Smart contracts have made Decentralized Finance (DeFi) possible. But among the different protocols, tokens often cannot be used directly but must be first “reprogrammed” into a compatible format.
In this article, we'll examine the concept of token wrapping, and look at three tokens that aim to occupy specific and edgy niches in the Ethereum DeFi ecosystem.
The idea of “wrapping” a cryptocurrency like Ether (ETH) can seem confusing, but it’s really quite simple. Consider a foreign exchange office. If you’re an American visiting Mexico, you need to exchange your dollars for an equal value of pesos. In effect, you’ve wrapped dollars. Returning home, the exchange takes the unspent pesos and “unwraps” them in dollars.
Wrapped cryptocurrency tokens such as wrapped Ether (WETH) work on this principle. ETH is deposited with a “custodian”—an exchange, multi-signature wallet or smart contract—that issues an equal value of tokens that are compatible with whatever blockchain is needed.
There’s one important difference, however. A wrapped token’s value is pegged to the original coin. So WETH on the Binance Smart Chain (BSC) increases in value relative to BSC.
Wrapped tokens are useful because blockchains are not interoperable. Transactions on the Avalanche blockchain must be denominated, and fees paid, in AVAX only. But ETH wrapped on the Avalanche chain works fine.
Technically, WETH is an ERC-20 token. This standard dictates a set of common rules that make it easy to move value between blockchains. Other blockchains have their own version of WETH tokens. For example, BSC has the BEP20 standard.
DEXs and other decentralized applications (dApps) on the Ethereum blockchain require WETH to swap between different ERC-20 tokens.
WETH can be created to work on virtually any blockchain that uses the Ethereum Virtual Machine (EVM) model, including Avalanche, BSC, Fantom, Harmony, Solana, etc. Unfortunately, not all blockchains provide equivalent tokens, so full interoperability is still a future goal.
However, WETH may not be around much longer as a new ERC223 token standard being introduced may eventually make WETH obsolete.
While Ethereum moves to Proof of Stake consensus, many investors have begun staking their ETH to earn significant interest. LIDO is one such Ethereum staking pool that enables investors holding less than the required 32 ETH for staking to pool their resources together. But it offers more than that.
LIDO stakers also receive an equal amount of Lido’s stETH tokens back. And as the staked ETH earns interest, an equivalent amount of stETH is given to stakers every day.
LIDO refers to this as “liquid staking" as the received stETH can be used to earn further yields or lending rewards investing in other apps such as Curve. The yield can eventually be redeemed for the original ETH, or it can be sold on exchanges.
On the surface, Olympus (OHM) is a new kind of cryptocurrency sometimes referred to as an algorithmic stablecoin. But unlike a true stablecoin, it’s backed by, not pegged to DAI, FRAX and other Ethereum-based stablecoins that are in turn pegged to the US dollar, allowing its value to somewhat float.
According to a Coindesk feature article, OHM might also be a giant Ponzi scheme. A number of red flags do suggest that extreme caution is warranted.
The Olympus website claims that although the value of dollar-pegged stablecoins is tied to the US dollar, the dollar is artificially controlled by the US Federal Reserve, so depreciation of the dollar also equals a depreciation of stablecoins.
OHM, on the other hand, is backed by “decentralized assets”, providing dependable “free-floating value” similar to gold. If it ever trades below 1 DAI, the treasury will buy back and burn enough to stabilize its price. There’s no control mechanism if OHM’s value rises above 1 DAI.
OHM's tokenomics are incredibly complex. Investors can stake, bond or inverse-bond OHM and earn a very high APY. Currently, that’s only (!) 850%, considerably less than the project’s initial 100,000%. The announced goal of such a high APY is to encourage continued staking, rather than selling if OHM’s price jumps.
Olympus claims that the actual price of OHM is irrelevant because an investor’s balance will grow exponentially. In fact, after reaching its all-time high of over $1,400 in 2021, OHM has lost 95% of its value by February 2022, trading near $68.
Now, consider these warning signs before you jump in:
- The Olympus founders are anonymous, using names like Zeus, Apollo and Unbanksy.
- According to Whois, the owners of the “olympusdao.finance” domain are anonymous.
- The funds used to back up OHM are kept in their central treasury.
- Annual yields are unusually high, over 800% at the time of writing but down considerably from 7,000% APY in December 2021.
- Olympus claims OHM is a currency, but it can’t be used for anything except to earn more OHM. It’s traded only on the Uniswap and SushiSwap DEXs, and only for WETH and the stablecoins used to back it.
- Many have claimed that Olympus is a pyramid scheme. At the very least, potential investors should be extremely cautious.
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This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.