INTRODUCING: “CALL OPTIONS AS INCENTIVES” A NEW APPROACH TO TOKEN EMISSIONS IN DEFI
In the world of TradFi, incentives play a crucial role in promoting various initiatives. Recognizing the numerous benefits of this approach, Dopex is now bringing the power of call options as incentives to the DeFi space. Dopex aims to revolutionize the way protocols incentivize participants and optimize capital allocation. In this blog post, we will explore the benefits, and mechanics, and provide an example to illustrate the potential of this new service. Dopex will also be implementing this new approach ourselves to set an example of the great benefits this new service provides.
DOPEX NEW INCENTIVES STRUCTURE
- All current options incentives will be marked up by 150%
- New incentives on vaults without incentives (e.g. stETH)
- All call options as incentives are distributed with DPX at a 10% ITM strike
- Exceptions are the ARB & rDPX vault which incentives will be done in their respective tokens
🔵 The Benefits:
- Flexibility: Options offer a flexible incentive structure compared to fixed token emissions. Issuers can customize terms and conditions, such as strike prices and expiration dates, to align with specific goals and market conditions.
- Risk Management: Call options provide the right, but not the obligation, to buy underlying assets at predetermined prices. This helps manage risk exposure and mitigate potential downsides and volatility associated with direct token emissions.
- Controlled Supply: Unlike token emissions that flood the market with new supply, options provide controlled supply through their expiration dates. This controlled issuance helps maintain a stable token market and control the dilution of existing holders.
- Long-Term Engagement: Call options incentivize long-term engagement as participants have the potential to profit from the options' intrinsic value. This aligns their interests with the success of the initiative and encourages sustained involvement in the ecosystem.
- Efficient Capital Allocation: By utilizing options, issuers can allocate capital more efficiently. Instead of immediately releasing tokens, options offer the potential for future token issuance while optimizing resource allocation and capital utilization.
- Price Stability: Token emissions often result in price volatility due to increased supply. Options, being derivatives, can help reduce price volatility by providing a more controlled and stable approach to incentivizing stakeholders.
- Secondary Market: The introduction of a secondary market for options allows participants to trade and exit positions, providing liquidity and a means for participants to realize profits. It also enables short-term speculators that are not aligned with the protocol's vision to exit through a discount.
⚫ The Mechanics:
Dopex delivers European covered call options with fixed expiry dates. These options would be slightly ITM, enabling users to extract a minimum intrinsic value at distribution through the secondary market. The flexibility of this approach caters to both short-term and long-term investors.
Protocols can determine the ITM percentage they want to allocate to the options, which can discourage quick exits by mercenary capital while offering greater returns to long-term believers as the derivative's price increases.
This model allows protocols to incentivize deposits into their products or liquidity pools while maintaining control over their token supply. It provides exposure to the protocol's token and prevents sell pressure if the token's price moves down, benefiting all stakeholders.
Requirements for utilizing this service include emission/treasury tokens and integration with the Chainlink price feed.
Let's consider an example involving DPX and the so-called ETH SSOV. Dopex plans to emit 100 DPX (Dopex tokens) as incentives to the depositors of monthly ETH SSOV. However, instead of directly distributing the tokens, Dopex deposits 400 DPX in an ITM strike, such as 10%.
These ITM call options are automatically purchased and given to the depositors of ETH SSOV. If all recipients choose to exit their positions at the distribution, the payout would be 40 DPX instead of the initial 100 DPX. However, if participants hold onto the derivative, they have the potential for uncapped gains with a value of 400 DPX. In other words, for every dollar DPX goes up, the total amount of value from the incentives goes up by 400$.
This approach provides an innovative tool for protocols to incentivize deposits into their products or liquidity pools. As the price of the protocol's token appreciates, participants can sell the call options, generating profits while the protocol benefits from the accrued liquidity.
Call options as incentives offer a range of benefits for protocols in DeFi. The flexibility, risk management, controlled supply, long-term engagement, efficient capital allocation, price stability, and the presence of a secondary market make this approach appealing to any protocol wanting to incentivize. Dopex's introduction of call options as incentives opens up new possibilities for protocols to optimize their incentive models and drive participation in their ecosystems.
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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