# FAQ

## Why do we need DAO Finance 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.*

DAO Finance aims to solve this by creating a free-floating reserve currency called FAO. By focusing on supply growth rather than price appreciation, DAO Finance hopes that FAO can function as a currency that is able to hold its purchasing power regardless of market volatility.

## Is FAO a stable coin?

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

## FAO is backed, not pegged.

Each **FAO** is backed by 1 **DAI**, not pegged to it. Because the treasury backs every **FAO** with at least 1 **DAI**, the protocol would buy back and burn **FAO** when it trades below 1 **DAI**. This has the effect of pushing **FAO** price back up to 1 **DAI**. **FAO** could always trade above 1 **DAI** because there is no upper limit imposed by the protocol. Think pegged == 1, while backed >= 1.

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

## How does it work?

At a high level, DAO Finance consists of its protocol managed treasury, protocol owned liquidity, 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 **FAO** and distribute them to stakers. With liquidity bonds, the protocol is able to accumulate its own liquidity.&#x20;

## What is the deal with (3,3) and (1,1)?

(3,3) is the idea that, if everyone cooperated in DAO Finance, 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 FAO 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 the worst possible outcome (-1).

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

![](https://2528165684-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FFDCDpy4QEggTCGWvs6W1%2Fuploads%2FpzNAaTOi2ygvlqwdFZ8l%2Fgame_theory.png?alt=media\&token=eb577cd5-c390-4e5d-af71-3db61a3d4bc5)

* 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 FAO off the market and put it into the protocol, while bonding provides liquidity and DAI 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 important?

As the protocol controls the funds in its treasury, **FAO** can only be minted or burned by the protocol. This also guarantees that the protocol can always back 1 **FAO** with 1 **DAI**. You can easily define the risk of your investment because you can be confident that the protocol will indefinitely buy **FAO** below 1 **DAI** with the treasury assets until no one is left to sell. You can't trust the FED 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 important?

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

* DAO Finance does not have to pay out high farming rewards to incentivize liquidity providers a.k.a renting liquidity.
* DAO Finance guarantees the market that the liquidity is always there to facilitate sell or buy transaction.
* 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 FAO. The LP tokens are marked down to their risk-free value for this purpose.

## What is a rebase?

Rebase is a mechanism by which your staked **FAO** balance increases automatically. When new **FAO** are minted by the protocol, a large portion of it goes to the stakers. Because stakers only see staked **FAO** balance instead of **FAO** the protocol utilizes the rebase mechanism to increase the staked **FAO** balance so that 1 staked **FAO** (**sFAO**) is always redeemable for 1 **FAO**.

## What is reward yield?&#x20;

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

## What is APY?

**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 Dao.Finance, your staked **FAO** represents your principal, and the compound interest is added periodically on every epoch (8 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 **FAO** on day 1, after a year, your balance will grow to about 1377.&#x20;

![](https://2528165684-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FFDCDpy4QEggTCGWvs6W1%2Fuploads%2FR4WRbwyAdhhEyx4W4gDJ%2Fimage.png?alt=media\&token=2c77f359-a0ee-48aa-99ef-b9b21feb77f4)

## How is the APY calculated? <a href="#how-is-the-apy-calculated" id="how-is-the-apy-calculated"></a>

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

$$
APY = ( 1 + rewardYield )^{1095}
$$

It raises to the power of 1095 because a rebase happens 3 times daily. Consider there are 365 days in a year, this would give a rebase frequency of 365 \* 3 = 1095.

Reward yield is determined by the following equation:

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

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

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

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

## Why does the price of FAO become irrelevant in long term? <a href="#why-does-the-price-of-time-become-irrelevant-in-long-term" id="why-does-the-price-of-time-become-irrelevant-in-long-term"></a>

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

## What will be FAO intrinsic value in the future? <a href="#what-will-be-time-intrinsic-value-in-the-future" id="what-will-be-time-intrinsic-value-in-the-future"></a>

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 TIME with 100 **DAI**, the intrinsic value will be 100 **DAI**. It can also be decided by the future DAO. For example, if the DAO decides to raise the price floor of **FAO**, its intrinsic value will rise accordingly.

## How does the protocol manage to maintain the high staking APY? <a href="#how-does-the-protocol-manage-to-maintain-the-high-staking-apy" id="how-does-the-protocol-manage-to-maintain-the-high-staking-apy"></a>

Let’s say the protocol targets an APY of 100,000%. This would translate to a rebase rate of about 0.6328%, or a daily growth of about 2%. Please refer to the [**equation**](#how-is-the-apy-calculated) above to learn how APY is calculated from the rebase rate.

If there are 100,000 FAO tokens staked right now, the protocol would need to mint an additional 2000 FAO to achieve this daily growth. This is achievable if the protocol can bring in at least 2000 DAI daily from bond sales. If the protocol fails to achieve this, the APY of 100,000% cannot be guaranteed.

## Do I have to unstake and stake FAO on every epoch to get my rebase rewards? <a href="#do-i-have-to-unstake-and-stake-time-on-every-epoch-to-get-my-rebase-rewards" id="do-i-have-to-unstake-and-stake-time-on-every-epoch-to-get-my-rebase-rewards"></a>

No. Once you have staked **FAO** with Dao.Finance, your staked **FAO** (**sFAO**) balance will auto-compound on every epoch. *That increase in balance represents your rebase rewards.*

## How do I track my rebase rewards? <a href="#how-do-i-track-my-rebase-rewards" id="how-do-i-track-my-rebase-rewards"></a>

You can track your rebase rewards by calculating the increase in your staked **FAO** balance.

1\. Record down the Current Index value on the staking page when you first stake your **FAO**. 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 **FAO** balance has increased.

$$
ratio = endIndex / startIndex
$$

## Is DAO.Finance Audited?

DAO.Finance is a fork of Olympus DAO on the Fantom Network, audits will occur at a later stage. Dao.Finance is currently unaudited! Stay cautious!

##
