How to Make a Black Hole for Assets
Happy Monday!
You may have seen some buzz recently about the absolutely mind-boggling APYs (Annual Percentage Yield) on certain crypto projects. You may have seen numbers ranging anywhere from “meager” 7000% APYs all the way up to truly staggering >300,000% APYs.
What the heck is going on here? What is driving this massive yield? Are we all getting scammed? I mean could this be anything but a scam?
First off let’s define what a “staking APY” even is. Does a 300,000% APY mean that I am guaranteed to make a whopping 3000x on my money in just a year? No it does not!
Annual percentage yield is the yield over the entire year assuming that price stays the same and that the position yield remains the same and is constantly compounded. In reality both the price and the % yield amounts change all the time. If the price crashes to zero, well 300,000% of zero is zero.
On the other hand, “staking” refers to the act of locking your crypto tokens into a special program (called a smart contract) that rewards you for “hodling” the coins rather than selling. So you have to keep your tokens locked for the whole year to theoretically get to those numbers.
These crazy staking APYs have been born out of a new model first introduced by OlympusDAO (found under $OHM ticker). OlympusDAO set out to be a “central bank” of crypto by creating a treasury that would naturally suck in desirable assets in exchange for the OHM token. The team optimized their treasury model for incentive-alignment and game-theory, and what they came up with is known as the “bonding model”.
Here’s how it works: The project allows users – anyone – to sell certain assets to the OHM treasury in exchange for discounted OHM. These assets usually take the form of liquidity shares in the project’s native token liquidity pairs. For example, the OHM treasury will pay you for, say, creating liquidity between OHM-ETH and then selling that liquidity to OlympusDAO. The treasury secures liquidity – which generates a revenue stream from trading and confidence in the token – and the user gets more OHM than they could have otherwise.
But how to get people to hold this OHM instead of immediately selling for cash? That’s where the crazy-high staking APYs come in. The protocol uses a mechanism called a “rebase” to constantly inflate the supply of OHM tokens (it’s not all out of thin air, remember the protocol does generate revenue from its liquidity positions and other activities). 100% of this inflation is distributed to users staking OHM. In this way, the treasury itself acts like a black hole.
Stakers have a high incentive to remain staked for the APY, or else they must sell immediately or get wrecked by the multi-thousand % inflation rate. Meanwhile other users have an incentive to lock valuable cryptoassets (think stablecoins and ETH) to the protocol treasury in exchange for discounted tokens. OlympusDAO demonstrated unequivocally that this model can work – they now boast a >$4 Billion market cap with a >$800 million treasury ($175 million of that being “risk free” directionless stablecoins). They also own 99.9% of their own on-chain liquidity. The staking APY for OHM tokens is currently 7,228%.
But OlympusDAO is just scratching the surface. Now that the bonding model has been successful, other projects of all sorts have started to adopt it as a means to grow a mixed-asset treasury quickly and attract strong-handed stakers. It is not uncommon to see these projects launch with dizzying APYs in the hundreds of thousands of %.
Many of these are undoubtedly scams seeking to prey on the unwary speculator and/or capitalize on the heat of the moment. But many of them are also legitimate projects using the bonding approach to tackle big problems in new and unprecedented ways.
One of these that I have become very interested in is KlimaDAO. KlimaDAO is bringing the treasury-bonding mechanism to the carbon markets. KLIMA uses new tech to bridge verified carbon credits onto the blockchain (e.g., the Polygon chain where KlimaDAO currently lives). Once they’re on-chain, KLIMA incentivizes users to buy these offsets and sell them to the protocol treasury (the “black hole”) in exchange for discounted KLIMA tokens. The point is to create positive buy-pressure for carbon offsets and drive up the price as high as possible. It’s ingenious. Higher carbon offset prices mean two things: 1. projects doing the work to create these offsets (e.g., by planting trees or creating renewable sources) get more money to reinvest in their work, providing a strong positive incentive 2. companies that need to buy these credits to offset their emissions have to pay more, providing a strong negative incentive to pollute in the first place.
KlimaDAO’s staking APY is currently at around 35,000% APY. Helping the environment never felt so good!
For more information on KlimaDAO and other cutting-edge projects like these, I encourage you to join our growing Discord group – a community filled with curious blockchain/crypto learners like yourselves 😉 !
Crypto News:
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El Salvador to Create ‘Bitcoin City,’ Use $500M of Planned $1B Bond Offering to Buy More Crypto (LEARN MORE)
Square Releases White Paper Detailing Protocol for a Decentralized Bitcoin Exchange (LEARN MORE)
A hedge fund billionaire outbid crypto investors for a rare copy of the US Constitution (LEARN MORE)
Have a great week!
Shahar
This newsletter is meant for informational purposes only. It is not meant to serve as financial advice. If you are interested in financial advice, please schedule a personal consultation with me, and be sure to read the accompanying disclaimer.
