Dopex Is Kickstarting Arbitrum Adoption
Arbitrum szn in full force.
Welcome Anon! Today we will go through a protocol that have been making noise lately. Before I get started, I understand that Options is not the most intuitive matter and have done my utmost to keep it on a high level view. Suppressing the inner autist is not always easy but it should make for more pleasant reading.
2022 seems to be the year of the rollups. We know that the market is cyclical in nature and capital rotation is a feature. The main rotation during 2021 was the L1 rotation which can be seen in the explosion of their value throughout the year. This year it seems that Layer-2 solutions will have the same experience. The main difference here is that they do not have a token. So what has been driving the masses to use layer two solutions as most protocols are residing on the Ethereum mainnet? In terms of Arbitrum, one of the answers has been Dopex.
Most people already have some kind of understanding in relation to real estate and stocks when they get into the crypto market. However, the same can’t be said for options which is why this is flying under the radar. Options are not as intuitive so I will do a quick walkthrough on options before getting into Dopex. I will keep it on a high-level view to not deter you from wanting to read further.
What are Options?
Options are derivatives that enable you to speculate on the future of an asset's price movement. Considering they are derivatives it means that you do not own the underlying asset but only a contract that represents that an agreement is in place for the asset at a said price. There are some main things to take into consideration when it comes to options:
Call options
Put options
Underlying asset/strike price
American vs European
Call options allow you to buy the asset at a specific price. It is important to understand that it gives you the right and not the obligation. To make it as easy as possible, see this as a possibility to get access to more capital. Essentially a down payment of an eventual future purchase. If you expect Asset A worth $100 to have a substantial increase in value of 50% over a time period of 6 months, you can buy a call option allowing you to purchase 10 shares/tokens of this asset for $125 in 6 months, earning you a substantial profit.
Put options works in the opposite manner and gives you the right to sell the asset at a specific price during a certain period of time or a specific date. Imagine that you expect volatile times in the market and you expect Asset A worth $100 to go down 25% in 6 months. Then you can purchase a put option that allows you to sell it for $90 dollars in 6 months. Essentially hedging your position.
If your strike price is not “hit” for the underlying asset you do not have to exercise the option, instead, your premium paid will just be worthless. Nonetheless, the same option that has a strike price in 1 year will be more expensive than the one that expires in 1 month. If the price of the underlying asset does not move, the value of the option is more worthless tomorrow than today. This is because you pay a higher price to have more “options” in terms of how the market moves, hence a premium.
There are two types of options styles used which are American options and European options.
American options give the person the right to exercise the option at any time until expiry.
European options give the person the right to exercise the option only at expiry.
If I go deeper into this topic at this stage, your brain might explode so let’s leave it at that for now. Further down the line in this article, I will go through the relevance of American and European options to this protocol. With that said, this brings us to the main topic of this article. Dopex is a Decentralized Options Exchange that is gaining traction by the minute. However, what is the fuss about it? Let’s take a look.
What’s so special about Dopex?
Dopex is a maximum liquidity and minimum exposure options protocol. In other words, it maximizes gains for options buyers and minimizes losses for options writers. How do they achieve this? Through SSOV (Single Staking Options Vault) and Options Pools (not live yet).
Dopex has enabled users to get involved in options without needing extensive knowledge about them through SSOV. How do they work? SSOV allows users to lock up their assets for a specified period of time and earn a yield on these locked assets. This time period is one “epoch” that normally lasts for one month. Users deposits their assets into a smart contract which consequently sells the deposits as call options to buyers at fixed strike prices that they have pre-selected for the end of month expires. The SSOV’s utilize a European options style with the option only being able to be exercised at expiry.
The other way is through the use of Options pools, although they are not active on the platform yet, it is well documented in terms of how they will function. Options pools allow you to participate passively by providing base asset(first-listed asset in a pair) liquidity and quote asset(second-listed asset in a pair) liquidity. This is valuable liquidity for other users that want to buy either call options or put options. Instead of having to decide which strikes and expiries to provide liquidity to, they can simply provide the same liquidity to a pool instead.
At the end of an epoch, every participant can collect their fair share of rewards in relation to their pool holdings. If losses have been incurred by the pool itself due to option purchasers making net profits then the pool participants receive rDPX that are minted to the equivalent of 30% of pool losses. Hence, why they are called rebate tokens. This makes Dopex a better place to provide liquidity than an options platform like Deribit.
Fun fact: Let’s not forget that it is 2022 and Dopex has more going on in their ecosystem than Cardano.
Tokenomics
Dopex has a two-token model for their protocol. The first token is DPX which is a vanilla governance (used to vote on protocol and app-level proposals) and protocol accrual fee token. DPX accrues fees from vaults, pools and wrappers built on the protocol after every global epoch. It has a limited supply of 500,000 tokens.
The distribution was as follows:
Operational Allocation: 17%:
Farming (Liquidity Mining): 15%:
Platform Rewards: 30%
Founders Allocation: 12%
20% initially staked in liquidity pools
Early Investors & Token Sale: 26%
Early Investors: 11%
Token Sale: 15%
The second token in the protocol is rDPX, which is the Dopex Rebate token. A percentage (decided by governance) of rDPX gets minted and distributed for any losses that get incurred by the participants of the pool. rDPX has no supply cap but there are exciting upcoming mechanisms that will make it very valuable. This brings us to rDPX V2.
rDPX V2
The new version of rDPX will be a deflationary token that would majorly be backed by stablecoins. For this to work, we need to talk about DPXUSD. The token DPXUSD will be a stablecoin issued by the Dopex protocol that can be minted through bonding with rDPX LP’s. Thus, submitting LP’s (if LP’s confuse you, read more about it here) consisting of rDPX/USD or 50% OTM (out of market) rDPX Atlantic puts (we will get to Atlantic options in the next section). To mint DPXUSD it is vested over 5 days as you get to purchase it on a discount through LP’s.
While this takes place, Dopex will hold the LP token and decouple rDPX from it and burn 10% of it. After that is done it will recouple it again, which will make it a deflationary token that is required to mint DPXUSD.
The other option is minting DPXUSD through Curve LP’s. Yes, you heard that right. This would enable LP’ing through two different measures. One is through a bonded measure (OHM model) and the other option is through standard Curve LP that exists in the ecosystem. In order to mint DPXUSD, the bonded LP has 2 x weight when it gets deposited in comparison to standard Curve LP. Protocol revenues would be split between these LP’s while being vested and claimable after 7 days. Since the bonded LP has 2 x stronger weight, it gets more revenue generated in relation to it’s initial investment. That explains it briefly, although if you want a more technical explanation you can find it in the RDPX V2 whitepaper.
With that said, the goal is not only to enable rDPX to mint DPXUSD, but also to mint synthetic derivates such as stocks, commodities, ETFs, indices, and other tokens. However, it’s not only rDPX that has exciting times ahead. The protocol itself has created a new form of options called Atlantic options.
Atlantic Options
As it sounds, Atlantic options are a mixture of European and American options. Hence, the name Atlantic. It is a form of innovative usage of options created by the protocol itself. Similar to European option they have fixed expiries but you can move the collateral within the contract through managed contracts. Essentially the capital can be moved within this managed contract, so the collateral you deposit to get an Atlantic option such as an Atlantic put can be withdrawn at any time if you swap it with the underlying token. Consequently, it then works the other way around as well.
It enables capital to be put into better use as this enables you to buy an Atlantic Put and use it for leverage to perhaps yield farm. This would provide you with a specified liquidation price which you can borrow against and buy another put below liquidation price. This makes leverage more “safe” although I do not advise you to do this unless you have capable experience in this regard. Basically, Atlantic options enable you to put capital to better use and hedge yourself against different market environments.
If you buy a put with a strike price of $2,000, someone else that is more bearish and has a target price of $1,500 can buy it from you and both can win. If the person is right he will have $500 extra considering the difference in value.
It guarantees a buyer at certain levels while providing the market with different price floors for the tokens. However, considering the flexibility, this enables it is no surprise that they will be priced at a premium in comparison to regular options offered by the Dopex protocol. There is no free lunch and capital flexibility is a premium worth paying for.
Lastly, Dopex has the capability of changing the Curve Wars through veDPX and Interest Rate Options Pools. Let’s finish the article with that.
veDPX, Interest Rate Options Pools, and the Curve Wars
To begin with, veDPX stands for vote-escrowed Dopex and is a governance token that can be locked into the protocol to earn fees. The longer the token is locked, the higher amount of fees you accrue. To get veDPX, you lock DPX. This sounds familiar to most people that are aware of the Curve Wars. What if I told you that Dopex has the capability of changing the Curve Wars forever? Let me enlighten you.
Dopex has the possibility of routing the total value locked of Curve directly to their protocol instead. How would that be the case? Dopex has the capability of providing its services to every large ecosystem through Atlantic options and SSOV etc. This enables people to leverage, hedge, and further speculate on Curve and would provide enormous value for other ecosystems but also an incredible amount of fees to Dopex.
Also, the protocol has plans on releasing Interest rate pools. This would allow you to bet and hedge on the underlying interest rate. The interest rate you would bet on would be the Curve pools. Essentially, if you expect that a certain pool will receive a lot of votes that will boost its interest rate, you can buy a call option on that pool. If the pool APR is at the strike price or above then you would profit. If you think it will be stable instead, you can sell call options at the same strike price and profit from the premium if the APR remains below that.
Take into consideration that people will have the possibility of voting on the Dopex rewards through their veDPX and a new dilemma has arrived. Curve Wars x Dopex Wars. This is especially important if a large bribe is looming over a LP in Curve. Being able to hedge against that in advance through the use of options means that your approach to the Curve wars changes completely. Add to the fact that the yield from Dopex rewards could be used to generate veDPX and you have a powerful loop that will have major implications for the Curve Wars. There is even room for a certain [redacted] to get involved but that is for another article.
Author’s Words
I want to clarify that even though I am a finance professional, this is not financial advice, and this article is only meant to bring light to the current market situation. I advise everybody to do their own research, I only want to help you to find what you are looking for. If you enjoyed this piece, feel free to share it and subscribe.