An ELI5 on Fuse for the Ohmies
Hello Ohmies! If you’re reading this, you’ve likely seen the announcement for the Olympus Fuse Pool located here. The pool quickly reached over $10m in TVL and a lot in the community seem to have questions so this post aims to explain the product, what it means for the Ohmies and hopefully answer any potential questions that you may have.
What is Fuse
So first of all, what is Fuse? Fuse is currently basically a tool that lets you borrow and lend against your crypto-assets. Let me explain it with an example.
Let’s say you have 1k OHM (you must be pretty lucky lol) and OHM is worth $1000 (for the sake of this example). Your overall OHM position is worth $1m and if it’s staked (which it better be!) it is constantly becoming more and more OHM. What Fuse enables is for you to borrow against this OHM position, or any portion of it. What are you borrowing? USD (through FRAX, DAI or USDC-all pegged to $1) OR ETH (though the pool composition can change at the Olympus policy team’s discretion).
Let’s say you have $1m but you want to go buy a car without selling your OHM. You can borrow $100,000 against your sOHM (staked OHM) which you have deposited into Fuse. You can do whatever you’d like with this $100,000 but the $1m in sOHM will not be accessible until the loan + interest has been paid back. You can pay back the loan at anytime as long as it is repaid in USDC.
Usually you would also be able to earn interest (in addition to staking rewards) from users who would be borrowing OHM. However, this feature is not currently on. When this feature is turned on, all users who are deposited will instantly start earning interest. In the meantime, you will continue to receive your staking rewards.
Why use Fuse?
There are a wide range of applications. For some people, it will be so that they can actually go and do things with their capital instead of selling OHM, like in the car example above. Other examples are wide-ranging and include taking on a levered OHM position (lending OHM, borrowing USDC, buying OHM and repeating), all the way to using the borrowed assets to buy more bonds. We are likely to see more exciting applications as the Olympus platform evolves.
Things to be cautious of when borrowing (liquidations + interest)
Borrowing doesn’t come free. There are a couple to be aware of.
The first of which are interest payments: when you borrow whatever asset, you are constantly paying a dynamic amount of interest (it is based on supply and demand). The APR displayed in the Fuse pool dashboard should show the interest rate at any given time. For a loan which you think you may have for a while, be prepared to deal with interest rate volatility.
Everyone is always scared of this next one: liquidations. So what is a liquidation? A liquidation is basically when the amount you have borrowed, falls beneath your borrow limit. If I deposited $1m and OHM’s CF (collateral factor, determines how much you can borrow) is 33%, then the maximum I can borrow is $333,333, this is my borrow limit. If the amount that I have borrowed exceeds the borrow limit, my loan will get liquidated. What would cause that? Two things: the collateral falling in value OR the asset you have borrowed rising in value.
We have built a calculator specifically for the Ohmies to find their liquidation price here.
What’s an example of when an account needs liquidation? Let’s follow this same example to illustrate it. $1m in OHM as collateral. $100k USDC borrowed. $333k borrow limit. Now let’s say OHM collapses to 1/4th of its previous value. My collateral is now worth $250,000 and my borrow limit would be $83k USDC but I have $100k USDC borrowed. This account is under-collateralized and needs a liquidation.
What happens once it needs liquidation? A liquidator will come along, and repay some or all of your USDC debt. For every $1 of your debt they repay, they get to take $1.12 of your collateral. This $0.12 bonus is defined as the liquidator incentive and is used to ensure the pool stays healthy. This amount is chosen by the pool creator.
The liquidation mechanic is necessary to prevent the pool from going underwater, however, most users will want to avoid being liquidated if possible.
In conclusion, Fuse opens up a ton of new and exciting opportunities for the Olympus community. Let me know your questions and I’ll try and update this piece as I hear more. None of this is financial advice and please please do your own research before doing anything.
