 each to qualified participants
- Max allocation: 141 OHM per person (~$564 investment)
- Remaining 27% used to seed Sushiswap liquidity
Launched between March 12–14, this fair-launch approach prevented whale dominance and ensured broad distribution. At its peak, OHM exceeded $1,042—over **260x return**—though it remains above $400 today.
Despite being a stablecoin, OHM’s price volatility reflects its early-stage dynamics. As new supply enters circulation through staking rewards and bond redemptions, downward pressure will grow—eventually guiding OHM toward its 1 DAI peg.
Team incentives are managed via pOHM, a derivative token representing a claim on future OHM issuance:
- 1 pOHM = 1 OHM – 1 DAI
- Only valuable when OHM > DAI
Allocation includes:
- Team: 7.8% (330M pOHM)
- Investors: 3%
- Advisors: 1%
- DAO: No cap (550M+)
With bonding and rebasing not yet fully active, current prices remain elevated—but structural mechanisms are in place to guide eventual convergence.
Treasury Management and Future Expansion
The PCV treasury holds all protocol-controlled assets—currently DAI and OHM/DAI LP tokens—valued conservatively at risk-free levels. Post-epoch, surplus revenue is distributed: 90% to stakers, 10% to DAO operations.
Looking ahead, Olympus plans to diversify its treasury with:
- Yield-bearing assets (e.g., yVault shares)
- Other algorithmic stablecoins (FEI, FRAX)
- Blue-chip cryptocurrencies (BTC, ETH)
This multi-asset backing aims to insulate OHM from single-point failures and enhance long-term sustainability.
Frequently Asked Questions
Q: Is OHM truly a stablecoin if it trades at $400+?
A: Yes. While currently speculative, OHM is designed to gradually converge toward its 1 DAI peg through controlled supply expansion and staking rewards.
Q: How does bonding benefit regular users?
A: Bonding offers discounted OHM with high yield potential while strengthening protocol liquidity—benefiting both participants and long-term holders.
Q: What prevents a death spiral if OHM falls below peg?
A: The PCV treasury holds sufficient reserves to buy back supply. Combined with bonding incentives and supply contraction tools, it mitigates collapse risks.
Q: Can anyone create an Olympus-style stablecoin?
A: Technically yes—but success depends on trustless treasury growth, effective governance, and sustained user participation.
Q: Why use TWAP instead of spot price?
A: TWAP resists short-term manipulation by averaging prices over time, ensuring more reliable data for monetary policy decisions.
Q: What happens when all pOHM vests?
A: Vesting occurs gradually over years. By then, protocol revenue should sustain development via DAO funding rather than dilutive emissions.
Final Thoughts
Olympus DAO represents one of the most ambitious experiments in algorithmic monetary policy. By merging PCV, bonding, and community-aligned incentives, it challenges conventional notions of what a stablecoin can be.
While risks remain—especially around price volatility and adoption hurdles—the underlying mechanics offer a compelling blueprint for decentralized, self-sustaining economies.
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