OHM forks on Polygon: The case of KLIMA
This guide will present an overly simplified presentation of OHM-forks and related projects, and how you can benefit from them on Polygon with the special case of Klima DAO.
If you've been following the crypto news for the past few months, you certainly noticed a lot of (3,3) references, and heard about Ohm-related projects. I will try to present quickly what these projects are, what are the principle rules from their core, and how you can actually use them as part of your investment strategies. For this last part, we'll be focusing on Klima DAO, one of the most successful ohm-forks on Polygon, that also has a very interesting story and goal.
Everything started on the Ethereum Mainnet with Olympus DAO. Their goal is to create a new reserve currency to compete with the dollar, except that unless other stable coins, this new currency would have a floating value. The native token (Ohm) needs to be fully backed by a basket of different assets, however the tokenomics of the project make the value Ohm is defined by the market.
Olympus DAO launched in March 2021 and is still a very successful project on Mainnet. The TVL is denominated in dozens of millions of dollars, and the Ohm price is keeping a very high price. Because of this success, the project has been forked (copied) and multiple Olympus DAO clones popped on many chains.
This section will be a little more technical than what we use to present in our other guides, but to understand the success of Olympus and other Ohm-forks, it's important to understand how they work.
The base idea of the Olympus protocol is to increase the treasury as much as possible by selling the native token at a discount, while maintaining a circulating supply as low as possible to maintain a high price. This is done by providing very high rewards to stakers, and having almost full control of the liquidity.
- Bonding: the protocol will propose native tokens at a discounted price. The price is paid using specific assets that are used to back the native token. In the example of Olympus DAO, the OHM token is 100% backed by a few tokens that include mostly DAI, so bonds can be purchased using DAI directly, or using DAI-OHM LP tokens (and lately additional tokens including FRAX). When people buy the native tokens using the backing assets or LP tokens, the payment goes directly in the treasury, allowing the protocol to mint more tokens, hence being able to run for a longer period of time. The only thing is that the discounted token is released over a vesting period, meaning the user who bought the native token using bonding will not be able to fully use it right away.
- Staking: after bonding, users will collect the native tokens and will have the choice between selling them or staking them. In order to make sure that the latter option will be chosen, the protocol offers insanely high rewards to stakers (we're talking about 1.2% daily gains !!!). The goal behind these high APRs is to get a staking ratio as close as possible to 100%. If there aren't a lot of tokens circulating, the price is driven up, and coupled with high rewards, it makes it even more interesting to stake. As a side note, a price that goes up will also help keep high reward rates.
- Increasing the treasury and control the liquidity: Treasury is increased from bonding, and from the fact that native tokens can be bonded with LP tokens that are almost completely controlled by the protocol. These LP tokens are used to collect swap fees for users who prefer buying the native token on the market at full price over bonding (see next chapter for details).
- Buy back and burn: Most OHM-like projects include a mechanism that will buy back the native tokens and burn them on very specific occasions. Problems occur when users are selling the native token, driving the price down. However, if people sell their tokens, the APY goes up since the number of minted tokens remains the same for less staked tokens. But even with higher APY, if nobody buys and stakes the sold tokens, the protocol can possibly buy them back from the market in order to apply buying pressure, drive the price up and keep the circulating supply low. Tokens that are bought back are simply destroyed. Indeed, since part of the treasury has been used to acquire these tokens, keeping them in the treasury or distributing them would actually dilute the treasury, which would either reduce the rewards rate, or affect periods of time during which the protocol can run.
You can find additional resources about the concept of Olympus DAO and its tokenomics here:
Why would someone pay for a token when there's a discounted version available through a bond? This is a legitimate question, and the answer will depend on the discount offered by the bond.
Since we'll be working with Klima DAO, let's compare the buying + staking VS bonding:
Klima staking reward as of November 2021
Klima bonding ROI as of November 2021
If one buys directly Klima from the market and stake it for 5 days (the actual vesting period for bonding), the ROI (Return On Investment) will be 8.51%. If one buys a bond instead, the maximal ROI would be 5.47% by providing BCT/KLIMA.
This means that, with the equivalent of $100, you would get after 5 days
- $108.51 with the 1st option
- $105.47 with the 2nd option
However, it's important to understand that bonded Klima are released over the vesting period. Hence you can harvest the vested Klima and stake it in order to profit from rebases (reward distribution). Since you will only get rewards for whatever you staked during the vesting period, and since there are 15 rebases during the 5 days for the bond to be fully released, we can assume that you can potentially harvest 6.67% before each one of the 15 rebases. Assuming you will harvest and stake at the beginning of each rebase, you would get this:
At the end of the vesting period, the 5.47% ROI is respected, but staking rewards also added an extra 4.65% (that haven't been compounded for simplicity), resulting in a 10.12% ROI. This means that bonding is actually more interesting than staking directly, even if the bonding ROI seems lower than the staking ROI.
The total reward you will get by staking N times over the vesting period (with Nmax = 15 at most) is:
You can then run your own simulations in order to verify if it's better to buy and stake, or to bond. For our example, with a staking ROI of 8.51% over 5 days, a bonding discount of 3.95% with 15 rebases would be better (giving an equivalent ROI of 8.52%).
The specificity that makes Klima DAO different from other Ohm-forks is the main asset backing the Klima token: the BCT token, provided by the Toucan Protocol. The BCT (Base Carbon Tonne) is actually representing investments in the real world to decarbonize the earth, turning carbon offsets from the real world into tokens. You can read a lot more about how it works in the official documentation of Toucan.
BCT is then used by the Klima DAO app to mint the KLIMA tokens, the same way DAI is used by the Olympus DAO to mint OHM. In other words, Klima acts like a Carbon sink, providing real life funds to fight climate change. More info can be found on the Klima website and documentation, and you can come and discuss ways to make crypto greener on the Discord server of QiDAO.
Without going deep into the (3,3) game theory, (9,9) represent a situation where one is leveraging a staked position. This is actually possible because Klima DAO will provide a sKLIMA token as a proof of deposit that some platform will accept as a collateral for a possible loan. Let's see the details of it.
Leverage your Klima position
The idea is to get an initial amount of KLIMA token that you can deposit on Klima DAO. This will allow you to get very high APY (as of writing, the APY is 38,873.08%, or 601% APR or a daily gain of 1.68%) and by depositing your KLIMA token, you will get sKLIMA as a proof of deposit.
Green locker on Market XYZ as of november 2021
It's not an obligation for you to borrow MAI, you can actually borrow whatever token with the lowest interest rate, but you need to keep in mind that you will have to pay fees on your loan, and the faster you repay your loan, the less fees you will pay.
With your loan, you will be able to buy more KLIMA tokens and repeat the loop.
You will notice that the APY on sKLIMA will largely compensate the interests on your loan.
Market XYZ will also have some liquidation levels, meaning that if your collateral value goes below the liquidation level, there's a risk for you to lose your collateral. In order to lower the risk of liquidation, the following simulation assumes that you will keep an C/D ratio of 250%, and that you invest an initial $1,000 of KLIMA tokens at 38,873% APY to borrow MAI at 20.49% interest
Of course, it's possibly enough to stop after 3 loops since the equivalent APY won't grow much past that.
As a side note, because the initial investment is $1,000,the value you will get at the end of 1 year would be $646,820.00, assuming everything stays the same. In other words, you invest $1,000, you will need to repay $665.57 with an additional $136.38 (an accumulated debt of $801.95) but you will also earn $646,820.
You can also see that the value of your sKLIMA position is growing very quickly (around 8% every 5 days), which means you can also increase your debt at this point and leverage even more for additional gains.
One of the main issues with Ohm-fork projects is that it assumes that everybody is staking and nobody sells. But, if nobody sells, nobody gets any benefits, and in most cases, the first to sell will get the cake.
For any investment strategy, it's important to capture the value of your gains. You can do it by withdrawing a part of your sKLIMA position on Market XYZ and get back KLIMA that you can sell.
If you invest $100 and operate the 7 loops as above, your investment in KLIMA would have generated $67.11 after 31 days, which means you can fully repay your loan with interest in 1 single month. If you do so, you will start again with 166$ the next month and no outstanding debt. Just keep an eye on the borrowing APR that can get pretty high on Market XYZ.
Once again, (4,4) is related to game theory and reserve currencies, and indicate people who bond their tokens then stake them. In this strategy, we will see how we can use Klima and Augury to purchase bonds regularly, and stake them continuously.
Continuous investment using Augury Finance and Mai Finance
We are still using Klima, but this time we're using an infusion from Augury Finance in order to automate the extraction of the value of Klima. By depositing your KLIMA tokens in the infusion, the algorithm in charge of the infusion will perform the following actions after each rebase:
- 50% of the KLIMA harvested is restaked to increase your sKLIMA position
- 50% of the KLIMA harvested is sold for USDC added to the NFTM pool on Augury, and distributed to you as NFTM tokens
Augury Infusion with 0% performance fee and 0% deposit fee
NFTM can then either be held while it increases in value, or redeemed for its USDC value. In other words, it doesn't matter if the KLIMA token loses value after a rebase since its value is captured and stored as NFTM.
After redeeming the USDC value of your NFTM rewards, you can then buy the token of your choice and store it in a vault in Mai Finance. The example above is using a camWETH vault, but you can really use any vault you like. The idea is to be able to use the vaults on Mai Finance to borrow MAI and buy new bonds on Klima DAO to repeat the loop. Then you can harvest the KLIMA tokens and inject them in Augury. Keep in mind that bonds are vesting little at a time, so it's totally possible to harvest regularly and stake on Augury before your bond is totally vested.
Assuming you invest $100 like in the previous example, and place it directly in the Augury infusion, that the APR of the Klima infusion is 552.94% (current value as of writing), and that you want to keep a C/D ratio on the camWETH vault of 240% and a APY of 2.19% on the camWETH vault, here are the results over one year:
Once again, assuming that all rates and prices stay the same, at the end of the year you would have
- $4,684.775 worth of KLIMA tokens
- $3,284.424 worth of wETH
- and outstanding debt of $1,368.510
Which is an equivalent APY of 6,866.46%. This is far from the 38,705.13% advertised by KLIMA, but still pretty impressive for a $100 investment. Also, a good load of your gains have been converted into wETH in a vault on Mai Finance, and your loan on the application will get you some additional Qi Tokens.
Everything presented in this document is pure theory and is proposed for educational purposes. The biggest issue with projects like Olympus and Klima is that, once again, the first user to sell will profit from the high price. If the first sell is massive (because gains are massive), it can snowball quickly into a panic effect that can very well kill the price of the KlIMA token. However, in this case, the APY would skyrocket, meaning that users who don't sell will benefit from very high rewards, so that when the APY attracts new users, the ones who held will be big winners.
It's also good to note that the project can only continue to print tokens as long as additional funds are injected into the treasury.
So the risk can be very high if you don't extract some benefits from time to time in order to lower the risks.
As a final note, pay attention that ohm-forks are the new trend, but most projects may fail, and a lot of these forks are not solid projects. Because of their nature, they are not verified by RugDoc yet, and it may be very complicated to identify real applications from pure scam.