Deep Analysis of rDPX v2: Enhanced Price Support | TKX Research

TKX CAPITAL
8 min readFeb 13, 2023

by @Guaaronnnn
editor @FriedWagyuu

Despite the numerous advantages of DeFi options, such as faster settlement, lower costs and increased access, compared to TradFi options, they remain relatively unpopular due to a lack of retail users and insufficient liquidity for institutions. Dopex is the protocol that has been trying to provide both the liquidity of TradFi and the efficiency of DeFi.

Intro

Dopex is a decentralized options protocol designed to maximize liquidity, minimize losses for option writers, and maximize gains for option buyers. It offers several products to enable users to create different trading and yield farming strategies, including:

  • Single Staking Option Vaults (SSOVs)
  • Atlantic Straddles
  • Option Liquidity Pools
  • Atlantic Insured Perps

To reduce losses for option writers, Dopex provides them with $rDPX, a rebate token given as a percentage of the writer’s losses. Initially, $rDPX was criticized for lacking real utility and a clear use case. However, with the introduction of $rDPX v2, Dopex has improved its design to be more robust and useful, making it an essential part of the Dopex ecosystem. This article will explore the details of $rDPX v2 and how it has been designed to better support option writers.

Main Products

  1. Single Staking Option Vaults (SSOVs)

A yield farming mechanism. Deposit tokens into a contract, which sells them as call options with end-of-month expiry and strike prices set by buyers. Lock tokens for a set period and earn passive income; option buyers buy call options, pay a premium and writers earn yield.

Note: Options are European style, meaning they are only exercisable at the end of the period.

2. Atlantic Straddles

Atlantic Straddles are essentially an Atlantic Put with the same payoff as long straddles (simultaneous long position in call and put options with same strike and expiry for price volatility profit). With an Atlantic Straddle, you borrow 50% of the collateral and buy the quote asset. If the price of the quote asset goes up, you profit from the asset. If it goes down, you profit from the put option.

3. Option Liquidity Pools (OLPs)

OLPs offer a flexible way to exit options positions while maintaining their European style. OLPs are built on top of SSOVs and allow buyers of SSOV options to leave their positions in the OLP for a discounted price at any time.

4. Atlantic Insured Perps

Atlantic Insured Perps provide a solution to the problems faced by leveraged perpetual futures traders. These traders often worry about liquidation of their positions due to price volatility. Insured Perps solve this problem by automatically calculating and buying puts to protect the leveraged positions, thus preventing liquidation. Insured Perps are currently available for ETH/USDC with long positions only.

rDPX v2

The rDPX v2 system is a revolutionary new development that brings benefits to all participants in the ecosystem. It enables users to create $DSC (Dopex Synthetic Coins), a synthetic asset that is pegged to another asset.

The system is composed of several key DeFi components, such as bonding, permissioned AMM, perpetual puts, and peg stability modules. Each of these elements is essential for providing value to $rDPX and developing the Dopex ecosystem. To illustrate how $DSC works, we will use $dpxETH, a pegged $ETH asset.

Bonding

The bonding mechanism in rDPX v2 is similar to that of OlympusDAO. It enables users to bond their assets to the protocol in exchange for another asset with a discounted rate over a fixed vesting period. These bonded assets become Protocol-Owned-Liquidity (POL), which can be used to back $dpxETH, permissioned AMMs, peg stability, or even yield farming in other DeFi protocols.

Bonding

Where:

  • X = Value received by bonder after vesting period
  • Y = Value of bonded assets
  • D = Bonding discount

D is the control of the bonding mechanism. It can be used to incentivize or disincentivize bonding when backing is high or low. The higher D is, the more profitable it is to bond one’s assets.

Mint $dpxETH

To mint $dpxETH, users must bond the following:

  • 25% $rDPX
  • 75% $ETH
  • A premium for a 25% out-of-the-money (OTM) $rDPX/$ETH perpetual put

Bonding a $rDPX ETH-denominated perpetual put serves as a backstop value for $rDPX. While bonding, the value of $rDPX may fluctuate relative to $ETH. To maintain the peg of $dpxETH, Dopex sets a minimum backing of 93.75% of ETH value. Of this 93.75%, 18.75% comes from 25% $rDPX and 25% OTM put (0.25 * (1–25%)).

All bonded assets will be placed into the v2 Treasury as Protocol-Owned-Liquidity (POL). The primary purpose of the v2 Treasury is to operate the rDPX/ETH Permissioned AMM and act as reserves for the Peg Stability Modules.

rDPX/ETH Permissioned AMM

The v2 AMM is a 50/50 constant product formula AMM that is exclusive to $rDPX and $ETH. Only the v2 Treasury is authorized to provide liquidity to this AMM. $rDPX and a portion of the bonded $ETH will be deployed in it, and all fees from the AMM will go into the v2 Treasury.

In addition to basic transaction fees, the v2 AMM implements a 5% selling fee (in $ETH) on $rDPX, designed to discourage $rDPX holders from selling their $rDPX. The selling fee will also accrue to the v2 Treasury to support the backing of $dpxETH. This fee not only supports $dpxETH but also effectively reduces selling pressure on $rDPX. With a discount factor of 10%, the price difference between selling and bonding can reach as high as 15%.

Dopex also applies Liquidity Provider Management to v2 AMM, every time $rDPX holders choose to bond, v2 AMM will rebalance the liquidity pool. It intends to reduce the circulating supply of $rDPX which will be kept in v2 Treasury and deepen the liquidity of rDPX/ETH pool.

rDPX-ETH Perpetual Pool

In addition to bonding $rDPX, an OTM $rDPX/$ETH perpetual put is also required to serve as a backstop for $dpxETH. Twenty-five percent of $dpxETH is comprised of $rDPX, which may fluctuate in value relative to $ETH, so the OTM ETH-denominated perpetual put helps to protect against any downside for $rDPX. The counterparty of the put is the option writer, who receives premiums at the start of each epoch (one month) and settles premiums and P/L in $ETH.

You might notice that the presence of sufficient liquidity from option writers is essential for purchasing the mandatory $rDPX perpetual put for bonding. The circulating supply of $dpxETH depends on the amount of available put liquidity. Insufficient liquidity will result in the inability to mint additional $dpxETH until more liquidity is added to the writer’s pool. Therefore, Dopex have various ways to compensate option writers for providing liquidity. In addition to option premiums paid by bonders, option writers will be rewarded with:

  1. A funding rate from v2 Treasury in $ETH for every epoch.
  2. A share of 3000 $DPX/year from Dopex Treasury.

Peg Stability Module

$dpxETH is a synthetic asset pegged to the value of $ETH. Liquidity for $dpxETH is available in the Curve pool in the form of $dpxETH/$ETH. The stability of the price of $dpxETH/ETH is dependent on the depth of liquidity of the pool. To protect against de-peg events, Dopex has designed the v2 Peg Stability Module (PSM).

There are three types of de-peg scenarios:

  • $dpxETH > 1.01 $ETH: In this case, new bonders can bond $ETH to mint $dpxETH and swap it for $ETH from the Curve pool. Additionally, $rDPX holders can arbitrage the price difference.
  • 0.985 $ETH ≤ $dpxETH < 0.99 $ETH: Dopex allows holders of $veDPX with more than 1K $veDPX to swap $ETH for $dpxETH to take advantage of the price difference.
  • $dpxETH < 0.985 $ETH: In this scenario, Dopex allows $veDPX holders with more than 1K $veDPX to redeem $dpxETH for an underlying asset composed of 75% $ETH and 25% $rDPX from the v2 Treasury. This allows them to arbitrage the price difference resulting from the de-peg event.

Decaying Bondable $rDPX ($dbrDPX)

To support the $rDPX, Dopex initially distributed $rDPX to option writers who experienced losses. In v2, Dopex introduced a new asset called decaying bondable $rDPX ($dbrDPX) as a replacement for the original $rDPX. This ERC-721 token can only be realized by bonding and has a fixed expiration date, after which it will become worthless.

The purpose of these changes is to provide stronger price support for $rDPX and promote the use of $dpxETH. This is achieved in two ways:

  1. The supply of $rDPX is fixed, preventing a potential huge supply shock.
  2. $dbrDPX cannot be sold or exchanged for $rDPX, so the only way to realize its value is through bonding. This results in more $dpxETH being minted and more $ETH being bonded into the v2 Treasury.

Why $dpxETH?

Dopex has been strengthening its presence in the Convex-Curve ecosystem by accumulating $CVX and $CRV. This position allows Dopex to direct emissions to the $dpxETH/$ETH pool, incentivizing $dpxETH holders to hold and provide liquidity. By participating as a liquidity provider (LP), holders of $dpxETH can earn yield through liquidity mining rewards. This not only attracts deeper liquidity, but also helps protect $dpxETH from de-pegging.

In the near future, when the $dpxETH/$ETH liquidity is established and deep enough to prevent price fluctuations, Dopex will integrate $dpxETH into its ecosystem. For instance, $dpxETH will be accepted as collateral in various products.

In Short

Incentive Flow from @0xMrFreeze
  • $rDPX bonding: For Dopex — POL can be used to farm yield which brings more revenue to the protocol; For $rDPX holders — profiting from the discount of minting $ETH.
  • v2 AMM and liquidity management: For $rDPX holders — benefit from a stronger $rDPX price; For $rDPX option writers — less likely to suffer a loss due to stronger $rDPX price; For Dopex — higher collateral value in v2 Treasury > stronger $dpxETH peg.
  • Peg Stability Module: For $DPX holder — higher demand on $veDPX > better price performance.
  • CRV emissions: For $dpxETH holders — additional yield from farming, higher demand on $dpxETH > deepen liquidity > less likely de-peg.
  • Decaying Bondable $rDPX: Supply shock on $rDPX, benefit $rDPX holders, $rDPX option writers, Dopex and so on.

Risks & Thoughts

Although, in theory, the backing of $dpxETH is at 93.75% of $ETH, there is no guarantee that it is 100% secure. The chance of de-pegging with less than 93.75% of $ETH is extremely low, as there are actual assets backing it. In an extreme scenario, it is possible that the price of $rDPX could skyrocket or go to zero. In this case, will the $rDPX mechanism still be able to work as it is supposed to?

Dopex has identified the pain point of option trading, which is the asymmetric risk of being an option writer. To attract more liquidity, Dopex compensates option writers through its rebate token. The re-work of rdpx v2 successfully aligns all participants of the ecosystem. This robust design turns $rDPX from a worthless token to a token that is the key driver of Dopex. The incentive flywheel will likely make Dopex gain traction once rdpx v2 is launched.

Reference

https://twitter.com/0xMrFreeze/status/1622354461783097344
https://twitter.com/AwuAle/status/1623607248206594048
https://docs.google.com/document/d/1005YPC8-tUJhuhzTZK__3KZss0o_-ix4/edit#
https://ignasdefi.substack.com/p/defi-option-protocols-a-gold-mine?sd=pf
https://defillama.com/protocols/Options
bit.ly/dopexpedia
https://medium.com/@omeguhh/how-to-choose-the-right-decentralized-options-platform-for-your-needs-82e2b278ed8f

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Note: TKX Capital do not offer any financial advice for retail investors and we have no affiliation with projects in this research.

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