Olympus DAO, according to their website, is a "Decentralized Reserve Currency". They are trying to build a "community-owned decentralized financial infrastructure to bring more stability and transparency for the world." In this post, I'll try to break down what that actually means in the context of Olympus DAO and how they can afford to provide an unreal APY of ~5000%.

A brief history of money

As humans developed and evolved, so did our needs. In order to fulfil those needs, often times you'd need to "buy" it from another person. Methods like the barter system, gift economy and debt handled these exchanges. Eventually, many cultures developed commodity money. Shells were a popular form of currency for a long time and then, rare metals like Gold and Silver came into play. With growing trade, it became extremely inconvinient to handle Gold. Say you want to buy a pack of chewing gum worth $1. If we were still trading with Gold, you'd have to shell out 1/60th of a gram. You can probably see this getting tedious extremely quickly and that is essentially what happened. With time, representative money gained popularity.

Representative money, (often paper money) is a medium of exchange that represents value but does not have any intrinsic value. For a long time, the US dollar was backed by gold meaning that for each dollar you own, you could get it exchanged for gold at a fixed rate on demand. Dollars could only be issued/printed if the country had the equivalent amount of Gold in its reserves. Today, US Dollar is a fiat currency meaning that it isn't backed by anything other than the trust in the US Government. Often times govenments print cash whenever a quick infusion is needed. This often leads to inflation and in some cases, hyperinflation like what happened in Zimbabwe and Venezuela.

What is a DAO?

DAO stands for Decentralized Autonomous Organization. You can think of DAOs as a community with a shared bank account. All the decisions are made by the community from the bottom up, unlike traditional organizations where all the decisions come from the top down.

You might have heard about the ConstitutionDAO, which set out to buy a rare copy of the US constitution. They ended up raising $47 million within days. While they ultimately were outbid, it was nonetheless a very interesting experiment to see what a community can come accomplish together with help of the blockchain. I plan to write more specifically about DAOs in the future but for now, all we need to proceed here is that Olympus is a DAO.

5000% APY, how?!

A ~5000% APY certainly sounds sketchy and unsustainable. How is that even possible?