January 1, 2022


Introducing: The [redacted] Option Vaults

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It’s time to reveal the secret weapon we’ve been working on.
The weapon that will empower the Curve wars participants — the [redacted] option vaults.

Let’s have a quick recap on what Curve wars are about:

  • Curve is a protocol to exchange stablecoins
  • LPs are incentivised with the CRV rewards
  • The APR of each pool depends on how the CRV rewards are allocated
  • Voting allows to direct the CRV rewards to a chosen pool
  • Currently, Convex (CVX) is the key to controlling the votes
  • A pool that wins more CRV APR will benefit the current LPs, while bringing on more liquidity to the pool

This is what the war is about

But what does Dopex has to do with it?

What if there was a way to bet and profit on outcomes of the Curve wars?

What if there was a way to hedge the risk of a pools’ APR getting slashed?

What if there was a way to payoff bigly on sudden APR changes?

What if there was another angle to look at the votes and rewards?

So let’s reveal what the [redacted] option vaults are…

The Interest Rate Options

First of all, let’s have a look at regular crypto options. If you buy a call option on ETH, your payoff will increase if ETH price goes up. If you buy a put option on BTC, your payoff will increase if BTC price goes down.

What about Interest Rate options?

Interest Rate options would allow you to bet/hedge on the underlying interest rate. In this case it’d be the interest rate of a chosen Curve pool.

Do you expect that APR or a certain pool will go up?

Buy a call option to speculate

Afraid that the APR of your pool will go down?

Buy a put option to get insured

Are you a CVX whale?

Write options and control the votes to make sure the APR works for you

How long would the epochs be?

They would be weekly, with Thursday expiries

And what will the payoff look like?

The option payoff will be the weekly interest accrued on a difference between the spot and strike.

In simple words — you boost your APR if the market moves the way you expect

Can you give more specific examples?

Yes, they are below.

Can we make it more degen?

Of course — keep reading.

Let’s talk about the parameters

As is the case for all other options, IR options could be calls or puts. They will have parameters such as spot and strike. They will be European — i.e. they can be exercised only at expiry,

What does it mean?

Spot = reference rate observed at expiry

Strike = pre-determined interest rate

Now some boring definitions:

Call IR Option: Buyer has a right to receive interest based on the spot rate, while paying interest based on the Strike. In simple words: Receive float (market), pay fixed (strike)

Put IR Option: Buyer has a right to receive interest based on the strike rate, while paying interest based on the Spot. In simple words: Pay float (market), receive fixed (strike)

Some examples?

Example I:
An investor expects that a certain pool will receive many votes and the pool APR will go up. They can buy a call option. If the pool APR is above the strike, they profit.

Example II:
An investor expects that the pool rate will remain stable and not go above a certain level. They deposit their collateral and agree to sell call options at certain strikes. If the pool rate is below that strike rate, the investor profits from premiums collected.

Example III:
An investor expects that a certain pool will lose votes and the pool APR will go drastically down. They can buy a put option. If the pool APR is below the strike, they profit.

Example IV:
An investor expects that the pool rate will remain stable and not go below a certain level. They deposit their collateral and agree to sell put options at certain strikes. If the pool rate is above that strike rate, the investor profits from premiums collected.

How exactly will the payoff be calculated?

Payoff calculations:

Call payoff = Notional x (Epoch time / 365) x (Spot — Strike)

Put payoff = Notional x (Epoch time / 365) x (Strike — Spot)

What do they mean?

The parties agree to exchange the difference between interest at spot (at market rate) and at strike, which was accrued during the epoch.

Well but exchanging 3% APR to 5% APR is still a boomer APR, can we make it more degen?

Yes.
Let’s think about the following — assume we have 1 million USD of capital. 20% APR accrued over a week on that 1 million would give like 3800 dollars of accrual. 5% APR is equal to like 960 dollars.
That’s not much. Isn’t it? But hey, let’s keep reading.
What about the risk of liquidation as an options writer? Well, also not much of a risk.
What if we leverage it a little? 5x leverage? Small number. Make it 100x? Too small. How about 500x or 1000x?
Want more capital efficiency? What if the same collateral will be used to issue calls and puts on the rates of the same pool?
With these assumptions, 1 million USD of collateral could allow the protocol to issue options with a face value of 1 billion USD.
Curve TVL is ca. 20 billion USD.

20 million in stablecoin deposits would allow underwriting options on the whole of Curve’s TVL

What if we have 100 million USD TVL in the [redacted] vaults?
Well, that’s 100 billion USD in options on Curve pools, which is over 5x the Curve’s TVL.
1 billion USD TVL in the [redacted] vaults?
That is 1 trillion USD in options on Curve pools.
That’s over 50x of the Curve’s TVL.

Imagine rates derivatives being 50x of the underlying ecosystem

Imagine 1000x leveraged bets on the Curve gauge voting

Imagine the smell

What does it mean for Dopex?

Think about the TVL, the volume, the fees and the power the protocol will have over CVX and CRV voters. All the three protocols will operate in a synergy.

veDPX holders will have the governance power over interest rate option pools — i.e. they will be able to whitelist the pools and determine the strikes. The veDPX holders will be choosing the battlefields.

Final words

Once the [redacted] vaults capture the TVL, once the derivatives are magnitudes larger than the Curve market itself, a single butterfly flapping its wings could lead to a chain of events leading to a storm

But wen?

Q1 2022


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