A New Gameplay with Algorithmic Reserve Tokens: A Better Solution to Increase Revenue

5 min readJan 4, 2022

A New Story in the DeFi World: Incentive Mechanism at the Master level and Protocol-Owned Liquidity

Perhaps the most striking attraction of the crypto world lies in the fact that innovators are being innovated almost daily, and this is especially true in the DeFi space. While many people are still addicted to the game of liquidity mining, there are already some DeFi builders who are getting creative in designing more effective incentive mechanisms, focusing on the full utilization of liquidity tokens, and pursuing sustainable and lasting growth of the protocol.

OlympusDAO is one of the pioneers. Its incentive mechanism allows anyone involved in this game to have a compelling motivation to buy and stake, as well as to always hold regardless of market fluctuations, thereby resulting in a win-win situation, or what is more widely known as (3,3) equilibrium, and building trust over time, which is the source of the reserve asset system’s reliability.

The other side of the system is protocol having its own liquidity. In the past, liquidity in DeFi protocols was almost always created in the form of (liquidity) mining, which made a trend where capital would only provide liquidity when it was profitable, and as soon as the returns dried up, the liquidity provider would leave. OlympusDAO, on the other hand, has chosen to become its own market maker, being able to commit to providing liquidity no matter how returns change and ultimately reducing the volatility of its token prices.

It’s Time to Give Algorithmic Reserve Tokens a New Narrative to Gain More Returns

The concept proposed by OlympusDAO has also sparked a lot of thought in many projects. SatoshiDAO, for its part, is hoping to combine this rather creative DeFi experiment with BTC to provide investors with a better solution for gaining returns.

In Olympus DAO’s system, each OHM is backed by a basket of assets in the Olympus treasury(e.g., DAI, FRAX), while in SatoshiDAO’s system, each SATO is backed by a basket of Bitcoin-pegged tokens, which in turn are backed 1:1 by native BTC, so it can be understood that SATO’s intrinsic value is following that of Bitcoin.

In our ideal design, we would like SatoshiDAO to continuously absorb and lock Bitcoin-pegged tokens like a black hole, which would also imply a reduction in the amount of Bitcoin circulating in the market, and if the whole system has enough people participating in it for a relatively long period of time, then the probability is that it can help reduce Bitcoin’s volatility and drive its price growth. On this basis, we conclude that SATO, as compared to other algorithmic reserve tokens, not only enjoys the excess returns of this optimized wealth creation system through compound interest on staking in the long run, but also captures the returns of the intrinsically valuable asset, i.e., Bitcoin, itself, and it is built on the perception that Bitcoin is the cornerstone of the entire cryptocurrency market, with the best liquidity, the highest market capitalization, and as the most recognized digital currency, so the long-term value of Bitcoin itself is indisputable.

Simulated Backtest of a One-Time Investment in OHM vs. an Investment in SATO at any Starting Point

Does the data prove the above inference? We did a calculation.

The assumptions were that 1% of the group invested in OHM participates in investing in SATO, and the SATO price trend will be similar to the OHM price trend.

-If 10,000 USD were invested in BTC and SATO 10,000 USD respectively on June 1, 2021, the total position of fixed OHM would have been 135,926.91 USD as of December 17, 2021; the total position of fixed Sato would have been 173,616.82 USD; making the return 27.73% higher.

-The changes in positions are shown in the chart below:

-Detailed data are as follows:

Simulated Backtest Table for OHM DCA vs. SATO DCA

In the article “When BTC embraces DeFi, Data Comparisons Show You How to Optimize Your Bitcoin DCA”, we introduced the concept of DCA and hoped that SatoshiDAO participants would all invest in this way, so we also extended the data measurement to see how things would look if we changed the one-time investment to DCA investments.

The assumption is that 1% of the group who invest in OHM ends up participating in SATO, and the SATO price trend will be similar to the OHM price trend.
Putting 10,000 USD in OHM DCA and SATO DCA on the 1st of each month.

-If the start date of DCA was June 1, 2021, the total fixed position in OHM would have been 282,402.74 USD as of December 17, 2021; the total fixed position in SATO would have been 342,189.11 USD; making the return 21.17% higher.