May 9, 2022

Dopex Papers: Interest Rate Options (Introduction)

With our Curve Interest Rate Options (IRO) just around the corner, it is time for us to do a moderately deep dive into how everything fits together. Read on to stay ahead of the so-called “Curve” and learn how this product will work and the types of strategies you might want to employ.
Release is imminent, Employees!
This article uses some examples from this cheeky little spreadsheet. Please feel free to make a copy of this model and input your own variables.


  • Curve interest rate options allow purchasers to hedge or speculate on APY of specified Curve pools
  • Option writers deposit Curve 2Pool LP tokens into an IRO SSOV which can be used to write both puts and calls
  • Option writers can leverage up to 500x (if they write both puts and calls on the same deposit, leverage up to 1000x is possible) - this means a 5K deposit can claim premiums on $5m notional value!

What is Curve?

Curve is the largest decentralized AMM that specializes in stableswaps between pegged assets. The protocol incentivizes LPs via a highly modifiable emission schedule, with LPs receiving CRV emissions based on ‘gauge weights’. Gauge weights are controlled by veCRV voters with emissions to each pool changing every two weeks which makes Curve APY per pool a gamable system that would benefit from a robust options market.

What is a Curve IRO?

An option is a financial instrument that gives the buyer a right, but not an obligation, to buy or sell an underlying asset at an agreed price (strike price) within a certain time frame. For Curve IROs, the underlying asset is the interest rate.
The two types of Curve IROs will be:
  1. Call IR Option: Buyer has a right to receive interest based on the spot rate whilst paying interest based on the strike rate; i.e. receive floating (spot), pay fixed (strike)
  2. Put IR Option: Buyer has a right to receive interest based on the strike rate whilst paying interest based on the spot rate; i.e. receive fixed (strike), pay floating (spot)

How will Curve IROs work on Dopex?

A Curve IRO on Dopex has a number of variables to keep note of:
Strike (Fixed) Rate: Strike price selected by the purchaser
Type of Option: Call or Put, refer to above for what this dictates
Style: European (can only be executed at expiry)
Expiry: Time before the option is settled (7 days or 14 days)
Premium: Calculated using a Black-76 model, a variation of the Black Scholes pricing model.

Buying a Curve IRO

Of the above, the only variable factors that the option buyer selects are the strike rate and the type of option (call or put). Style and expiry duration are preselected whilst the premium will depend on which strike rate and option type are selected. Of course, the spot rate will vary depending on pool gauge weight, trading volume, and TVL.
If the option expires ITM, the option buyer will receive the difference in the corresponding rates (depending if they bought a call or a put) in the form of the Curve IR SSOV’s underlying (2Pool LP Tokens, explored in Selling a Curve IRO). They would also have initially paid the premium when the option was purchased.
If the option expires OTM, the option buyer will receive nothing and the option premium is paid regardless.
We will go through some examples later on in ‘Who would buy a Curve IRO?’.

Selling (Writing) a Curve IRO

Writing a Curve IRO works in a similar way to Dopex’s other SSOVs, with the underlying asset being Curve 2Pool LP Tokens (representing USDC/USDT deposits into Curve’s 2Pool).
Option writers can choose to sell both call and put options at a chosen strike price. Note that the 2Pool LP Tokens can be used for both calls and puts, meaning the same underlying tokens are used for both option types. Since volatility in Curve APY’s are typically quite small, writers are also able to leverage up to 500x (note that writers can write both call and puts with the same deposit and thus reach up to 1,000x leverage!).
Collecting premiums for $1m options with a $5k investment? IRO’s sure are crazy stuff!
Let’s walk through an example of what writing an IRO would look like:
Let’s pretend we have an option writer who has $5k capital and wants to leverage it by 200x to give $1m notional value.
  1. Option writer deposits $5k into a IRO SSOV, chooses to write calls, strike price of 5%, expiry duration of 14 days, and 200x leverage. At this point, the option can expire OTM or ITM.
  2. Option Expires OTM
    1. Let’s assume the final interest rate for the period is 4%
    2. Floating rate /> Fixed rate (4% /> 5%) meaning it expires OTM
    3. Option writer collects premiums based on a notional value of $1m and their deposit is returned in full
  3. Option Expires ITM
    1. Let’s assume the final interest rate for the period is 6%
    2. Floating rate > Fixed Rate (6% > 5%) meaning it expires ITM and the option writers’ deposit is slashed by $383.56 ($1m x 0.01 / 365 * 14)
    3. Option writer collects premiums based on a notional value of $1m and they receive their slashed deposit of $383.56
Who would buy a Curve IRO?
Curve IROs will serve as a powerful tool for Curve LPers to control the APY they receive. Speculators can use these options to profit if they believe the current market rate is mispriced. Whales that control a large amount of voting power may also adjust their votes to encourage their options expire ITM to claim the settlement fees.
This means there are 3 main uses for Curve IROs - hedging, speculation, and strategic vote allocation.
  1. Hedging
Hedging is a risk management strategy that investors may take on to ‘lock in’ a predetermined price (in our case, an interest rate)
Worried about fluctuating interest rates? A hedger could purchase a Put IRO that will allow them to receive a fixed rate whilst paying the floating rate. If they purchase options of notional value equal to their LP amount, they can effectively ‘lock in’ the strike rate as the APY.
Let’s go through an example to see how this would work (refer to spreadsheet for calculation of Step 4):
  1. A LPer has $1m in Curve Pool X with an APY that typically fluctuates between 2-7%
  2. Since they are happy with 4% APY, they purchase $1m of 4% strike rate put IRO with a 14 day expiry date
  3. Throughout this period the final interest rate was 3% which nets the LPer $1,150.68 in rewards ($1m * 0.03 / 365 * 14)
  4. Their put IRO’s strike rate > floating rate (4% > 3%) meaning it expires ITM which allows them to claim settlement rewards of $383.56 ($1m * [0.04-0.03] / 365 * 14)
  5. The total amount of $1534.24 (1150.68 + 383.56) is exactly equal to what they would have received if the floating rate was equal to 4% ($1m * 0.04 / 365 * 14 = 1534.24) minus the premium paid for the options
Position hedged, simple as that.
  1. Speculation
Speculators may have the conviction that Curve APY prices are likely to change. Options allow them to turn this conviction into profit.
Imagine a scenario where an investor expects a certain pool to receive a lot of veCRV votes resulting in a higher APY. They could purchase a Call IRO that allows them to receive the floating rate whilst paying the fixed rate. If their idea is correct and the floating rate > fixed rate they take home the profit.
The opposite scenario is also possible, with an investor expecting a certain pool to receive less veCRV votes and lower APY.They could purchase a Put IRO that allows them to receive the fixed rate whilst paying the floating rate. If their idea is correct and the fixed rate > floating rate they take home the profit.
Let’s go through a worked example for the first scenario [expecting higher APY]:
  1. A speculator sees that Curve Pool Y currently has 2% APY but expects it to go a lot higher due to a future influx of veCRV votes
  2. They purchase $1m of 3% strike rate call IROs with a 14 day expiry date
  3. Lo and behold, a DAO allocates their full veCRV voting power to Curve Pool Y and the final average interest rate ends up being 6%
  4. The floating rate > call IRO’s strike rate (6% > 3%) meaning it expires ITM which allows them to claim settlement rewards of $1150.68 ($1m * 0.03 / 365 * 14)
Profit secured. Groppa.
  1. Strategic Vote Allocation
Large CRV and CVX holders have the ability to sway Curve gauge weights due to their voting power, allowing them significant control over the floating APY. Curve IR options allow them to speculate around this asymmetric information.
Imagine you are a CRV/CVX whale with immense voting power to throw around. You usually allocate all your voting power to Pool A and thus provide a significant APY boost to Pool A LPs. This time around, you decide to vote on Pool B instead. Using Curve IR options, there are 2 methods a speculator could consider:
  1. Pool A APY Decreases → Purchase Put IRO
  2. Pool B APY Increases → Purchase Call IRO
Let’s go through a worked example for the first scenario [Pool A APY Decreases]:
  1. A strategist holding large amounts of veCRV/vlCVCX usually votes for Pool A and their vote allocation accounts for 2% of total APY (usual APY = 4%)
  2. They purchase $1m of 4% strike rate put IROs with a 14 day expiry date
  3. Rather than voting for Pool A, they allocate their votes to Pool B and collects bribes. This causes Pool A APY to decrease to 2% whilst Pool B APY increases
  4. The put IRO’ strike rate > floating rate (4% > 2%) meaning it expires ITM which allows them to claim settlement rewards of $767.12 ($1m * (0.04 - 0.02) / 365 * 14)
  5. In addition, they can shift their TVL to Pool B to benefit from the new boosted APY whilst claiming bribes on top
Unilateral information allowing the so-called strategist to profit from an ITM IRO, earning boosted yield in their new pool, whilst also collecting bribes?
He can’t keep getting away with this!
Parting Poem
Oh me, oh my. Maya Angelou back at it with another smash hit poem. How does she do it?
Until next time, students.
*Cough* *Cough*
Thank you for listening.

About Dopex

Dopex is a decentralized options protocol that aims to maximize liquidity, minimize losses for option writers and maximize gains for option buyers — all in a passive manner.
Dopex uses option pools to allow anyone to earn a yield passively. Offering value to both option sellers and buyers by ensuring fair and optimized option prices across all strike prices and expiries. This is thanks to our own innovative and state-of-the-art option pricing model that replicates volatility smiles.

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