FAQ
Why do we need SOHMDAO in the first place?
Dollar-pegged stablecoins have become an essential part of crypto due to their lack of volatility as compared to tokens such as Bitcoin and Ether. Users are comfortable with transacting using stablecoins knowing that they hold the same amount of purchasing power today vs. tomorrow. But this is a fallacy. The dollar is controlled by the US government and the Federal Reserve. This means a depreciation of dollar also means a depreciation of these stablecoins.
SOHMDAO aims to solve this by creating a free-floating reserve currency, SOHM, that is backed by a basket of assets. By focusing on supply growth rather than price appreciation, SOHMDAO hopes that SOHM can function as a currency that is able to hold its purchasing power regardless of market volatility.
Is SOHM a stable coin?
No, SOHM is not a stable coin. Rather, SOHM aspires to become an algorithmic reserve currency backed by other decentralized assets. Similar to the idea of the gold standard, SOHM provides free floating value its users can always fall back on, simply because of the fractional treasury reserves SOHM draws its intrinsic value from.
SOHM is backed, not pegged.
Each SOHM is backed by 1 BNB, not pegged to it. Because the treasury backs every SOHM with at least 1 BNB, the protocol would buy back and burn SOHM when it trades below 1 BNB. This has the effect of pushing SOHM price back up to 1 BNB. SOHM could always trade above 1 BNB because there is no upper limit imposed by the protocol. Think pegged == 1, while backed >= 1.
You might say that the SOHM floor price or intrinsic value is 1 BNB. We believe that the actual price will always be 1 BNB + premium, but in the end that is up to the market to decide.
How does it work?
At a high level, SOHMDAO consists of its protocol managed treasury, protocol owned liquidity (POL), bond mechanism, and staking rewards that are designed to control supply expansion.
Bond sales generate profit for the protocol, and the treasury uses the profit to mint SOHM and distribute them to stakers. With liquidity bonds, the protocol is able to accumulate its own liquidity. Check out the entry below on the importance of POL.
What is the deal with (3,3) and (1,1)?
(3,3) is the idea that, if everyone cooperated in SOHM, it would generate the greatest gain for everyone (from a game theory standpoint). Currently, there are three actions a user can take:
Staking (+2)
Bonding (+1)
Selling (0)
Staking and bonding are considered beneficial to the agreement, while the sale has no effect. Staking and selling will also cause price changes, while Bounding will not (we believe that buying SAME from the market is a prerequisite for staking, which leads to price changes). If these two actions are beneficial, then participants in mobile prices also get half of the benefits (+1). If these two behaviors are contradictory, the bad guys with mobile prices get half the benefits (+1), and the good guys with mobile prices get half the benefits (-1). If both of these actions are harmful, which means that both participants are selling, Then they will be punished by the system (10% trade fee).
Thus, given two actors, all scenarios of what they could do and the effect on the protocol are shown here:
If we both stake (3, 3), it is the bestthing for both of us and the protocol (3 + 3 = 6).
If one of us stakes and the other one bonds, it is also great because staking takes SOHM off the market and put it into the protocol, while bonding provides liquidity and BNB for the treasury (3 + 1 = 4).
When one of us sells, the system will deduct 10% of his trade fee and add it to the bond sold in the last hour
When we were all sold, it had no effect on our agreement, but the seller was fined 10% trade fee(0+0=0).
Why is PCV important?
As the protocol controls the funds in its treasury, SOHM can only be minted or burned by the protocol. This also guarantees that the protocol can always back 1 SOHM with 1 BNB. You can easily define the risk of your investment because you can be confident that the protocol will indefinitely buy SOHM below 1 BNB with the treasury assets until no one is left to sell. You can't trust the FED but you can trust the code.
As the protocol accumulates more PCV, more runway is guaranteed for the stakers. This means the stakers can be confident that the current staking APY can be sustained for a longer term because more funds are available in the treasury.
Why is POL important?
SOHM owns most of its liquidity thanks to its bond mechanism. This has several benefits:
SOHM does not have to pay out high farming rewards to incentivize liquidity
providers a.k.a renting liquidity.
SOHM guarantees the market that the liquidity is always there to facilitate
sell or buy transaction.
By being the largest LP (liquidity provider), it earns most of the LP fees which
represents another source of income to the treasury.
All POL can be used to back SOHM. The LP tokens are marked down to their risk-free
value for this purpose.
What will happen if there is a bank run on SOHM?
Fractional reserve banking works because depositors don’t withdraw their funds all at once. A depositor’s faith in the banking system rests on regulations and agencies like Federal Deposit Insurance Corporation (FDIC).
SOHM 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 hypothetical bank run. In this scenario, we assume the majority of stakers would panic and unstake their tokens from SOHM - the staking percentage which stands at 92% now quickly collapses to 3.3%, leaving only 55,000 SOHM staked.
Next, we assume the Risk-Free Value (RFV) inflows to the treasury completely dry up. For context, RFV is currently growing at about $1 million every 2 days. However, during a bank run this growth will likely stop.
Finally, we assume that those last standing stakers bought in at a price of $500 per SOHM. The initial investment of these stakers would be:
As of September 15 2021, the total SOHM supply is 2,082,553 and the RFV is $47,041,833. Remember that 1 SOHM is backed by 1 USD (BNB). By subtracting these two numbers, we know 44,959,280 SOHM will eventually get issued to the remaining stakers. In roughly a year, these stakers who are holding 55,000 OHM will have:
$27.5 million investment made by these stakers will turn into about $45 million based on cash flow alone if they stay staked (recall that 1 SOHM is backed by 1 USD). In this bank run scenario, the stakers who stay staked not only get their money back, but also make some profit. Therefore, (3,3) isn’t just a popular meme, it is actually a dominant strategy.
The above scenario is unlikely to play out because when other people find out that extremely high rewards are being paid to the stakers, they will copy the strategy by buying and staking SOHM. This is also why the percentage of SOHM staked in SOHM has consistently remained over 90% since launch.
Why is the market price of SOHM so volatile?
It is extremely important to understand how early in development the SOHMDAO protocol is. A large amount of discussion has centered around the current price and expected a stable value moving forward. The reality is that these characteristics are not yet determined. The network is currently tuned for expansion of SOHM supply, which when paired with the staking, bonding, and yield mechanics of SOHMDAO, result in a fair amount of volatility.
SOHM could trade at a very high price because the market is ready to pay a hefty premium to capture a percentage of the current market capitalization. However, the price of SOHM could also drop to a large degree if the market sentiment turns bearish. We would expect significant price volatility during our growth phase so please do your own research on whether this project suits your goals.
What is the point of buying it now when SOHM trades at a very high premium?
When you buy and stake SOHM, you capture a percentage of the supply (market cap) which will remain close to a constant. This is because your staked SOHM balance also increases along with the circulating supply. The implication is that if you buy SOHM when the market cap is low, you would be capturing a larger percentage of the market cap.
What is a rebase?
Rebase is a mechanism by which your staked SOHM balance increases automatically. When new SOHM are minted by the protocol, a large portion of it goes to the stakers. Because stakers only see staked SOHM balance instead of SOHM, the protocol utilizes the rebase mechanism to increase the staked OHM balance so that 1 staked SOHM is always redeemable for 1 SOHM.
What is reward yield?
Reward yield is the percentage by which your staked SOHM balance increases on the next epoch. It is also known as rebase rate. You can find this number on the SOHM staking page.
What is APY?
APY stands for annual percentage yield. It measures the real rate of return on your principal by taking into account the effect of compounding interest. In the case of SOHMDAO, your staked SOHM represents your principal, and the compound interest is added periodically on every epoch (2200 BscScan blocks, or around 8 hours) thanks to the rebase mechanism.
One interesting fact about APY is that your balance will grow not linearly but exponentially over time! Assuming a daily compound interest of 2%, if you start with a balance of 1 SOHM on day 1, after a year, your balance will grow to about 1377. That is a lot!
How is the APY calculated?
The APY is calculated from the reward yield (a.k.a rebase rate) using the following equation:
It raises to the power of 1095 because a rebase happens 3 times daily. Consider there are 365 days in a year, this would give a rebase frequency of 365 * 3 = 1095.
Reward yield is determined by the following equation:
The number of SOHM distributed to the staking contract is calculated from SOHM total supply using the following equation:
Note that the reward rate is subject to change by the protocol. For example, it has been revised due to this latest proposal.
Why does the price of SOHM become irrelevant in long term?
As illustrated above, your SOHM balance will grow exponentially over time thanks to the power of compounding. Let's say you buy an SOHM for $400 now and the market decides that in 1 year time, the intrinsic value of SOHM will be $2. Assuming a daily compound interest rate of 2%, your balance would grow to about 1377 SOHMs by the end of the year, which is worth around $2754. That is a cool $2354 profit! By now, you should understand that you are paying a premium for SOHM now in exchange for a long-term benefit. Thus, you should have a long time horizon to allow your SOHM balance to grow exponentially and make this a worthwhile investment.
What will be SOHM's intrinsic value in the future?
There is no clear answer for this, but the intrinsic value can be determined by the treasury performance. For example, if the treasury could guarantee to back every SOHM with 100 BNB, the intrinsic value will be 100 BNB. It can also be decided by the DAO. For example, if the DAO decides to raise the price floor of SOHM, its intrinsic value will rise accordingly.
How does the protocol manage to maintain the high staking APY?
Let’s say the protocol targets an APY range of 1,000% to 10,000% (see OIP-18 for more details), this would translate to a minimum reward yield of about 0.2105%, or a daily growth of about 0.6328%. Please refer to the equation above to learn how APY is calculated from the reward yield.
If there are 100,000 of SOHM staked right now, the protocol would need to mint an additional 632.8 SOHM to achieve this daily growth. This is achievable if the protocol can bring in at least $632.80 of daily revenue from bond sales. Even if the protocol doesn't bring in that much revenue, it can still sustain 1,000% APY for a considerable amount of time (see the runway chart for instance) due to the excess reserve in the treasury.
Do I have to unstake and stake SOHM on every epoch to get my rebase rewards?
No. Once you have staked SOHM with SOHMDAO, your staked SOHM balance will auto-compound on every epoch. That increase in balance represents your rebase rewards.
How do I track my rebase rewards?
You can track your rebase rewards by calculating the increase in your staked SOHM balance.
Record down the Current Index value on the staking page when you first stake your SOHM. Let's call this the Start Index.
After staking for some time, if you want to determine by how much your balance has increased, check the Current Index value again. Let's call this the End Index.
By dividing the End Index by Start Index, you would get the ratio by which your staked SOHM balance has increased.
In this example, the SOHM balance has grown by 1.5 times.
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