The Necessity for Decentralized Liquidity

The cryptocurrency space is in a bit of a squeeze at the moment. The SEC and other regulatory agencies have stablecoins in their sights. Some, like Elizabeth Warren, go as far to suggest that banks should be banned from holding reserves that back centralized stablecoins like USDC.

The problem with the major stablecoins like USDC or Tether is they serve as a choke point for the entire cryptocurrency market. A government doesn’t have to control the entire market, only it’s liquidity. The cascading effects of an attack on stablecoins could be devastating in the short to mid-term for crypto markets.

Luckily, there are alternatives being constructed. My goal is to provide a bridge between the communities of two of the most promising projects in crypto, Olympus DAO and Terra, with a focus on TerraUSD.

TerraUSD (UST) is a decentralized algorithmic stablecoin created by TerraForm Labs and is the native stablecoin on Terra’s blockchain. To understand what this means let’s do a quick overview of stablecoins.

There are 4 types:

• Fiat-backed: centralized; they are collateralized by fiat such as the dollar (Tether, Gemini, USDC).
• Commodity-backed: centralized; they are collateralized by commodities like gold (Digix Gold Tokens / DGX)
• Cryptocurrency-backed: decentralized; these are backed by cryptocurrencies like Ether (MakerDAO / DAI)
• Algorithmic: decentralized; multiple mechanisms but usually arbitrage and seigniorage (UST, LUSD)

Let’s zoom in on algorithmic stablecoins as they warrant some explanation; specifically UST.

UST’s peg of $1 dollar is maintained through seigniorage and its symbiosis with LUNA, Terra’s native token.

When UST rises above $1 dollar any holder of LUNA can swap one dollar worth of LUNA for one UST, making a profit from the spread. If UST goes below $1 dollar we can reverse this process, swapping UST for LUNA.

When LUNA is swapped for UST a portion is burned and the other portion is sent to a community fund. In 2 weeks, after the Columbus-5 upgrade, this will cease and the portion that goes to the community fund will go to stakers of LUNA.

What makes a stablecoin like UST special is that it can’t be controlled by governments. New UST can only be minted by burning LUNA. The holders of LUNA and UST control UST minting.

For a deep dive on Terra written from the perspective of an Ohmie on the Olympus partnerships team check out this “The Terra Triforce: Rise of the Lunatics”.

Olympus DAO is, in essence, a decentralized “central” bank that seeks to create a free-floating reserve currency through fractional reserve, OHM. This means OHM is not a stablecoin, OHM is backed, not pegged. The difference being pegged is 1==1; backed is >=1.

To oversimplify, for every one dollar in approved assets Olympus brings into its treasury, it mints one OHM; this excludes assets like xSUSHI and wETH. These are used purely for backing and not used to mint new OHM. This also excludes yield the protocol makes from these assets and profit from bonding.

The vast majority of newly minted OHM is given to stakers (3, 3). Yield from staking compounds three times a day, resulting in about an 8000% APY at the time of writing; because of this, OHM boasts one of the highest staking rates in crypto at ~92% of OHM staked. The DAO also controls 99% of OHM liquidity.

Back to minting and collateralization, because of the bonding mechanism. OHM is actually backed by far more than $1, it is currently backed by $27, we call this Risk Free Value (RFV). This essentially means $27 dollars is the floor of OHM. Combined with compounding it does not take long to reach a point where you are guaranteed profit in all but the most extreme black swan events.

There’s a lot more to Olympus. If you’re interested you can check out my piece, “Climbing the Summit of Olympus”. It’s a beginners guide and quite accessible.

How are UST and Olympus DAO related and how can they and their communities benefit each other?

This goes back to problems with stablecoins and centralization. Both Olympus and UST seek to solve problems with centralization of liquidity.

The idea behind Olympus is OHM would be a reserve digital currency. Rather than being denominated in dollars, cryptocurrencies would be denominated in OHM; this frees us from the dictatorship of fiat. We would no longer have to depend on the dollar. It’s a major and essential step forward in having a truly decentralized digital economy.

Likewise, Terra seeks to free us from fiat backed stablecoins. Terra boasts multiple stablecoins representing different currencies from Dollars to Korean Won to Mongolian Togrog. In theory, Terra could create decentralized stablecoins for any currency, indeed, this is the plan. Terra can then create dApps to create a global decentralized payment and finance system that can operate in any country and uses a stablecoin version of that country’s currency.

Like OHM, UST is also truly decentralized and positioned to rapidly expand its market cap, the EOY target is a 10 billion market cap, almost 5x from here; ambitious, but possible. In about 2 weeks Wormhole will be live and UST will flood into Cosmos and Solana. Additionally, UST will reach new markets by increasing the utility of UST, this is a top priority for Terra Form Labs. They already have a dApp called, “Chai” with millions of users, many normies, that utilizes TerraKRW (KRT), a Korean Won stablecoin. Chai is in the top 5 dApps in terms of both users and volume. Other applications like Alice are being developed that would do the same as Chai, but with UST complete with UST debit cards.

One risk of Olympus at the moment is the amount of the treasury that is in DAI. While DAI is one of the better stablecoins and mostly backed by ETH, some USDC is used to back DAI, enough that if USDC faced strict regulation it could hurt DAI. This is why it is important Olympus diversify its treasury.

Olympus’ policy team has recently put forth a proposal to bring LUSD from Liquity into the treasury. I know my fellow UST maxis are a bit salty right now after hearing that.

LUSD is a logical step for Olympus. It is Ethereum native and Olympus can generate income from Liquity stability pools and liquidations. LUSD is backed by ETH and is algorithmic like UST.

Two things stick out to me about LUSD.

One, is that it can be redeemed at face value for ETH. You can always arbitrage and swap 1 LUSD for $1 of ETH, even if LUSD is below a dollar. This is very similar to LUNA/UST dynamics. Second it is accessed by independent and decentralized front-ends making it highly decentralized and censorship resistant.

The Olympus policy team is currently exploring avenues to bring UST into the treasury. They have heard the community and can’t ignore the incredible growth of UST.

It’s important to maintain security and weigh risks and rewards. Since it is cross-chain there are additional considerations. A large consideration for the policy team is they don’t have direct access to the Terra blockchain; this also limits the scope to assess liquidity. Wormhole is a big step in decentralizing the Terra bridge and increasing UST liquidity. With over 1000% growth of UST this year the problem isn’t UST liquidity itself, but getting it onto other chains.

To sum up, Olympus and UST is a win-win for both communities. This benefits Olympus by having a decentralized stablecoin that is growing incredibly fast with rapidly increasing utility. This brings many opportunities for Olympus to create revenue from UST holdings.

On the other hand, this benefits Luna holders and those in the Terra ecosystem. Olympus is a large holder of stablecoins. Olympus is one of the largest holders of DAI at $107 million and growing rapidly. One can see the benefits to Terra and Luna’s price action from a behemoth such as Olympus accepting UST.

I know there is some crossover between these communities already but I propose increased over-lap and curiosity from both sides. I firmly believe OHM and LUNA are two of the best investments one can make. It would be good to see more Lunatics make a foray into Olympus and more Ohmies using Terra and UST. There are going to be a lot of gems unearthed on Terra over the next few months.

I believe after Columbus-5 and Wormhole UST will see an explosion of liquidity across all chains and some much needed decentralization. This should provide Olympus with what it needs to determine if the benefits outweigh the risks. Before then, I hope to see more Lunatics coming to hangout in our Discord; and I hope to see more (3, 3)’s in Terra Twitter. As of today a proposal was introduced to bring Olympus to Arbitrum, this should provide a good opportunity for those that have avoided Olympus due to gas fees.

disclaimer: I hold investments in both Luna and Ohm. Nothing here should be considered investment advice. As always dyor and determine your own levels of risk.

Source: https://medium.com/@CryptoMugen/the-necessity-for-decentralized-liquidity-b95ce20cc456?source=rss——-8—————–cryptocurrency