FIP 31 - Olympus DAO <> FRAX DAO Swap

Background

Due to the great success of our Olympus DAO partnership since May, Ohmies have reached out to us to ask if we are interested in a DAO to DAO swap of OHM for FXS to further align incentives and get Olympus a significant allocation of FXS. We’re proposing a swap between DAOs to the fraximalist community, for your consideration.

Proposal

Swap up to $5m worth of FXS for OHM at a 30 day TWAP price of each asset. This would increase FRAX’s OHM allocation by up to $5m in addition to the ~$9m of sOHM we currently have. This would also give Olympus a $5m allocation of FXS which they have assured will be staked/held long term >1 year without selling/releasing into the open market. This is mutually beneficial for both sides as this increases our balance sheet with more high yielding assets as well as align Olympus DAO’s community to build around the FRAX ecosystem, farm FRAX gauges, and all around work closer together.

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do it!!! never let the sweet brothership between frax and ohm die out <3 we ride together for life

can we add some sort of agreement that we will not stake our OHM in any pool or fund that reduces APR % for other OHM holders and they do the same for their FXS?

Even as someone who’s less of an OHM bull than most here (and as someone who voted against swapping treasury FXS for other assets in the earlier gov proposal) I’d still say I support this.

Basic argument is just value of OHM + OHM partnership > FXS by itself.

I don’t think the swap is riskless but I think the added symbiotic value should make it +EV. Whatever your thoughts on OHM clearly it’s been a big benefit to us having them use Frax as one of their reserve assets.

Also I’d say it seems to benefit us more than them from a partnership POV. I can imagine a million different ways OHM might develop where they’re going to be in need of stablecoins in some form and holding FXS they’ll be incentivized to chose Frax over other options. From our side we’d probably be incentivized to chose OHM Pro bonds over some other bond provider if one emerges in the future but I think for the most part we’re still going to be able to develop how we see fit, I don’t think it should put too much demand on us.

The only change I’d possibly like to see would be to consider a smaller size, maybe something in the $1M-$3M range. We just did a large swap with Toke and want to be a little careful of removing too much flexibility to make partnerships with other protocols or take advantage of whatever other opportunities might arise in the future. I think it’s fair to say a tradeoff of doing this swap is the funds will effectively be locked, I don’t know if we’re agreeing to any formal guarantees but still think it’s obvious we won’t be selling the OHM we receive any time soon unless some sort of emergency arises.

We definitely shouldn’t do this if it means we can’t stake in their OHM pool. In fact I’d definitely vote against this (and this swap would be a big mistake) if we’re not allowed to stake our OHM.

Staking the OHM at Tokemak would be pretty dope, ngl

if we stake it and earn more OHM, this reduces the rewards other OHM holders get. and then what do we do with the more OHM we earned? we cant sell.

if a proposal was put up to sell it then OHM have the FXS needed to swing the vote.

I’m strongly against this proposal. OHM is a very innovative reserve asset, which also means it is very risky, for example, the biggest OHM whale holds 3% of the circulating supply and if she dumps the price would drop to 396$, a ~56% decrease in price (https://twitter.com/kaereste/status/1456500158259208194), we also know that whale dumping usually also causes more dumping in cascade.
Also, I do not see how this would benefit Frax other than increasing its exposure to OHM, on the other hand, OHM would become a big FXS whale, and with the upcoming Frax V3 they would be able to redirect a big chunk of the minted Frax to the OHM AMO, which would increase our exposure to OHM > non-stop increasing risk.
I think that we should keep buying OHM with our AMO, but no more than that. Also, if OHM wants to become a FXS holder in my opinion the most fair and beneficial option for the protocol and the FXS holders would be to buy from the open market, I think that letting them buy directly from the treasury at such a discount would be too big of an advantage, and also with money (OHM) that they’d basically mint from thin air. Finally, I do not see clear benefits for Frax other than saying ‘we have a partnership with OHM’, but rather only increased risk from OHM exposure.

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Hmm? We stake the additional OHM we receive and earn yet more OHM. Just because we wouldn’t have any immediate intention to sell doesn’t mean our holdings don’t have value and obviously we should aim to increase them.

Not staking OHM is literally burning money. It’s not a neutral position, it’s simply a transfer of value from those who are holding without staking to those who are staked. This is especially true in systems like OHM where there’s no hierarchy of stakers by time of lock, etc. It’s not correct to view the stakers as “making money” and the non-stakers as neutral, what’s actually happening is the stakers are taking market share from those who are not staked.

Feel like something that’s not well understood in general is quoted staking APRs are actually meaningless and tell you nothing about expected returns. What matters is earnings relative to other users in the system and if money in the system has increased or decreased from the point you got in.

As a simple example to illustrate this point think of a stock split. You could argue that the day the split happens holders of the stock experience 100% returns, after all they double their holdings! But of course this is irrelevant because everyone in the system experiences the same effect, every holder has the same % of the company as they did prior to the split. However if you had a “stock split” where only you received twice as many shares and everyone else in the system kept the same amount you actually would make a real gain and would experience something close to 100% return- you’d own twice as much of the company as you did previously.

This effect does not change if rewards are distributed continuously instead of all at once as in the stock split example. If everyone stakes and receives the rewards it’s not everyone is making returns, no one is. The only relevance of APR is the extent to which stakers will effectively take market share from non-stakers and with OHM’s very high quoted APR it would be a disaster if we were not allowed to stake.

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As you mention yourself there’s nothing we can do to prevent OHM from becoming a large FXS holder since they could simply take their treasury OHM and use it to buy FXS on the open market if they wanted to. In what sense is doing a treasury to treasury swap giving it to them at a discount?

Your first point is essentially arguing risk-adjusted OHM is significantly overvalued relative to FXS or that having a large amount of OHM on the balance sheet poses significant risk. I actually sort of agree with this, as I mentioned I’m more skeptical of OHM I feel like than many, but I don’t think my confidence in this is high enough to believe the additional benefits of having a partnership make the swap -EV.

Also I think this is why we can discuss the size of the swap. The rough equation for if the swap is profitable looks like:
(Risk-adjusted value of OHM received) + (Value of OHM partnership) > (Risk-adjusted value of FXS swapped)

This is all maybe a little overly quantitative but the questions we’d have to answer to determine if this equation holds are:

  1. What is the difference in risk adjusted value between OHM and FXS?
  2. What is the relationship between the size of the swap and the value of the partnership?

I think it’s indisputable there’s value in having a strong partnership with OHM. I think the valuation of our respective tokens is more an open question. Personally I think OHM is overvalued relative to FXS but I would bet members of their community would possibly feel the opposite. I think reasonable people can disagree and arguments can be presented on both sides. What I think is more clear though is they’ve been good partners up to this point and have provided us with significant value by using Frax as one of their reserve assets.

If we could do a swap of $1 and significantly deepen our partnership and guarantee they’d use Frax as their stable coin of choice going forward it would be an obvious yes. If we have to swap our entire treasury with them to get that benefit then it would be a clear no. I personally think having a moderate swap that doesn’t expose us to large additional risk but still allows a good-faith showing of support for them and a deepening of the relationship is what we should strive for.

I think it is a fair point that whether you’re bearish or bullish on OHM that having too large a position in any other protocol on our balance sheet possibly exposes us to some unnecessary risk- we want to control our own destiny not have our future be possibly at risk due to OHM or any other protocol taking large losses.

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selling direct means they get no slippage. if they where to buy on the open markets it would be very likely that the last FXS they buy is a lot higher then the first

earning more OHM just means we become a bigger risk for OHM if we intend to sell at a later date. if we only sell our OHM after a vote then im sure we will get a great price by telling everyone we are about to start dumping a few weeks before we do. cant see anyone front running us … nope

Ok well that’s a fair enough point. Not sure it changes my overall opinion but you’re right if we’re looking at a larger size swap slippage would be pretty meaningful.

This is also true for any asset of another protocol we hold though right? I mean you could make the same argument to say we shouldn’t try to acquire a lot of CVX or Toke or Aave or whatever.

the other tokens we hold are mostly governance type tokens, and we would just rent out our votes to earn income from them tokens if we did not need them anymore. but with OHM we can only get an income if we sell the tokens.

i guess the ETH is a bit of an odd ball, but our little bag wont really hurt ETH in any noticeable way.

it also creates a conflict of interest for OHM, as there may be a case where selling OHM is good for FRAX protocol but bad for OHM and in that case they would likely vote to protect OHM. and they are getting this voting power at a reduced rate compared to other voters.

Also, the proposal is to use a 30 day TWAP, FXS has been like under 9$ for half of that time (currently on an uptrend) and OHM over 900$ (currently on a downtrend). Regarding the possibility of Frax selling its OHM, at least i heard from sam he personally does not have any intention to sell, idk about the rest of the community, i personally see as a long-term experiment so i’d rather not sell yet.

I agree if it would be better if there was a more concrete benefit of holding OHM the way there is holding CVX, would make the proposal stronger for sure.

That being said I still do not think risk of signaling the market before a future sell is a reason not to do this. It’s true for any other asset we might want to sell, the FXS we would be swapping with them included. You could actually argue this swap increases our net liquidity since the OHM we get is significantly more liquid than the FXS we give up (OHM has like $195M liquidity on Sushi vs our $38M on uni) and trying to sell an equivalent amount of FXS would have a much larger signaling risk.

Also I think these concerns over them getting voting power are a little strange since I’m sure one of the main goals of Frax V3 is to encourage and incentivize protocols to want to get a large share of FXS. It’s true as you mentioned earlier they’ll effectively get a better price by avoiding slippage but depending on the size of the swap I’m not sure this effect is that significant.

On 1inch a $1M swap shows 1.34% slippage, $3m shows 6.28% and $5 shows 9.92%. In absolute values ~$13k is saved on a $1M swap, ~188k is saved on a $3M swap and ~$496k is saved on a $5swap. I think if we’re going to do a full $5M swap we should probably ask for some sort of slippage compensation. I think there’s value in the partnership and don’t want to overly nit-pick but when you’re talking about a ~8% difference (swapping $5M to OHM shows 1.95% slippage) some sort of adjustment should be made. At a smaller $1M swap think this is much less of a concern.

This is a big win for both protocols - both will be able to stake their respective tokens and have a governance voice in the other. This will also further cement our relationship with Olympus and likely help us improve the expansion of our community - something Olympus has in spades. Since Olympus never sells their tokens effectively we are getting a diamond hand swap at 30 day MA price - a bargain. The future is DAO to DAO treasury swap holdings and this will be our second after Toke - with hopefully many more to come!

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I’d love to see more collaboration between the Frax and Olympus communities. Olympus has been a great partner to Frax and has one of the most active communities in the space. Frax has already accumulated a solid OHM position ($9m as @samkazemian mentioned) that the community can grow at will without disposing of FXS in the treasury. A direct FXS-OHM swap could still be very helpful to provide Olympus with FXS and strengthen our collaboration. I also understand some of the community push back given the limited nature of Frax’s treasury and overall strong belief in the future of FXS. IMO we’re very lucky to have a community that cares deeply about the project and thinks critically about the best path forward. It’s very inspiring to pause and appreciate how far the project has come (especially the community) and the direction it’s headed.

To address some of the concerns raised in this thread, perhaps an initial $3m swap with a 14 day TWAP (from the time of the trade) would be a win / win for both communities. It provides Olympus with a meaningful FXS position that should incentivize further collaboration and usage of FRAX on their end. It also grows Frax’s OHM position by 33% without overly depleting the treasury while ensuring a more fair market rate for the swap. If things go well and everyone is happy with the outcome, the possibility always exists to do more at a later date. I’d be interested to hear feedback on this approach.

Beyond this potential FXS-OHM swap, it’s probably a good idea for us to start thinking about treasury management and a framework for potential swaps (external to this thread). While I expect our community to act in Frax’s best interest and prevent any weak deals from passing, it’s probably easier to do so if we’ve coordinated some on a general direction for the treasury ahead of time.

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The current Mochi fiasco summarized by the Curve team is the following

I’d like to focus specially on point 3. Before doing a direct swap with Olympus we should know where their funds are coming from. On the docs they have no explicit tokenomics, and what I understood is that whenever a user buys a bond, an amount of OHM is minted and given to the buyer, but also the same amount of OHM is minted and sent to their treasury, which is this address that now holds 920k OHM or $830M at $900 per OHM.

They mentiond this as the DAO profit, but I find it quite questionable to have a 100% profit, and my opinion is this is like selling OHM at double the price with a 50% tax rate.
I’m still wrapping my head around this, would like to hear your opinion, but before doing a treasury swap with OHM, and prevent Mochi-like problems, I think we should verify that they have sound tokenomics/treasury source, which I currently do not see.

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