March 5, 2022

Dopex Papers: rDPX v2

Dopex-Papers
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RDPX V2

v1.0
Introduction
rDPX was conceptualized as an integral part of the Dopex protocol and ecosystem as a whole - and something that would be a differentiating factor compared to other centralized and decentralized option platforms. The concept was simple - option writers taking risk by locking up their deposits and selling options could get a rebate at the end of their lockup period (epoch) - weekly or monthly - and would earn a % of their losses in the form of a rebate token - rDPX.
The rebate % based on backtests was touted to be 25-30% to safely grow the market cap based on historical crypto price data. The rDPX minted would need some use-case for option writers to gain some value out of it - which’s where synths come into play.
An entire synth market would be built around rDPX, using it as collateral and allowing makers to earn off fees from the synth platform. Giving option writers taking a risk to have a quantifiable way to value their collateral tokens.
Assuming no leverage, rDPX price could easily be calculated based on its current total supply, total size of synths on the platform and the collateralization ratio.
This was pretty similar to how Synthetix was set up but with a theoretically ceiling-less token supply and dependent on how option writers do during epochs. A good model but with a few concerns considering it’s not the best to do any kind of modeling considering supply changes can be entirely random since it’s based on market volatility.
Also with long periods of no volatility and sellers collecting theta, a fat tail event right before expiry could suddenly trigger large mints and the entire synth market could be priced completely differently which could lead to large liquidations if depositors didn’t react in time.
Additionally, holders would have to constantly rebalance their % of supply across option pool writing, LP’ing and staking. There are workarounds to all of the concerns by building contract level infrastructure that automated these processes, however it did increase the overall complexity involved in building the system out.
What would be ideal would be a way to handle all of this natively at the lowest level and have the system immune to supply shocks, have the synth market depend on stable collateral while not worrying about c-ratios during times of volatility and have native incentivization - while being able to withstand tail events.
In theory, this would result in a near perfect model where users would never have to worry about constantly rebalancing their rDPX holdings to keep up with supply increases while having a robust synth market that can flourish and offer all kinds of options, perps etc. and maybe we could fix the theoretically limitless token inflation problem while we’re at it?
 
Enter Olympus
Since the initial model was conceptualized - a lot has happened within the crypto market. Dopex was launched via public sale, rDPX was born and claimable via airdrops as well as staking DPX or DPX/rDPX LP. And a new concept of crypto liquidity was introduced to the market - Bonding - by a new coin that was unknown at the time, OlympusDAO or OHM.
The premise was subsidising early liquidity via token rewards was essentially renting liquidity from (usually) mercenary capital and this was often rotated out to the next farm once rewards became less lucrative - either through them being too crowded, farm & dump strategies or sometimes capital just moving to the next shiny thing.
It took some time for participants to wrap their head around the concept which is actually pretty simple. Bonding allowed users to deposit LP tokens into the protocol to purchase OHM at a discount to market - but the tokens would be vested out to the user over a 5 day period, discouraging instant arbs. The ohm received by the bonder could then be staked to earn reward yield (via rebases)
Once market participants caught on to how the system prevented liquidity from being rotated and worked very well when everyone (3,3)’d (staked + bonded) - it grew rapidly and into the mainstream in a matter of a few months.
It even withstood large market volatility during the year and still works well today. With other kinds of bonds to diversify their treasury and passive, low risk ways to earn a yield on their treasury as well - by using SSOVs for example.
This seemed like an interesting way for coins to own their liquidity via POL or “Protocol owned liquidity” and caught our attention ever since it had launched.
 
Curve wars
In the meantime another battle was brewing deep within DeFi for a previously touted “worthless governance token” - CRV, the token behind Curve, a stablecoin AMM which offered a way to have large efficient stable-to-stable swaps with low slippage and fees.
CRV as a token allowed holders to collect fees from swaps on pools (via veCRV) and vote on “gauge weight rewards” which are CRV emission distributions in % across each pool. CRV can be “vote-locked” for upto 4 years, which gives depositors veCRV (vote-escrowed CRV) at higher multiples proportional to it being locked longer.
veCRV is locked and non-transferable, so other protocols namely Convex, sprung up and allowed holders to have exposure to veCRV while the CVX token was transferrable.
Protocols and whales began and are still acquiring CVX en masse today based on Curve being the most important pillar within the DeFi ecosystem today.
Being early curve adopters, Dopex core was always interested in the ve dynamics and it was instantly applicable to the Dopex model. The idea was holders could lock their DPX for veDPX, veDPX could be used to vote on reward emissions between pools/vaults and the veDPX could collect fees on pools/vaults.
This evolved over time and requirements were polished and quite a few more mechanics were added to it - which will be disclosed in a veDPX paper - however one that stood out was using veDPX as collateral natively within the protocol.
Allowing holders to always obtain cash flow without needing to sell. This could add liquidations to the mix, however it is avoidable through the use of Atlantic options - which is for another paper too.
And if veDPX was usable as collateral - holders could always obtain ETH, more DPX, rDPX or even stables whenever there was a need. Brilliant. It solves hopping between multiple protocols to achieve the same since it’s done natively.
 
Rate Vaults
All the while this was happening Dopex core always kept brainstorming different ways to innovate and differentiate the product suite from vanilla tradfi products and have them cater more to a DeFi native audience who didn’t really care about capital efficiency, latency and other concepts that were more suitable for tradfi products.
An idea clicked to create SSOVs (single staking option vaults) for curve pool APYs considering these were volatile in nature - but not too volatile, and could be a nice product to speculate on and earn a yield from Curve gauge rewards.
On further discussion with a certain wrinkle brain - the possibilities of using it as *the* tool for the curve war emerged - where participants could leverage this up 100-1000x considering the relatively low variance in weekly volatility in gauge rewards. Leading to protocols, DAOs, whales, retail alike to hedge, speculate, frontrun Curve gauge rate APYs - with capital efficiency found nowhere else in the defi world.
The game theoretical value this product added to the Curve wars meta was game changing - since veDPX would allow control over strikes for rate vaults and there was now a way to influence gauges without even touching CRV or CVX - at a much larger potential market size than all of Curve with a fraction of the capital required. Curve war participants would be handicapped without exposure/usage of veDPX.
This made Dopex core realize how a lot of the future flow within Dopex would be largely stablecoin based and having to choose a stablecoin for this purpose would fit right in with veDPX being usable as collateral - allowing for cashflow at any point in time for DPX holders.
 
Enter DPXUSD
After a little thought, it made sense to have Dopex’s own stablecoin - backed by platform native collateral like DPX/WETH, rDPX/WETH LP and usable within all Dopex protocol products. It seemed like a no-brainer to issue this across rate vaults, SSOV-P (put vaults) and other stablecoin denominated Dopex products.
However, there was concern about how rDPX’s theoretically infinite supply could still create problems over an extended period of time - all solvable but with an increased level of complexity to ensure LPs were always exposed to the same % of rDPX that they were aiming for.
After constant iterations and tinkering on the rDPX model - a solution came to light making use of concepts that were all successful in their own right within the DeFi space. Let’s just call this:
 
rDPX V2
Imagine a deflationary rDPX, resistant to supply shocks via rebates, strong liquidity & stability and the core behind Dopex’ own DPXUSD, with a synth market built around it.
The new rDPX model combines concepts from SNX, LUNA, OHM, DPX and LQTY. The goal being to create an architecture that could always remain stable and liquid while being incentivized enough to keep the system running regardless of how bad market conditions could get.
The model flow is as follows:
  • Bonder deposits 50% rDPX/USD LP and either 50% in USD stables *or* 2x 50% OTM atlantic rDPX puts - which can be purchased from an atlantic put pool - the detailed spec of atlantic options will be released in the future. If rDPX is at $100 - this would be 2x $50 puts, giving the protocol access to $100 in stables for use as collateral.
  • The protocol is now backed by 75% usd stables and the stables are used for put liquidity - which is also farmed on Curve to earn yield
  • Put liquidity is used as a buyer of last resort for rDPX - while earning premiums and a yield consistently via SSOV-P
  • Treasury re-LPs using a fixed % of deposit to push ratio up (un-lp, buy with stables, re-lp at new ratio, hold excess rdpx in treasury)
  • rDPX is withdrawn from reserves at x% discount to market - where x is a function that returns an inverse to a max % cap based on remaining rDPX in the treasury balance
  • 2 * (1 + x/100) rDPX is burned and 100% of the burned rDPX value is minted in DPXUSD
  • DPXUSD is vested over 5 days
  • DPXUSD can be deposited in DPXUSD/3pool crv pool to earn premium from put sales, treasury CRV yield and possibly CRV from gauge rewards (using bribes)
  • DPXUSD CRV LP is bonded to receive y% in DPXUSD over 7 days - where y is a function of fees/revenue earned every week
  • Bonded DPXUSD CRV LP is now owned by the treasury
  • Bonded DPXUSD CRV LP gets 2x more weight of fees vs regular DPXUSD CRV LPs
  • % of rate vaults and protocol fees are added to treasury to increase backing
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rDPX v2 architecture
Example 1 - minting DPXUSD using rDPX LP:
  • Let’s assume rDPX = 100 USD
  • A user delivers 1 LP token and 200 USD (USDT, DAI, MIM, USDC or any other whitelisted stablecoin)
  • 1 LP token will consist of 1 rDPX and the equal worth of USD. If 1 rDPX is worth 100 USD, then the LP token will consist of 1 rDPX and 100 USD
  • All in all, the user delivers assets worth 400 USD. 100 USD of that is in rDPX, the rest is in stables
  • These assets delivered by the user are worth 4 rDPX - let’s write this number down
  • The protocol will check for the x% discount - let it be 5%
  • The reserves will withdraw the 4 rDPX from the reserves plus additional 5%, in total it’d be 4 * (1.05) = 4.20 rDPX
  • 4.20 rDPX will be then burnt
  • As 4.20 rDPX that was burnt was worth 420 USD, the same amount will be minted in DPXUSD
  • User will be able to claim 420 DPXUSD over 5 days - so 84 DPXUSD a day
 
What if rDPX price is lower? What if rDPX price is higher?
  • The mechanism will work exactly the same, as the ratio of rDPX to stablecoins delivered will be always 4:1
 
What if the x% discount is lower? What if the x% discount is higher?
  • The x% discount will depend on the rDPX in the treasury balance. The higher the balance, the larger the discount to allow for more aggressive issuance of DPXUSD and vice versa
Assume x% discount = 10%:
  • The reserves will withdraw the 4 rDPX from the reserves plus additional 10%, in total it’d be 4 * (1.10) = 4.40 rDPX
  • 4.40 rDPX will be then burnt
  • As 4.40 rDPX that was burnt was worth 440 USD, the same amount will be minted in DPXUSD
  • User will be able to claim 440 DPXUSD over 5 days - so 88 DPXUSD a day
  • Higher discount will incentivize more people to bond and mint DPXUSD
Now, let’s assume x% discount = 1%:
  • The reserves will withdraw the 4 rDPX from the reserves plus additional 10%, in total it’d be 4 * (1.01) = 4.04 rDPX
  • 4.04 rDPX will be then burnt
  • As 4.04 rDPX that was burnt was worth 404 USD, the same amount will be minted in DPXUSD
  • User will be able to claim 404 DPXUSD over 5 days - so 80.8 DPXUSD a day
  • Smaller discounts should wind down the emissions, but still allow for a room to bond and earn in the process
Example 2 - minting DPXUSD using CRV LPs
Assumptions:
  • 100 USD in CRV LP is delivered to the bonder
  • There is 900 USD in CRV LPs that is not bonded that is in a broad ecosystem
  • The weekly revenues were 11 dollars
  • User deposits 100 USD in CRV LP
  • Normal CRV LP has a 1x weight
  • The bonded has a 2x weight
  • The user’s, bonded 100 USD in CRV LP has 2 x 100 = 200 weight
  • The 900 USD in CRV LPs has 1 x 900 = 900 weight
  • 11 USD of revenues will be split as follows:
    • 2 USD to the bonded CRV LP
    • 9 USD to the rest CRV LPs
  • 102 DPXUSD are vested and claimable over 7 days - ca. 14.57 USD a day
What if there would be 100 USD in CRV LP in the bonder and other 100 USD that is not bonded?
  • The user’s, bonded 100 USD in CRV LP has 2 x 100 = 200 weight
  • The remaining 100 USD in CRV LP has 1 x 100 = 100 weight
  • 11 USD of revenues will be split as follows:
    • 7.33 USD to the bonded CRV LP
    • 3.66 USD to the rest CRV LPs
Does it mean that everyone will be bonding their CRV LP over and over?
Not really, as protocol will soon own the majority of the LPs, meaning that the real boost would be at ca. 2x the fees. At the same time, the more liquidity is added, the more the fees would be diluted, so at a certain point adding new liquidity to protocol will have very diminishing returns.
This would incentivize an effective usage of POL as it would get a moving “soft cap” that would depend on protocol’s revenues
 
Double bonding
The rDPX model uses a 2-step bonding process for rDPX LP -> DPXUSD and then DPXUSD CRV LP -> DPXUSD + premium.
This is a vital step to the entire rDPX architecture with the first step guaranteeing continuously increasing protocol owned liquidity in USD notional while decreasing in rDPX notional.
The burned rDPX from reserves leads to a supply crunch for rDPX pretty quickly as one rDPX is replaced by 25% of rDPX and the remaining in stables.
This reflexively results in the rDPX LP continuously being repriced upwards against USD as the discount to market on bonding inversely reduces as rDPX reserves are depleted.
Which in turn results in a larger amount of USD being minted per rDPX as its market value increases and rDPX notional minted during rebate distributions decrease in absolute terms considering the price appreciation of rDPX and rDPX non-LP supply being constantly burned.
The minted DPXUSD from rDPX burns can then be locked into curve factory pool LPs to earn incentives in the form of protocol fees, treasury incentives and possibly gauge rewards.
The curve factory pool LP can further be bonded for a 2x multiplier on these rewards as well as a discount on vested DPXUSD from the protocol - which is a function of protocol fees and revenue.
Existing rDPX emissions meant as incentives for liquidity provision will be winded down and added to protocol reserves as well as incentives for DPXUSD LP provision. The circulating supply at the start of rDPX v2 would approximately be between 1-1.25m. DPX rewards will also be redistributed between LP incentives, bonding and veDPX.
 
Liquidity & Stability
Two steps of bonding - one for liquidity and another for stability. The Atlantic option pool within the protocol treasury is used as a buyer of last resort for rDPX during times of price instability and maintains a price floor. A yield producing mechanism that doubles as a safety net for the rDPX market price.
Both rDPX and DPXUSD liquidity being majority protocol owned - making the system more resilient to mercenary LPs as well as backed 75% by other stablecoins setting a price floor resistant to downward price action reflexivity. The stablecoins continuously earn a yield on Curve to increase the protocol funds and constantly aim towards over 100% stablecoin backing.
Having protocol-owned stable pool liquidity adds another dynamic where arbitrageurs can earn a risk free % on DPXUSD via bonding and collect 2x the protocol fees with a relatively minor risk of losing peg.
 
Rebates
Converting the model from a flat % rebate decided and set by governance to a new model that issues rebates based on volatility experienced by option writers through the epoch across all governance approved SSOVs and pools - with a rDPX mint ceiling based on protocol yield/revenue earned from staking stables in treasury as well as yield earned from selling puts.
Considering rDPX rebates are minted based on USD notional - as rDPX is bonded, burned and increases in price - rDPX minted decreases in amount over time.
Bonding discounts being an inverse function of rDPX supply remaining in the reserve makes it attractive to users to bond and burn rDPX for DPXUSD. The flywheel effect from bonding -> burning -> minting another asset - DPXUSD leads to deflationary rDPX as well as a market cap that is a function of DPXUSD requirements for puts, rate options, synths, yes/no vaults and insurance markets within the ecosystem.
 
Claiming Rebates
Once rebates are issued, the users would be able to claim rDPX and bond it together with stablecoins to trigger minting DPXUSD.
As the bonding process requires 3 USD worth of stablecoins per 1 USD worth of rDPX, the users could either:
  • Deliver USD in the protocol to trigger the claiming, bonding and minting in one transaction. DPXUSD worth 4x the rebate (+ possible extra yield) would vested over 5 days
  • Delegate the minting to delegates. As some users may not have enough free stablecoin liquidity to deliver the stablecoins in order to claim their rebates and mint DPXUSD, they may choose to delegate the process.
Delegated rebates could be claimed by delegates for a z% discount. The discount will gradually increase, until the delegate is found. The delegate will then deliver the stablecoins and trigger the minting process. The delegate will receive vested DPXUSD equal to the stablecoins delivered + to the z% discount. The remaining DPXUSD will be vested afterwards to the user that delegated the process.
This process would create a leeway to mint DPXUSD whenever rebates are issued without diluting the backing. Users would be able to claim/bond/mint in full or delegate. Delegators will be able to help smaller users with the process while earning a fixed return on their stablecoins.
Example:
  • let’s assume rDPX = 100 USD
  • 1 rDPX is issued as a rebate
Regular route:
  • User posts 300 USD of stablecoins and starts the process
  • 1 rDPX and 300 USD is sent to the bonding contract
  • As per the startad process, some USD is used to push-up the ratio, remaining rDPX is is zapped into LP
  • 400 DPXUSD (+ possible premium) is minted and vested over 5 days
Delegation Route:
  • User approves his rebate for delegation
  • The discount starts at a certain level and increases until a delegate is found. Let’s assume 5% of a discount here
  • The delegate posts 300 USD of stablecoins
  • The bonding process takes place
  • 400 DPXUSD (+ possible premium) is minted and vested over 5 days
  • The delegate’s portion vests first - 305 DPXUSD (300 from stablecoins posted and 5 from the discount)
  • The original user’s portion vest right afterwards - 95 DPXUSD (100 USD minus 5% discount) + a possible premium
 
veDPX Synergy
rDPX and veDPX end up working synergistically with each other as veDPX is usable as collateral to borrow DPXUSD. In an ideal case, large veDPX holders such as DAOs, whales, protocols are voting on strikes for Curve rate vaults and frontrunning/hedging flow using borrowed DPXUSD to earn a consistent yield on their veDPX.
Large veDPX holders could also use borrowed DPXUSD on their veDPX to sell OTM puts that act as a buyer of last resort for tokens of their choice.
Combined usage of veDPX as collateral to borrow DPXUSD and using the DPXUSD within the Dopex product suite, would lead to a reflexive increase in demand for rDPX burns - resulting in a scarcer rDPX, steady increase in rDPX/USD ratio and overall increase in platform TVL.
This entire flow can be automated through the use of wrapper contracts and simplified UI accessible through web and multisignature wallets such as Gnosis Safe - allowing for easy onboarding of significant TVL.
 

Conclusion

Unlike the previous rDPX architecture which had quite a few non-deterministic variables and was at mercy to market volatility, this new architecture results in a constantly deflationary rDPX supply while aiming to be backed 100% by majority stable assets.
Using these stable assets as a buyer of last resort via selling OTM puts acts as a backstop and price floor in times of cascading downward price action.
With the right amount of incentives across the board with stable yield, premium earned from selling puts - which also acts as a buyer of last resort for rDPX, as well as potential gauge rewards attained via bribes.
Users are now incentivized to continuously purchase rDPX off the market and bond them - resulting in a decreasing rDPX supply, increasing market price as well as the protocol owning all the rDPX as well as DPXUSD liquidity.
Onboarding DAOs and protocol treasuries that own significant CVX and CRV to run automated strategies combining veDPX, rDPX/DPXUSD and rate/put/YN vaults becomes a self-sustainable means of onboarding sticky TVL.
Having a 100-1000x leveraged market for speculative plays on rates adds fuel to the fire and constantly adds assets to protocol treasuries every week by means of fees and revenue.
In short, rDPX transforms from being a volatile speculative play at the lowest level with complexity required to be built over it to offer protocol wide stability - to a liquid, stable, asset always aiming to be fully backed with protocol owned liquidity on 2 levels and at the lowest level powering a stable synth and options market with continuously expanding TVL.

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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