Market Recap — Jan 14–17, 2022

Plus: OHM, Wonderland, & FaaS

My long BTC trade from Jan 11 was stopped out on Friday as BTC continued to chop around in a tight range over the holiday weekend. Now that we have Monday’s range formed, which tends to provide decent entries, I’ll wait for a retest of Monday’s low before entering any longs. I still like the confluence area at the range EQ / 3-day supply / yearly open, noted by the light blue box, as a target. The question is a finding an entry that provides decent areas to place stops.

The major L1’s are sitting just below flat since Thursday close, with ATOM retracing a 15% bounce over the weekend and Fantom seeing significantly more volatility than the others.

OHM, Wonderland, and Finance-as-a-Service

In the Spring of 2021, Olympus DAO was launched as the first “rebase token” to hit blockchain. Billed as a crypto-native reserve currency, Olympus DAO is a fascinating experiment in creating a token with a reserve backing, but not pegged to any other asset. The mechanics behind the idea are a bit complex, but the short version is Olympus DAO sells bonds in its native token, OHM, at a discount. Buyers can pay one of several assets, including liquidity tokens representing stakes in various pools. The idea is Olympus DAO could build up a treasury of income producing assets in return for discounted tokens in its protocol, which buyers would then have to stake for rewards. The results are…mixed…

The term “rebase” comes from how rewards were paid to those that staked their OHM tokens. When a buyer sold their assets or LP tokens to Olympus DAO in exchange for OHM, those OHM tokens were minted and released to the buyer of the bond over a period of five days. The effect is purely inflationary, and with yields currently at over 3,500% APY, dramatically so. Unsuspecting stakers are obviously drawn to high yield numbers, but the short term effect of enormous inflation is enormous selling pressure, seen in the chart above.

There is a ponzi-like element to a system like this, and I don’t think it’s quite settled if the model works long term. Given daily compounding and decent entry, it may well be the case that many holders are in the green, but this is hard to confirm since protocol inflation has varied dramatically over the life of the project.

However, it’s an extremely attractive idea to many traders who are blinded by the huge APY numbers. Where else can you part your dollars for 3,000% returns?! The cost here is hidden, of course, so the one who wins this trade isn’t the holder, its the seller.

The success of OHM, with a current market cap of over $195 million, led to dozens of forks, each with their own slight variation to draw more liquidity. While most of those forks failed, some have done very well, like Wonderland on the Avalanche network, which has a treasury valued at over $1 billion and a current APY of over 72,000%.

What isn’t clear from the chart is the compounding effect of 70,000% APY stakers receive, so even though the price of TIME has pretty much been in “downonly” since mid-November, the rebase rewards, which are paid/compounded every eight hours, do have a powerful effect.

The point of all this is the game is changing. First, many OHM forks were extremely effective at drawing massive amount of liquidity to their protocols due to the massive, and massively inflationary, rewards. Many projects were caught in an APY race that was so crazy it was common to find rebase rewards of 10% or higher, PER REBASE (that’s 10% every eight hours — I won’t compute that to APY because it’s ridiculous). Meanwhile, Wonderland stayed more conservative and survived. The resulting shakeout was brutal, and effective.

The second effect is buyers of these tokens are starting to realize that you don’t buy these rebase tokens for the fantastic rebase rewards. You buy them for their treasuries, and what they intend to do with them. Olympus DAO was designed to provide the first crypto-native reserve currency backed by a basket of assets in its treasury. If the price of OHM fell below a specific level, treasury assets would be sold to repurchase OHM. (The price upside of OHM is uncapped). Wonderland also took this approach but, in a nod to the changing landscape, Daniel Sestagalli, the founder of Wonderland and several other projects, is going a different direction:

Essentially, Wonderland is now the most high profile example of a protocol that offers “Finance-as-a-service,” or FaaS, a concept that really kicked off late last year and has seen promise early on. Some early movers in the space are MCC, REFI, and AGFI, each with different takes on an idea that combines transaction “taxes” to fund the treasury and team, “reflections” and dividends to reward holders, and a treasury that invests in yield opportunities across the blockchain universe and pays its holders in dividends . It’s something of decentralized take on an actively managed mutual fund focused on DeFi products, and one I think has promise. I’ll cover this space more in a future post, but the key takeaways for now are that OHM forks need to offer more than just massive rewards, and some are positioning themselves to do just that.

Edit: I came across this post as soon as I published mine. It’s worth a read on the history of rebase tokens, Daniele Sestagalli, and what he and Andre Cronje are cooking up