Thread by @ohmzeus

1/20 - A thread🧵on Protocol Controlled Value

New protocols are being built that can never die.
👇👇👇👇👇👇👇👇👇👇👇👇

2/20 - The first generation of algorithmic stablecoins were solely centered around incentive and mechanism design.

Starting with AMPL and the rebase, the concept of elastic supply blossomed into an entire sub-genre of DeFi

3/20 - Mechanisms and incentives are an important part of the success of any token, but algos especially. Certain behaviors need to be rewarded, and some behaviors even punished, to manifest the desired behavior of the system

4/20 - However, this sole reliance comes with a cost. Incentive design means nothing if no one responds to them.

And in a world where 2 digit APRs look low, those incentives need to be pretty damn strong to warrant participation

5/20 - If you're consistently relying on third-party actions to manifest behaviors, you're forced to both pay handsomely for those actions, and pay for them in perpetuity

6/20 - These games are played by mercenary capital; money that will come when times are good and leave the moment they find a better opportunity

7/20 - Thus, they can be dependable in the short term, but are extremely undependable in the long term. And even when they are participating, they exact a large toll.

8/20 - I equate third-party reliance to spending with a credit card; in the moment you feel rich, but eventually you'll need to pay the bill, and the interest alone will eat you alive

9/20 - In comes PCV: now, while you still have mechanisms and incentives in place, there is an entity constantly swallowing up assets. Even when the mercs leave, that money remains.

The protocol becomes hedged against the conditions of the future

10/20 - This is huge for two reasons:

1) Longevity: A protocol that owns its own assets can go dormant but can never die

2) Efficiency: The more the protocol owns, the less it relies on third-party actors, and the less it needs to pay third-party actors

11/20 - Value-drains that exist as the core perpetual design of V1 algo's are the bootstrapping mechanism of V2s. They are costs we pay in the short term, but they decrease with growth and time

12/20 - What's more, by owning assets the protocol can manifest market behavior by itself.

It is an entity that can be trusted with unfair advantages in the market; in the case of Olympus, that advantage is the lowest cost of capital (the ability to mint at intrinsic value)

13/20 - This allows the protocol to centralize the gains of its own market, and distribute those gains to reinforce incentives. Through this, we can shift incentives from short-term behaviors to long term behaviors (to promote sustainability instead of excess)

14/20 - I feel confident that the dominant algo's years from today will have PCV at their core. It is the most (only) logical and sustainable design for a long term system

15/20 - I'm proud to be among the builders at @reflexerfinance @FloatProtocol @feiprotocol and @fraxfinance who have come to the same conclusion. I know that we are building something great, and that this is far from a zero-sum game.

16/20 - Now, the question becomes how to bootstrap this growth. This past week, we saw a 0 to 100 approach from Fei; billions we're onboarded in a three day window, and now their protocol is extremely capitalized

17/20 - My concern there is growth potential. I think it is important that users and participants take part in the growth of the protocol. They need to feel that they helped build it, and reaped the rewards of its success.

18/20 - This is why we started with low supply @OlympusDAO. A successful system should be able to build its way to large-cap state. It should prove itself the entire way up.

This is how you build confidence and longevity. If you can't do this, is your design really that good?

19/20 - Time will tell which approach is best. The market decides at the end of the day. But I am incredibly bullish on this new sector of the industry, in both profit and ideological terms. Something truly special is being built. These are the innovations that drive our industry

20/20 - A shameless plug to some Olympus resources. If you're interested in learning more, be sure to join our discord. We have a fantastic community that is always happy to share and discuss.

discord.gg/6HUNj6jPvP
medium.com/@olympusdao
app.gitbook.com/@ohmzeus/s/oly…