Thread by @ishaheen10

Simulating a bank-run on @OlympusDAO : a thread exploring the absolute worst case, doomsday scenario for stakers committed to (3,3)

TL;DR: you get your money back and a slight return.

Read on for the longer answer with context, mechanics and math 👇

1. Fractional reserve banking works because depositors don’t withdraw their funds at once.

A depositor’s faith in the banking system rests on regulations and agencies like Federal Depositor Insurance Corporation (FDIC).

FDIC: backed by the full faith & credit for the US Govt

2. $OHM does not have FDIC insurance but it has an incentive structure that protects stakers.

Let’s take a look at how it performs during a bank run.

Assume extreme FUD, every Ohmie panics and the staking % currently at 92% collapses to 3.3%.

—> 18,600 $OHMs stay staked.

3. Also assume that RFV inflows completely dry up.

RFV that is currently growing at about $1 million every 3 days just completely stops growing because of total panic.

Ridiculous assumptions I know, but we are imagining doomsday here so bear with me.

4. Assume that these last standing stakers bought in just today at a price of $375/OHM.

So the total investment of the 3.3% stakers is:

$375/Ohm * 18,600 Ohms = ~$7 million

5. Total Ohm Supply right now is 687,402 and RFV is $12,342,027

Remember that 1 $OHM is backed by 1 USD (DAI or FRAX)?

This means that 11,654,725 $OHMs will get issued to the stakers currently holding 18,600 $OHMs at a rate of 0.35% * Circulating Supply every 8 hours.

6. In roughly one year, the stakers holding 18,600 $OHMs will have

18,600 + 11,654,725 = 11.7 million $OHMs.

Meaning the $7 million investment made by these stakers will be $11.7 million based on cash flows alone if they stay staked (1 OHM backed by 1 DAI)

~1.6x return.

7. Once all rewards have been paid out, the remaining stakers can sell their $OHMs into the liquidity pool that is owned by the protocol to get $DAI.

Because the protocol owns the liquidity, it won’t snatch it away during a panic.

That’s why we call $OHM a benevolent whale.

8. In a Ponzi scheme, the last person holding the proverbial bag gets screwed.

In a bank run scenario, the Ohmie who stays staked and doesn’t panic gets their money back through cash flows alone.

(3,3) isn’t just a popular meme, it is actually a dominant strategy.

9. If the liquidity pool is unable to cash out all the last standing stakers, the remaining community can vote to dismantle the treasury and go their their own way.

This IMHO is an even more unlikely outcome because I doubt these stakers will just wait around and do nothing.

10. This leaky $OHM vault not only gives downside protection to stakers it does one more thing:

It captivates attention of Ohmies.

It is that captivated attention that has made a ~100 day protocol a formidable force in Defi.

Come check out the discord and see for yourself.

Note: this analysis assumes smart contracts don’t get hacked and $DAI peg holds.

Someone pointed out that in actual doomsday, stablecoins like DAI also lose their peg. That’s a fair point.

And even more reason to create $OHM which will be backed by multiple assets.