# How it works? FAQ

## Why do we need Values 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.

Values aims to solve this by creating a free-floating reserve currency, VALUES token, that is backed by a basket of assets. By focusing on supply growth rather than price appreciation, Values hopes that VALUES token can function as a currency that is able to hold its purchasing power regardless of market volatility.

## Is VALUES a stablecoin?

No, VALUES token is not a stablecoin. Rather, VALUES token aspires to become an algorithmic reserve currency backed by other decentralized assets. Similar to the idea of the gold standard, VALUES token provides free floating value its users can always fall back on, simply because of the fractional treasury reserves VALUES token draws its intrinsic value from.

## VALUES is backed, not pegged.

Each VALUES token is backed by 1 MAI, not pegged to it. Because the treasury backs every VALUES token when it trades below 1 MAI. This has the effect of pushing VALUES token price back up to 1 MAI. VALUES token could always trade above 1 MAI because there is no upper limit imposed by the protocol. Think pegged == 1, while backed >= 1.

You might say that the VALUES token floor price or intrinsic value is 1 MAI. We believe that the actual price will always be 1 MAI + premium, but in the end that is up to the market to decide.

## How does it work?

At a high level, Values consists of its protocol managed treasury, protocol owned liquidity ([POL](https://valuesdao.gitbook.io/values-dao/glossary#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 VALUES token and distribute them to stakers. With [liquidity bonds](https://valuesdao.gitbook.io/values-dao/glossary#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 Values, it would generate the greatest gain for everyone (from a [game theory](https://en.wikipedia.org/wiki/Game_theory) standpoint). Currently, there are three actions a user can take:

* Staking (+2)
* Bonding (+1)
* Selling (-2)

Staking and bonding are considered beneficial to the protocol, while selling is considered detrimental. Staking and selling will also cause a price move, while bonding does not (we consider buying VALUES token from the market as a prerequisite of staking, thus causing a price move). If both actions are beneficial, the actor who moves price also gets half of the benefit (+1). If both actions are contradictory, the bad actor who moves price gets half of the benefit (+1), while the good actor who moves price gets half of the downside (-1). If both actions are detrimental, which implies both actors are selling, they both get half of the downside (-1).

Thus, given two actors, all scenarios of what they could do and the effect on the protocol are shown here:

![](https://3693663386-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FK5BHATCZ43FJOFQ2DCeS%2Fuploads%2FO5hcR7LvCULFBHUNgXM0%2Fgame_theory.png?alt=media\&token=28aca985-d4fe-4636-8d53-74fd9bd2a899)

* If we both stake (3, 3), it is the best thing 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 VALUES token off the market and put it into the protocol, while bonding provides liquidity and MAI for the treasury (3 + 1 = 4).
* When one of us sells, it diminishes effort of the other one who stakes or bonds (1 - 1 = 0).
* When we both sell, it creates the worst outcome for both of us and the protocol (-3 - 3 = -6).

## Why is [PCV](https://valuesdao.gitbook.io/values-dao/glossary#pcv) important?

As the protocol controls the funds in its treasury, VALUES token can only be minted or burned by the protocol. This also guarantees that the protocol can always back 1 VALUES token with 1 MAI. You can easily define the risk of your investment because you can be confident that the protocol will indefinitely buy VALUES token below 1 MAI with the treasury assets until no one is left to sell. You can't trust the FED (Federal Reserve) 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](https://valuesdao.gitbook.io/values-dao/glossary#pol) important?

Values owns most of its liquidity thanks to its bond mechanism. This has several benefits:

* Values does not have to pay out high farming rewards to incentivize liquidity

  providers a.k.a renting liquidity.
* 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 $VALUES. The LP tokens are marked down to their risk-free

  value for this purpose. You can read more about the rationale behind this in this

  [Medium article](https://olympusdao.medium.com/dai-bonds-a-more-effective-sales-mechanism-c9a57586f1f7).

## What will happen if there is a bank run on Values?

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).

Values 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 Values - the staking percentage which stands at 92% now quickly collapses to 3.3%, leaving only 55,000 VALUES token staked.

Next, we assume the Risk-Free Value ([RFV](https://valuesdao.gitbook.io/values-dao/glossary#rfv)) inflows to the treasury completely dry up. 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 VALUES token. The initial investment of these stakers would be:

$$
$500/ VALUES \* 55,000\ VALUES = $27.5\ million
$$

Assume that as of September 1 2022, the total VALUES token supply is 2,082,553 and the RFV is $47,041,833. Remember that 1 $VALUES is backed by 1 USD (MAI or FRAX). By subtracting these two numbers, we know 44,959,280 $VALUES will eventually get issued to the remaining stakers. In roughly a year, these stakers who are holding 55,000 VALUES token will have:

$$
55,000 + 44,959,280 = 45,014,280\ VALUES
$$

$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 VALUES token 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)](#what-is-the-deal-with-3-3-and-1-1) 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 VALUES token. This is also why the percentage of VALUES token staked in ValuesDAO has consistently remained over 90% since launch.

## Why is the market price of $VALUES volatile?

It is extremely important to understand how early in development the ValuesDAO 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 VALUES token supply, which when paired with the staking, bonding, and yield mechanics of ValuesDAO, result in a fair amount of volatility.

VALUES token 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 VALUES token 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** whether this project suits your goals.

## What is the point of buying it when $VALUES trades at a very high premium?

When you buy and stake VALUES token, you capture a percentage of the supply (market cap) which will remain close to a constant. This is because your staked VALUES token balance also increases along with the circulating supply. The implication is that if you buy VALUES token 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 VALUES token balance increases automatically. When new VALUES token are minted by the protocol, a large portion of it goes to the stakers. Because stakers only see staked sVALUES balance instead of VALUES token, the protocol utilizes the rebase mechanism to increase the staked sVALUES balance so that 1 staked sVALUES is always redeemable for 1 VALUES token.

## What is reward yield?

Reward yield is the percentage by which your staked VALUES token balance increases on the next epoch. It is also known as *rebase rate*. You can find this number on the Values staking page.

## What is APY? <a href="#what-is-apy" id="what-is-apy"></a>

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 ValuesDAO, your staked VALUES token represents your principal, and the compound interest is added periodically on every epoch (around 24 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 VALUES token on day 1, after a year, your balance will grow to about 1377. That is a lot!\\

![](https://docs.olympusdao.finance/~/files/v0/b/gitbook-28427.appspot.com/o/assets%2F-MV4hwONledQK5nEDaUc%2Fsync%2F585854ca21f006875c918ba2aed711730f71284a.png?generation=1622037634126699\&alt=media)

## How is the APY calculated?

The APY is calculated from the reward yield (a.k.a harvest rate) using the following equation:

$$
APY = ( 1 + rewardYield )^{365}
$$

It raises to the power of 365 because a harvest happens 1 time daily. Consider there are 365 days in a year, this would give a harvest frequency of 365.

Reward yield is determined by the following equation:

$$
rewardYield = VALUES\_{distributed} / VALUES\_{totalStaked}
$$

The number of $VALUES distributed to the staking contract is calculated from $VALUES total supply using the following equation:

$$
VALUES\_{distributed} = VALUES\_{totalSupply} \times rewardRate
$$

Note that the reward rate is subject to change by the protocol.

## Why does the price of $VALUES (VALUES token)become irrelevant in long term?

As illustrated above, your VALUES token balance will grow exponentially over time thanks to the power of compounding. Let's say you buy an VALUES token for $400 now and the market decides that in 1 year time, the intrinsic value of VALUES token will be $2. Assuming a daily compound interest rate of 2%, your balance would grow to about 1377 VALUES token 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 VALUES token now in exchange for a long-term benefit. Thus, you should have a long time horizon to allow your VALUES token balance to grow exponentially and make this a worthwhile investment.

## What will be VALUES token 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 VALUES token with 100 MAI, the intrinsic value will be 100 MAI. It can also be decided by the DAO. For example, if the DAO decides to raise the price floor of VALUES token, 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%, 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](#how-is-the-apy-calculated).

If there are 100,000 of VALUES token staked right now, the protocol would need to mint an additional 632.8 VALUES token 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 due to the excess reserve in the treasury.

## Do I have to unstake and stake VALUES token on every epoch to get my rebase rewards?

No. Once you have staked VALUES token with Values, your staked VALUES token balance will auto-compound on every epoch. That increase in balance represents your rebase rewards.

## How do I track my harvest rewards?

You can track your harvest rewards by calculating the increase in your staked VALUES token balance.

1. Record down the Current Index value on the staking page when you first stake your VALUES token. Let's call this the Start Index.
2. 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.
3. By dividing the End Index by Start Index, you would get the ratio by which your staked VALUES token balance has increased.

$$
ratio = endIndex / startIndex
$$

1. In this example, the VALUES token balance has grown by 1.5 times.

$$
ratio = 13.2\ /\ 8.8\newline = 1.5
$$

##
