Author: CryptoYC Tech, CYCLabs

TL;DR

• Dopex is a decentralized European options trading platform. It features a unique single-coin staking option vault (SSOV), interest rate options, and Atlantic options. In the future, collateralized stablecoins will be issued.

• SSOV: Supports staking a single type of token as liquidity in the options vault. If the underlying asset price rises, SSOV stakers will retain their dollar value; if the price falls, they will retain the token value. In either case, they will earn DPX rewards and option premiums.

• Interest Rate Options: Upgraded the Curve war gameplay, providing participants with more hedging or profit-making tools.

• Atlantic Options: Traditional option collateral cannot be used until the option expires. However, Atlantic options allow users to utilize these collaterals in some partnered projects, effectively insuring your leveraged position and achieving several goals:

• No liquidation on perpetual contracts.

• No liquidation on borrowing.

• Straddles that earn in both rising and falling markets.

• Two Types of Tokens:

• DPX: veToken type. Guides reward distribution, governance, etc.

• rDPX: The essence, but currently has no substantial function. It compensates for partial losses incurred when buying/selling options on Dopex with a "discount" token. The corresponding "option pool" for this compensation has not yet been launched.

Why Look at Dopex

For newcomers who have never encountered options, many concepts like delta, gamma, theta, and vega may be unfamiliar. They don't even need to understand what options are to sell options through SSOV and earn risk-free option premium dividends and DPX dividends. Dopex helps solve the most challenging problem of option pricing.

For options players, in addition to providing options priced based on the Black-Scholes fair pricing model, it also leverages DeFi's strong composability to offer "Atlantic options" that increase leverage, as well as interest rate options tailored to the characteristics of Curve itself.

So today, our focus will be on SSOV and Atlantic options, as well as interest rate options. We will also briefly mention the future utility of rDPX in the dual-token system.

SSOV: Single Staking Option Vaults

Similar to a staking pool, Dopex also supports locking a single token for a certain period in the corresponding SSOV pool to earn nearly risk-free token rewards + DPX rewards. However, there are a few points that differ from traditional staking:

• Because SSOV is an options pool, when locking tokens, you need to choose one from the four provided strike prices and then lock the corresponding tokens into the pool. Of course, before expiration, you can transfer your position through NFT transfer.

• Because Dopex uses European options, your funds and rewards cannot be withdrawn before the epoch expires.

• The rewards you earn in token terms are based on the premiums paid by the option buyers corresponding to the liquidity you provided (similar to fee rewards in conventional dual pools).

• The DPX token rewards you earn are proportional to how close the execution price is to the ATM at the time of option expiration. This is easy to understand because the closer the expiration execution price is to the strike price, the easier it is for the option to reach ITM, thus making it more likely for the option seller (i.e., the SSOV LP) to incur losses, requiring more DPX compensation.

• The so-called nearly risk-free is calculated in U terms. Calculating in token terms still carries risks.

• The collateral for put options is Curve's 2pool LP token.

This may seem a bit complex, but if we set aside some of the terminology and explain it with a practical example, the principle of SSOV becomes very clear.

Since most SSOVs are call options, we will use an example of a one-month call SSOV for ETH.

• We can see that the current four strike prices for this SSOV are: 1700, 2000, 2400, 3000. The epoch time is from 7.29 to 8.26. The asset that can be locked is WETH, and the current effective APY is 12.1%.

*Image source: * https://app.dopex.io/ssov-v3/ETH-MONTHLY-CALLS-SSOV-V3-2

• The current distribution of options in the pool is as follows: the four strike prices correspond to approximately 9.3, 50, 404, and 3763 WETH, respectively. The number of options already subscribed is: 8.7, 50, 379, and 3762 WETH, and the premiums earned so far are 0.7, 2.32, 3.61, and 7.7 WETH.

*Image source: * https://app.dopex.io/ssov-v3/ETH-MONTHLY-CALLS-SSOV-V3-2

• Suppose I invest 20 ETH into the four tiers of this pool in a ratio of 1, 4, 8, 7 on 7.29. If the ETH price reaches $1800 on 8.26, then only the first tier (strike price = 1700) will be in the ITM position, while the other three tiers will be pure profit. Here we know that the option buyer for the first tier can earn 100 * 8.756 / 1700 ≈ 0.51 ETH, but how much will the LP for this tier lose? Is it that 8.756 ETH is completely gone? Of course not; these LPs will only lose the money earned by the option buyer. We can illustrate this with a diagram:

Image source: https://drive.google.com/file/d/1QnNwIwJ6RdlIG_9A6qltTonWcDBF0vqW/view

Here we can see that, calculated in U terms, we actually did not incur a loss, and when adding premiums, DPX rewards, and rDPX rewards, we still made a profit. However, if calculated in ETH terms, our ETH principal may indeed have lost value.

It can be seen that compared to traditional option writers, selling options through SSOV saves a lot of trouble, especially regarding option pricing. Conventional option sellers need to consider option pricing, which requires calculating the corresponding option's delta, gamma, theta, and vega, performing reasonable modeling to maximize their rights and interests, a cumbersome process that requires a high level of specialization, making options a high-threshold activity. However, SSOV lowers this threshold significantly by automatically helping LPs price options using its BS method. This can lead to very interesting scenarios. For example, the simplest idea is that I hold ETH spot while locking ETH into the SSOV call pool, setting the highest strike price tier, thus treating it as an ETH stake-to-earn product, which is not only useful but also has a shorter lock-up time than ETH PoS, with comparable returns. At the same time, combined with the Atlantic options discussed below and the composability of DeFi, it achieves maximum capital utilization and yield (don't forget that the collateral for the put SSOV is Curve 2pool, which can also earn CRV).

Of course, if this seems too complicated, you can directly use projects like JonesDAO in the Dopex ecosystem for automated options investment.

Atlantic Options

We all know that the composability of DeFi is essentially the composability of "asset liquidity." However, for ordinary option products, their collateral cannot be utilized until the option is exercised or expires. In the current DeFi landscape, where liquidity is king, this approach inevitably leads to low capital efficiency. Therefore, in May of this year, Dopex released the white paper for Atlantic options and launched the first Atlantic option product: Straddles in early August.

Atlantic options are essentially a special type of SSOV. The collateral for this SSOV can be lent to option buyers. Of course, to prevent buyers from running away with the funds, the collateral lent through Atlantic options cannot be directly used through the user's wallet but is instead utilized through partnered projects in the form of proxy contracts. Currently, the partnered projects include GMX and Vesta (a lending platform). Specifically:

• Buying an Atlantic Call (AC) allows you to use its underlying asset. If you buy an ETH call option, you can lend ETH.

• Buying an Atlantic Put (AP) allows you to use its underlying asset, which is a stablecoin. If you buy an ETH put option, you can lend stablecoins.

After understanding the basic principles, we can look at the first Atlantic option product released by Dopex: Straddles. Specifically, it is a Long Straddle.

The Long Straddle strategy synthesizes an ITM call option and a put option with the same strike price, same duration, and same underlying asset, and its profit function is the sum of the profit functions of the call and put options.

This concept seems easy to understand, but its practical application involves issues such as ratios and option price calculations, requiring a high level of expertise. Essentially, it profits from high volatility, relying on a significant increase in Vega to generate returns. However, it is important to note that Theta will erode.

The counterpart to Long Straddle is the Long Strangle strategy, which involves buying OTM call and put options, also betting on high volatility.

The returns from Long Straddle, using ETH as an example, are approximately as follows: the greater the volatility, the greater the returns.

*Image source: * https://blog.dopex.io/zh/articles/dopex-papers/atlantic-strategies-atlantic-straddles

However, from its principles, we can see that to adopt this Long Straddle strategy, you need to buy both call and put options. At this point, you need to buy two options, paying premiums for both and incurring theta decay for both.

However, if you use Dopex's Atlantic options, you only need to buy one Atlantic Put (AP) and then use the borrowed stablecoins to buy the underlying asset. The cost of purchasing one option is certainly less than buying two, which is why this is referred to as a special trade in the business world.

Of course, we will still provide an example to explain how Dopex's long straddle works. The simple description of this strategy is as follows:

1. Buy 1 ETH in-the-money AP with a strike price of $1500.

2. Borrow 50% of the collateral ($750 USD).

3. Use the borrowed collateral to buy $750 worth of ETH.

4. Buying ETH's AP means you pay the option fee in exchange for the right to profit if ETH's price falls. Buying ETH means you profit if ETH's price rises. The combined result is the profit graph shown above.

(The official source provides a Google Sheet where you can input any data to see the profit results:

https://docs.google.com/spreadsheets/d/1xRlKbLzsvC9nO1bycoSEnncVuwCMN-Pw4uONqNN3MsQ/edit#gid=0)

We can look at the results in this table: you can see that there are profits in both rising and falling markets.

At the same time, to offset the premium, ETH's change needs to be at least 11.4%:

Of course, this process is fully automated on Dopex.

In addition to directly purchasing Dopex products, you can also use the collateral from Atlantic options for lending to improve capital utilization:

Assuming you borrow U using 1 ETH as collateral on a lending platform, with a liquidation price of 1500. At this point, you can purchase an AP (strike price > liquidation price, e.g., 1600) as insurance to protect your position from liquidation. During the validity period of the AP, the following scenarios may occur:

• If ETH falls below 1600, since you bought the AP with a strike price of 1600, Dopex will move the corresponding collateral, which is stablecoins, to your lending platform, protecting your position from liquidation.

• If ETH returns to above 1600, these stablecoins will be moved back to the AP.

Moreover, you don't even need to have this one ETH. You only need to:

1. Purchase an Atlantic Call (AC), using its collateral—ETH.

2. Use this collateral ETH to unlock an AP, using its collateral—stablecoins.

3. This way, you create a loan that will not be liquidated. The only limitation is that this process must occur within the ecosystem supported by Dopex.

As for other aspects, such as perpetual contracts that won't be liquidated, the basic principles are similar, for example:

• OHM bonding + circular lending (AC lending → AP protection against liquidation → bond OHM → vested OHM → repayment profit)

• Option spreads (2000 dollar AP → placed in 1500 dollar put SSOV, forming a spread profit)

• Circular lending

• Stablecoin insurance

• Low-cost leverage bribery agreements (mainly CVX, vlCVX generated from CVX locking generally lacks liquidity, but Dopex can support vlCVX Locker to borrow stablecoins at a 50% LTV, effectively purchasing a corresponding amount of AP. This feature will only be clarified after the DPXUSD launch.)

We can ignore a lot of the details above; what I need to know is that Atlantic options greatly enhance the capital utilization of options, and combined with the expanding Dopex ecosystem, it is bound to spark a new wave of DeFi gameplay. It also provides new passive income avenues for those of us unfamiliar with derivatives.

Interest Rate Options: IRO

In summary: IRO allows users to speculate on the direction and volatility of Curve pool interest rates. This product may initially seem useless because the interest rates on Curve are stablecoin rates, which do not fluctuate much, but the real innovation lies in Dopex supporting up to 500x leverage to sell IRO, and it allows the same collateral to issue both call & put IRO, theoretically achieving a maximum leverage of 1000x.

For writers, IRO is a special type of SSOV (but the option pricing uses the Black-76 model instead of the BS model), depositing Curve 2pool LP to sell rise and fall options. Therefore, the seller's IRO corresponding returns are divided into two categories:

• Call IRO: floating income, fixed cost. This allows sellers to receive interest at the spot rate while paying a fixed rate to the buyer.

• Put IRO: fixed income, floating cost. This is the opposite of call IRO.

Let's look at an example of the profit situation for an IRO writer: Suppose we have $5000 in capital, using 200x leverage, obtaining a nominal value of $1,000,000, and issuing a call option with a strike price of 5% and a duration of 14 days. By the expiration date, two outcomes may occur:

• If the spot interest rate is out of the money, for example, 4%: The IRO seller collects premiums based on the nominal value of $1,000,000 and receives a full refund of the margin.

• If the spot interest rate is in the money, for example, 6%: The IRO buyer receives approximately $383.56, while the seller incurs a margin loss of that amount but still receives the premium based on the nominal value of $1,000,000.

So, who would the buyers of IRO be? Since IRO is closely related to Curve, the corresponding strategies should include three types:

• Hedging: Suppose I am an LP in a Curve pool, with interest rates fluctuating between 2% and 5%. If I want to maintain the interest rate at 4%, I can choose to issue a put IRO with a rate of 4%, so that when the rate falls below 4%, I can still earn 4%. For example:

• Suppose my LP position is worth $1,000,000, and I issue a 14-day put IRO with a rate of 4%.

• If the spot interest rate at settlement is 3%, my Curve LP can earn $1,150.68 in returns.

• At the same time, since the spot interest rate < execution rate, the option is OTM, so I can earn approximately $383.56 in additional income. Thus, the total return equals $1,150.68 + $383.56 = $1,534.24, which exactly equals the 4% interest yield.

• Speculation: For example, if someone knows that the APY of a certain pool will rise, they can buy a call IRO, paying a fixed rate to gain additional floating rates, and vice versa. No further examples are needed; it is essentially similar to the above.

• Bribery Voting: Exclusive to whales. Protocols like FRAX hold a large amount of CVX/CRV, giving them strong control over Curve interest rates. They can exploit this information asymmetry to gain more profits. For example:

• Suppose Frax is bribing votes for its Frax-2pool, with the current interest rate at 2%. As the bribery progresses, the interest rate is likely to exceed 2%. Therefore, I can buy a call IRO option for that pool to gain excess returns.

• Suppose you are a CRV whale. Typically, you vote for A, bringing high APY to A, but you can use your votes to short A and long B, buying a put IRO for A and a call IRO for B. This way, you can achieve higher returns while also receiving bribery rewards.

Thus, IRO is primarily a tool for various protocols or whales. It is challenging for ordinary people to engage with. However, if future Curve wars involve protocols that do not consider the existence of IRO, their capital utilization will be very low. Conversely, whether someone will act contrary to expectations and influence Curve pool interest rates based on IRO is another matter.

Token Economics

DPX: Nothing much to say, it's the veToken model.

rDPX: Currently, its real utility is still outlined in the white paper and has not yet officially taken effect. Its role is to compensate option sellers who incur losses in the future option pool that will be launched. The tentative compensation share is 30% of the loss amount in rDPX. However, we all know that such purely compensatory tokens have no value. Therefore, the core of rDPX is empowerment. According to its white paper, the main utilities of rDPX may include:

• Collateralized stablecoins using rDPX.

• Synthetic assets.

• As fees.

• Burning mechanism.

The most complex aspect is related to the stablecoin. According to the white paper, the stablecoin issued by Dopex is DPXUSD, which is collateralized by 50% rDPX/USD LP + 50% US dollar stablecoins or two times 50% OTM Atlantic rDPX put options. If rDPX is priced at $100, it means two times 50-dollar put options, allowing the protocol to consider using $100 in stablecoins as collateral. At the same time, these dollar collateral will earn returns on Curve.

In this view, DPXUSD is an under-collateralized stablecoin backed by 75% stablecoins. Let's illustrate this process with an example:

• Suppose rDPX = $100, a user collateralizes 1 rDPX/USD + $200 in other dollar stablecoins (or rDPX Atlantic put options), making the total collateral value $400, of which $300 is stablecoins. The total value is 4 rDPX.

• The protocol will withdraw rDPX equivalent to the collateral value at a market discount rate of x%, burning rDPX and minting DPXUSD. If x = 5, then in this example, the protocol will take out 4 * 1.05 = 4.2 rDPX from reserves, burn it, and then mint $420 in DPXUSD.

• The newly minted DPXUSD cannot be withdrawn for use until 5 days later.

Of course, this involves some issues. For example, what happens if the price of rDPX fluctuates? What if x% increases or decreases?

• For the first issue, since in this example the value ratio of rDPX to the delivered DPXUSD is always 4:1, changes in the price of rDPX do not affect the number of DPXUSD minted. For instance, if rDPX now becomes $50, then the required dollar collateral would only be $150, resulting in the minting of $200 in DPXUSD.

• For the second issue, x will change with the quantity of rDPX in the reserve; the more there are, the larger x becomes.

Another minting process for DPXUSD involves the Bond mechanism. This process also involves a dual-bonding mechanism, which is relatively complex. Whether this mechanism is reliable is still up for debate, so we will not discuss it here for now.

Conclusion

In terms of data, Dopex may not perform as well as several futures products. However, currently, the discussion around Dopex is increasing, especially regarding the composability brought by its interest rate options and Atlantic options in DeFi. Whether it will become a dark horse remains to be seen. However, its innovative spirit and exploration of the possibilities of DeFi itself are worth our continued attention.

*Image source: * https://www.dopexanalytics.io/TVLCharts/Index References:

https://docs.google.com/document/d/1JSfuNMVp7OGHlKZuhSKDDby4WpzYEF9rfrXNnAqnogA/edit

https://blog.dopex.io/zh/articles/dopex-papers/atlantic-strategies-atlantic-straddles

https://medium.com/@tztokchad/dopex-rate-vaults-crv-and-cvx-7afc534e3bb7

https://medium.com/@tztokchad/dopex-atlantic-options-50a2d3b77aa7

https://twitter.com/bee_926/status/1531377047578169344

https://weibo.com/ttarticle/p/show?id=2309404731577325191225