The Optimist - oTokens and Incentive Models with Bebis and Tex

In Optimist’s Twitter Spaces, which took place on October 3, 2023, Charlie is joined by Bebis and Tex to discuss the evolution of incentive models in DeFi, the role and complexities of oTokens, and more! Read our notes below to learn more.

Background

Charlie (Host) – Co-Leader at The Optimist

Bebis (Guest) – Founder at Ethos Reserve

Tex (Guest) – Product Lead at Bond Protocol

Ethos Reserve – a next-generation stablecoin on Optimism

Bond Protocol – a permissionless product suite for optimizing DAO treasuries and token economics

OATH Foundation – the organization responsible for managing and developing the OATH Ecosystem

Evolution of Incentive Models

Tex mentions Bond Protocol’s focus on Olympus-style bonding to manage assets and diversify treasuries. He mentions a new podcast series they launched called DAOversified, highlighting its aim to promote treasury management best practices.
Tex believes that the success of early DeFi incentive models was largely due to favorable macroeconomic conditions. He argues that those models are not resilient in the current, more challenging environment.
Bebis agrees with Tex, adding that low-risk rates have led even traditional hedge funds to venture into DeFi for higher yields. He mentions that the rise in interest rates has made it evident that DeFi is still searching for product-market fit.

From Transaction Mining to Sophisticated Game Theories

Bebis suggests discussing the history of yield farming and asks Tex for his thoughts on Olympus DAO‘s $OHM ve(3,3).
Bebis says that incentives in crypto and DeFi began with transaction fee mining, where tokens were awarded for each transaction. This initially led to high trading volumes but became unsustainable as people began to sell their tokens for profits.
He mentions that Synthetix created the first yield farm and points to their blog on creating incentives for $SNX for further understanding. Bebis then talks about Compound introducing single-sided incentives in lending markets, which also proved to be unsustainable. He credits MasterChef for democratizing the creation of incentive farms, attributing it as a reason for the boom in DeFi.
Tex says that Bond Protocol was “born on the slopes of Mount Olympus (Olympus DAO)”. He says that the technology in crypto has evolved to work well beyond just existing on whitepapers.
Tex believes that the next evolution in crypto is robust incentive models. He praises the work done by Tapioca DAO in the realm of game theory and discusses Olympus DAO’s ve(3,3) which encourages mutual holding of tokens. He talks about Olympus Pro‘s Dutch auction mechanisms that offer tokens at a discount for small vesting terms.
Tex also delves into the complexities of the Nash equilibrium and subgame Nash equilibrium within these systems. He highlights how high premiums and speculation can deter long-term holding or ‘ve(3,3)’ing and says that time horizons for projects could be one way to mitigate these issues.

Bebis says that ve(3,3) was initially successful due to low competition in the yield product space. He says that the model became unscalable because organizing at the necessary scale was not possible, particularly when non-compliant or strategic actors entered the scene.
Bebis thinks that ve(3,3) introduced the DeFi industry to valuable financial and quantitative concepts. He shifts his perspective from focusing solely on mechanisms to also considering optimization and design.
Bebis is impressed with oTokens, stating they provide a predictable revenue model. He thinks this predictability is valuable when talking to hedge funds and other serious financial players.
Bebis criticizes Olympus for lacking “productivity,” stating that the real activity was happening at the asset management level of the DAO treasury. He suggests that treasuries don’t attract attention unless they’re redeemable assets.
Bebis believes that oTokens offer a way to incentivize optimal behavior in the ecosystem. They are not solely denominated in governance tokens, providing more flexibility and “firepower.”
Bebis also that Olympus DAO’s journey was crucial for understanding the needs of DeFi economics and how to engage users effectively. He thinks real financial products need to make sense when plugged into hedge fund algorithms.

Sustainability in DeFi Markets

Charlie asks if bear markets drive more innovation in DeFi compared to bull markets. He asks whether this pattern is inevitable or if innovation can happen regardless of the global economy and U.S. government policies.
Tex says that bear markets give teams more time to focus on fundamentals rather than obsessing over token prices. He notes that there seems to be less “mental illness” in the community during bear markets.
Bebis says that sustainability is crucial for projects to survive. He mentions that Olympus showed the crypto world that well-thought-out and sustainable economic models will win out over short-term “farm and dump” strategies. He says that the bear market has forced projects into a more conservative approach, making them better in the long run.
Bebis elaborates that targeting the right market and offering a competitive yield is vital. He mentions their focus on stablecoin funds and how collaborations with other projects like Yearn help mitigate risks.
Bebis insists that the age of unsustainability is over. He says that if interest rates for traditional finance go down below staked $ETH rates, it would make DeFi incredibly competitive.

The Role of oTokens in Long-Term Value Creation

Tex says that protocols are designed to run indefinitely, potentially becoming “immortal” as long as the blockchain runs. He refers to Hasu‘s article on Uncommon Core about new mental models for DeFi treasuries, highlighting that the DAO’s primary goal is to maximize long-term token holder value.
Tex says that a DAO should be a cyclical trader of its token. If a token is overvalued, the DAO should reinvest the capital into growth and development. He notes that some of the most exciting products from Olympus DAO were developed after its token price crashed, thanks to bonding mechanisms.
Tex suggests that these incentive mechanisms are crucial for long-term protocol value. During low token prices, the DAO can buy back tokens with excess cash from a bull market. He urges people to think long-term, stating that many attracted to crypto during peak hype cycles are not long-term oriented.
Charlie agrees with Tex, highlighting the need for real yield generation along with innovative incentive models. He argues that user activity must cover some percentage of the yield; otherwise, the model isn’t sustainable.
Charlie explains oTokens as option tokens used for incentivizing users. They differ from spot tokens, requiring users to pay some money to claim liquid tokens. This creates a revenue source for protocols.

Understanding oTokens

Tex explains that the idea of oTokens originated from Andre Cronje‘s concept of Liquidity Mining v2. He describes how free tokens given to people through liquidity mining are essentially options priced at $0 that never expire. He highlights that programmable blockchains allow for the modification of these variables.
Tex adds that oTokens function similarly to bonding, offering a discount to purchase tokens. He notes that oTokens eliminate the need for Oracle dependencies, making it a valuable feature for early-stage protocols.
Tex commends Tapioca DAO’s article, “RIP Liquidity Mining,” and mentions that Bunni (Timeless Finance) was the first to implement an oToken system, followed by many other protocols. He specifies that Yearn Finance is set to launch their version soon.
Tex says that these new token models will be a significant development, allowing protocols to generate revenue in non-native token assets and encourage targeted behaviors.
Charlie asks about the user experience and the potential barriers for adoption given the complexity of new mechanisms like oTokens, veNFTs, and vesting. He is concerned that users may be turned off by complicated systems and choose simpler, more straightforward platforms instead.
Charlie suggests that the initial pushback against oTokens is because they were considered too complicated for average users to understand and interact with.

Balancing Accessibility and Professional Expertise

Bebis says that the current state of tokens is not seamless for liquidity providers (LPs) and that the path to a sustainable system involves creating finer-grained controls for value creation. He highlights that traditional finance is mostly accessible to professionals, whereas DeFi aims to make complex financial systems accessible to regular people interested in finance.
Bebis asserts that the management of complex instruments in DeFi will likely be handled by professional firms, with everyday users interacting through aggregators or funds. He stresses the importance of working with professionals to maintain proper interest rates and advises DeFi teams to focus on business development and product design that appeals to professional finance managers.
Tex says that complex financial derivatives are best understood by professionals. He posits that maybe not everyone should be a liquidity provider if they don’t fully understand the risks involved.
Tex elaborates that providing liquidity in DeFi is similar to a short straddle in traditional finance, and those who don’t understand this often end up losing money. He recommends that people educate themselves on options and risk management to better participate in DeFi.
Tex says that more complex incentives could narrow the pool of participants but might lead to a more sustainable system. He advocates for a move towards more sophisticated users who can accurately assess and manage risks.

Complexity, Innovations, and the Journey Ahead

Charlie mentions that he wrote a thread comparing liquidity providing on Uniswap v3 to selling options. He highlights that liquidity providing is complicated and similar to market-making, not just a simple way to earn yield.
Charlie says that people often interact with DeFi protocols without understanding the complexity. He warns that lack of knowledge can lead to financial loss but appreciates the permissionless and open-source nature of DeFi.
Charlie states that UX improvements haven’t yet caught up to the rapid innovations in dev tooling. He believes a time will come when the UX is as advanced as the technology.
Bebis underscores the need for continuous effort to make DeFi a mainstream and viable alternative to traditional finance. He talks about the role of service providers like Bond protocol and looks forward to collaborative growth in the industry.
Bebis believes DeFi will eventually become a serious consideration in boardrooms of traditional finance companies, although it’s not ready for that yet.

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Show Information

Medium: Twitter Spaces
Show: The Optimist
Show Title: The Optimist: oTokens and Incentive Models
Show Date: October 3rd, 2023