Sphynx Labs

What is Protocol Owned Liquidity

The concept of yield farming could be attributed to being one of the most influential factors behind the explosion of decentralized finance in 2021, otherwise known as DeFi 1.0. However, a new trend has recently been observed making promising waves in the DeFi sector. And that trend is none other than DeFi 2.0, brought upon by the Olympus protocol with its revolutionary paradigm shift to protocol owned liquidity (POL)!
We are all familiar with the concept of yield farming. The idea that by providing liquidity and staking LP tokens investors can earn an income in protocol tokens in exchange for providing that liquidity and taking on the risk of impermanent loss. Liquidity providers rent liquidity to a protocol in return for being paid rewards in that protocol’s token.
Enter Olympus DAO, which flipped this idea on its head! Rather than renting liquidity from “mercenary” providers, the Olympus protocol takes matters into its own hands by constantly purchasing its own liquidity. Over 99% of all liquidity for $OHM (the governance token of Olympus) is owned by Olympus itself! How is this possible? That’s a great question!
Instead of the traditional yield farming model where the protocol perpetually pays rent (rewards) to liquidity providers, Olympus designed an alternative model known as POL. This is how POL works; Olympus offers to sell its governance token, $OHM, at a discount. Great! But, there is a catch. The discount is only valid if a user first creates eligible LP tokens (i.e. $OHM-$DAI) which the user may then exchange for $OHM at a discount rather than straight up buying the $OHM token on an exchange.

Let’s consider an example to understand this better:

Jimmy wants to invest $1000 into $OHM, he has two choices:

  • Choice 1: He can purchase $1,000 worth of $OHM on an exchange.
  • Choice 2: He can purchase $500 worth of $OHM and $500 worth of $DAI and create $OHM-$DAI LP, he can then trade $OHM-$DAI LP worth $1,000 with the Olympus DAO and receive $OHM at a discount of 10%. Over 5 days, Jimmy will receive $1,100 $OHM. Getting $100 extra worth of $OHM because he chose to bond liquidity!
In other words, rather than constantly paying mercenary liquidity providers to stake their LP tokens and maintain a healthy level of liquidity, Olympus DAO offers to buy $OHM-$DAI LP tokens from investors on the market through a process termed “bonding” to accumulate its own liquidity. On the users’ side this benefits the users by allowing them to purchase $OHM below the market price. Over time, as many users continue to bond as well as arbitrage $OHM, the Olympus DAO continues to accumulate greater liquidity while continuously earning trading fees. In time, the accumulation of LP tokens leads to price stability for the $OHM token, price appreciation, and investor trust in the Olympus DAO protocol.