Welcome, OMM
Welcome to this week’s edition of the RHIZOME Wire!
Enter OMM
Last week, yet another new project entered the ICON ecosystem: OMM, which stands for “Open money market”. Here is a description from the announcement:
Omm (Open Money Market) is a decentralized peer-to-contract money market protocol owned and operated by OMM token holders. The inspiration came from the important role of Compound and Aave in the Ethereum DeFi ecosystem, and we hope the Omm protocol will play a similar role for the ICON ecosystem and a broader audience who haven’t experienced DeFi yet.
Let’s break this down a bit, starting with the first sentence.
Here’s the definition from the announcement:
For those without prior knowledge of money market protocols, a peer-to-contract money market protocol consists of two primary market participants: Borrowers and Lenders.
Lenders will deposit digital assets (stablecoins and/or cryptocurrencies) into a smart contract to earn a variable interest rate. Borrowers will also deposit digital assets into a smart contract, but they will take the extra step of borrowing other digital assets against what they have deposited. Lenders earn a variable interest rate and Borrowers will pay a variable interest rate. The difference between interest paid by Borrowers and interest earned by Lenders will be funneled into the DAO fund operated by OMM token holders.
Most of this should be pretty easy to understand. Just as in real life, a bank has money, a portion of which it dedicates to providing loans (“deposit digital assets into a smart contract”); on the other side are people who want to borrow money — perhaps, as an example, for a house. They provide collateral — in this case, the house itself, which is their equivalent of “deposit digital assets.” The bank, for their troubles, earns interest. The borrower, due to the risk they may not pay the loan back, is on the hook for paying that interest (and can lose the collateral of they go delinquent).
Where this scenario starts to differ is in the fact that the contract in OMM isn’t between two parties who know one another, but rather with a smart contract, meaning both borrower and lender deposits are pooled together in one giant fund, referred to in OMM terms as the “lending pool.”
Meanwhile, interest rates are determined by supply and demand. If there are a bunch of people willing to lend money, the interest earned on lending is going to decrease. If there are a bunch of people who want to borrow money, the interest rate to borrow money is going to increase. And vice versa in both cases. In most instances, those two rates will vary, and — as OMM explains — “the difference between interest paid by Borrowers and interest earned by Lenders will be funneled into the DAO fund operated by OMM token holders.”
So what’s the advantage of this? First, from the white paper, is the use case for lenders:
Individuals or groups (P-Reps) with long-term investments in ICX and ICON-based tokens can use the Omm protocol as a source of additional returns, and to improve their capital efficiency. For example, a lender can earn variable interest rates by depositing fiat-backed stablecoins, ICX, and IRC-2 tokens. Additionally, by providing asset supply, lenders receive OMM tokens, which represent ownership in the Omm protocol and come with several benefits discussed in the Token Economics section of this paper.
In other words, if you’re a long-term ICX holder and don’t really need your funds anytime soon, you can earn interest on them by basically becoming the bank in the above scenario. OMM will utilize sICX as well, meaning you’d still be earning ICX rewards while your funds were being lent out, on top of the interest rate you’d be earning.
And for borrowers:
Users have the ability to add leverage or get access to another asset without selling or repositioning their portfolios. For example, a user can leverage their ICX holdings to purchase more ICX, or convert the additional capital directly into their bank account with the Bridge widget using Bridge Dollars.
Alternatively, traders can take short positions to profit from declines in asset prices. Under a falling price scenario, a trader can borrow an asset, sell it immediately, and retire their debt at a cheaper price after the price falls.
Similarly, if you’re a long-term ICX holder who also doesn’t plan on selling anytime soon but are in need of some capital — perhaps to purchase another asset you believe will increase in price — you can tie up your ICX as collateral and borrow additional funds, but paying an extra interest rate to do so.
Of course, there is an added risk, in the fact that your collateral can be liquidated if the ICX price drops to a certain level (for specific details on liquidation, be sure to consult the white paper).
So there’s already incentives built in for both sides. But as an added incentive, we have “OMM tokens,” which I’ve already alluded to:
OMM tokens will be distributed to both Borrowers and Lenders in exchange for the liquidity provided to the Omm protocol. OMM tokens distribution is purely based on the OMM distribution schedule and the amount of $ deposited/borrowed X APY.
In order to incentivize adding liquidity to the platform, OMM tokens are distributed to those who are, well, providing liquidity to the platform. For those who follow DeFi, this model is nothing new.
So what does the OMM token offer? To a certain extent, that’s up to the OMM holders themselves:
OMM holders will be entitled to governance rights of the platform, delegation rights of the staking pool for ICX deposits, and the usage of the OMM DAO fund. Note that at the onset, fees earned from the protocol will be deposited into a smart contract that is owned and operated by OMM holders, similar to a DAO fund. The protocol’s governance decision making for future updates will be based on ownership weight in OMM. Consensus among OMM holders will be required to adjust the protocol. Voting will be done on-chain and therefore binding so that each adjustment, once approved, will be implemented into the network.
In addition to governance rights, and the right to decide which P-Reps receive the delegations of the staking pool, there is also some potential monetary benefit as well, depending on the preference of the OMM holders.
I have seen some chirping on some of ICON’s social channels, wondering if by the time OMM (along with Balanced, another DeFi platform built on ICON, which I’ve written about as well) is launched, that the “DeFi hype will have died down,” implying the value of DeFi was found in token valuation (which has been slipping as of late), instead of the actual utility these platforms provide.
Ultimately, both Balanced, OMM, along with ICONPOOL, are DeFi tools that provide their own value. Their goal is to bring to ICON the same value that traditional finance brings each and every day in our non-crypto lives. Will “liquidity farming” OMM and BAL (the governance token of Balanced) offer 1,000% APY and parabolic token valuations? It’s possible, but not relevant. That’s not what they are there for, and — if executed correctly — they’re going to be around for a very long time, helping the ICON ecosystem grow and mature.
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