Welcome, ladies and gentlemen, to part 2 of the DeFi derivatives deep dives. Today, we’re covering Dopex.
“When a product is overly complicated, you question one of two things: competence or intentions”
– Karim, Cryptonary Co-Founder & Head of Research
Before we get into it, there’s something we must discuss.
Prior to publishing this article, I have been in extensive conversations with the team at Dopex, including considerable back and forth messaging with their lead developer, Witherblock, and 2 hour long calls, plus considerable messaging, with Halko, another team member.
Out of courtesy, and as a gesture of goodwill, I sent Dopex a copy of this report prior to publishing.
In response, I received a message – ‘this is inaccurate’.
No further details were provided.
I reached out to other members of the team, and got a response, giving very vague notes on the accuracy, and refusing to follow up when I asked for clarification.
For transparency, I have included the message received from the team, where they believe the inaccuracies to be. Please make your own decisions.
TzTok-Chad took to Twitter, in apparent attempt to discredit this report. Make sure to click on the tweet below, check out the replies, and consider these tweets, the screenshot above, and my considerable conversations with the Dopex team, when reading the rest of this report.
imagine being a crypto "researcher" and not talking to the core team who're going to roll out a new product when writing about it – but instead consult with competing protocols that you've bags of who handwave it as "marketing"
— TzTok-Chad (💎, 💎) (@tztokchad) April 27, 2022
Back To It
Many of you will have heard of Dopex, with a market cap of $355m (on the day of writing, 18th March, including both DPX and rDPX), this Tetranode backed project is the largest DeFi options protocol at the moment.
Does it deserve this title? Or is Dopex an overweight king, waiting to be overthrown?
That is what we will be discussing today…
There is way to much alpha in this article to create a proper TL:DR section, so instead, I’m going to list the key questions and topics discussed.
- Master of hype and marketing, does Dopex have the products to follow through?
- Dopex is launching a stablecoin?! What is DPXUSD and how does it work?
- Curve wars and Dopex – what does this mean for the platform?
- What is the Dopex Dilemma, and is the platform going to the moon?
As you will see below, there is much more to Dopex than options trading. In fact, as an options trading platform, Dopex is far from the best. Only allowing options to be exercised after expiry (unlike competitors), with a poor user experience, set monthly epochs (buyers can’t choose their expiry date, and only have one option, the end of that month), and a platform that is clearly based around liquidity providers, not options buyers.
V3, which according to the team has been launched (although the flexible expiry dates, which could be seen as the most important aspect for traders, doesn’t appear to be live) addresses some of these concerns, but not all of them. See the extract from their V3 article below:
In the process of researching for this report, I’ve come to believe that options in the pure form are not the focus of Dopex at all. If you want to know what is, read on…
What is Dopex?
Seemingly unable to keep still, Dopex is putting its fingers in many pies. Where Premia, the protocol covered in last week’s deep dive, has a clear focus on DeFi options trading, building with other protocols, and making the most of the money-legos ethos DeFi allows and enables; Dopex has a much broader offering.
Dopex has placed emphasis on attracting liquidity, by any means possible. They have implemented an arguably ponzinomic token structure (more on this later) to give additional incentives to deposit into their SSOVs (single-sided option vaults – these are the same as any other options vault, but with Dopex’s special branding).
Users can deposit into Dopex’s vaults, choose what strike prices they would like to underwrite (what price they want to sell options at), and earn yield. You can also purchase options on Dopex, although this seems to have taken a bit of a backseat when compared to the vaults.
This all sounds pretty simple, right?
Well… there’s a lot more to cover…
What Is Not Considered?
This article doesn’t consider platform fees, options pricing methodology, or potentially misleading APY statistics (as discussed in our DOV report here). These has been left out as Dopex is clearly targeting higher-level market dominance, and the moves discussed below will have far more impact on their success than what has been left out. Also not discussed is JonesDAO, their DOV partner. It is very early on in this partnership, and there is a lot unknown and untested, so we will revisit this when JonesDAO has developed further. For more info on DOVs and their significance, check out this report.
Before We Get To The Juicy Stuff
For the purpose of this article, and to prevent it being too long, I’m not going to get into Atlantic Options, which essentially offer holders the ability to take the deposited collateral out of options they have written early, whilst retaining the option itself. For this right, they pay a premium.
They add little value, and are much more of a marketing tool, and a way for Dopex to make up for the fact they offer European options (which can’t be settled until expiry) unlike their competitors, who offer American options, which can be settled at any time.
The team refute this, claiming they are undercollateralised loans, but don’t give full details on the mechanics. Attempts have been made to get these details from Dopex, however, these have been ignored.
Everything points to these ‘undercollateralised loans’ requiring collateral to be in the Dopex smart contracts. It appears to essentailly be a cross margin borrowing system on Dopex. Whilst certainly not the same, for the purposes of comparison, it would be similar to using your assets as collateral in cross margin borrowing on Binance, then using the unlocked funds to take out perps.
We will update this section should we hear back from the Dopex team, or when more details or the Atlantics themselves are released.
OTC Platform (Secondary Market)
Another effort to make up for those pesky European options, Dopex has created their OTC platform, which is their way of saying secondary market.
As you can see below, there has only been 4 trades since platform launch, and none in the last 2 weeks.
Honestly, to have a liquid and efficient secondary options market, volumes need to be massive, which is not something I see happening anytime soon.
The distribution was as follows:
Fee Sharing with DPX Holders
Last month (March, 2022) I was told that the veDPX and revenue sharing should be out this month. I’ve now been told that this won’t be shipped until at the earliest mid-May, but likely later.
I was, however, also told that all accrued fees (all fees paid so far) are kept in a separate wallet, and how they are distributed will be decided by governance when the time comes.
One wallet holds around 13% of the circulating supply, and it seems to belongs to a team member. When governance does eventually go live, which we’ve been told won’t be until all products have been shipped and are working well (could be a long time), this wallet could lock their funds up for the longest possible period, giving them considerable swing on governance.
Their clear focus on hype and marketing could cause issues, and has resulted in them currently having a large market cap, without a clear offering and product-market fit. One such issue is yet to come to public attention…
On Dopex, depositors choose the strike prices (if you need a refresher on what a strike price Is, check options report). This causes some issues, as unless you are a well-informed trader, with a clear picture of where the market is going next, it can be very hard to choose strike prices.
Whilst this clearly hasn’t put depositors off, in my opinion a lot of that is down to hype. See below, in the March epoch (monthly option cycle) around $60m of the $63m DPX deposited made no options return at all (as no one bought the options with the strike prices the users had selected). Note, the deposits are farmed by Dopex, there is those returns, however, they are not substantial. Also, this presents it’s own issues, especially as it’s unclear how Dopex goes about this. Security and centralisation are two factors that would need to be considered.
This is not sustainable. Even in the ETH pool, around 55% of the capital deposited was not used to sell options.
The hype machine that is Dopex drove in liquidity providers who likely don’t fully understand the process. Expecting high APR, when faced with the reality that they have to genuinely risk their funds to get this, they may think twice. We may see a lot of this liquidity leave the platform when they realise this.
More Than Just An Options Protocol
The Master of Hype
Dopex boasts an almost cult-like status. Backed by the master of hype and expert in game theory, Tetranode.
In terms of marketing, Dopex is head and shoulders above the competition. They have great resources for the community, including the Dopexipedia and the Dopex Academy.
Dopex has taken on community analysts, and spreads educational and informative content. This constant flow in engaging information helps them keep their community made up of mostly retail users engaged and coming back for more.
One important thing to note is that these articles and information are very biased towards Dopex and how amazing it is, and often spin things in a way that are overly complex, and draw connections to outlandish and bullish statements.
Speaking of outlandish and bullish statements, check out these:
The Discord gives us a great look into the marketing prowess, their strong community building and impressive engagement. See the titles in the server, these are carefully created to maximise engagement, and they work.
Dopex’s meme culture is one of the best, with community members, advisors and even team members hyping the project up through amusing and engaging memes, see examples below (these can be very dangerous for retail, as they are often misleading and contain outrageously bullish sentiment):
Diamond Pepe’s – The Dopex NFT
They have their own NFT project, called Diamond Pepe’s, which is a perfect demonstration of their impressive marketing prowess and use of game theory. Dopex minted 2,222 Diamond Pepe’s, which are a rather basic meme-based NFTs. With the attention around NFTs at the moment, Dopex saw an opening, and offered the NFTs for free to anyone who deposited Dopex LP tokens into the mint website for 2 weeks.
The benefits of this are clear, Dopex users are rewarded, NFT lovers are drawn to Dopex, and it creates social media buzz from the ‘free mint’. It worked.
Now considered a separate but linked entity, Diamond Pepe’s are launching Gen 2 of the collection. To receive this, users had to deposit and burn their Diamond Pepe Gen 1 NFTs, and the mint was triggered when 1/3 of the total supply had been pledged. See the logic and game-theory behind this below:
So, they incentive pledgers by offering them increased chances of a rare trait, and give power to those who burn their NFTs. Those who pledge their NFT get a free Gen 2 mint, worth 0.88 ETH, and share 15% of the revenue from the public sale (equal to around 0.27 ETH if it sells out). Holders of ‘Legendary’ (rare) Gen 1 Diamond Pepe’s will also get 15% of mint revenue, which equates to around 13.33 ETH each if sold out!
It’s clear to see how they are building value for the project through arguably ponzinomic means, and it’s working. The more attention the NFTs get, the more attention Dopex gets. It’s genius marketing, and it’s been done very effectively.
There was even an advert for Gen 2 Diamond Pepe’s in Times Square last week, projected across the famous screens for 15 seconds every 2 minutes, for the entire week!
This tweet is another great example. https://twitter.com/DiamondPepes/status/1516673853673848832
An expert in game theory, Dopex has been heavily influenced by advisor Tetranode. This NFT initiative is a clear value add for retail investors, who hear about NFTs 1,000x’ing and want to get involved. This is where Dopex can be compared to other options protocols, rather than focusing on the product with little marketing initiatives, Dopex focuses on the marketing, and ensuring they always have something going on which will generate hype. Whether this is a good or a bad thing is a question of effect, if it doesn’t affect their offering, longevity or ability as an options protocol, then hype and good marketing can only be good.
The announcement channel averages around 1 announcement per day, with 1 ‘major’ announcement every few days.
The question I’m going to look to answer below is: are these products built to further the protocol in a technological way, improving its offering and serving its users, or are they designed to take advantage of the ponzinomics of cryptocurrency, attracting hype and investors and inflating the market cap?
If it is the second, will Dopex be able to capitalise on this hype and create their niche in the market, or will the ship sink before they can plug the holes created by a lack of focused and directional work?
Let’s dive in…
Overly Complex or a Work of Art
Dopex seems to have fingers in every DeFi pie. The question is, are they trying to do too much? Let me tell you what they are trying to do, and you can decide…
DPX and veDPX
DPX has a limited supply of 500,000, a current price of $1,013, and a market cap of $190m.
It currently has little utility, but the plan is to use it as a governance token, and stakers will receive a % of fees generated by the platform. This will come when veDPX is launched in the coming weeks and months.
Fees to veDPX holders will likely to be 85%, with 15% going to the treasury. However, I have been told this is yet to be decided, and they are looking to create a more flexible and adaptive structure which directs fees to the treasury reserve or veDPX holders differently from different sources.
As you can see from the emissions chart below, DPX will be fully distributed by 2026. The Dopex platform, and planned offerings, rely heavily on incentives from emissions. Currently, we don’t know how Dopex will incentive people once the emissions stop.
Some of you may be familiar with ve-tokenomics, but for those that aren’t, here is a super-simplified explanation of how it will work:
- veDPX is the staked version of DPX. veDPX is locked for a period of time, decided by the staker. The longer they lock their DPX, the veDPX they are given, meaning more fees and voting rights (by way of a higher multiplier).
- veDPX gives the holder voting rights. These will allow holders to vote on which pools the DPX token emissions will go to, as well as the options strike prices (for the interest rate pools, it is likely this will be for other pools as well).
The full details have not yet been released, and involve many different moving parts (as the veDPX voting will be incorporated across many other aspects of the protocol). I expect it to involve much more than above. Full decentralised governance will only be possible after Dopex has launched its full product suite. A team member stated this is because they need quick and agile decision making at the moment, and decentralised governance doesn’t allow that. It is likely we see a diluted version of veDPX to begin with, which votes on things such as pool emissions, and shares revenue.
It will be interesting to see what happens to the protocol once emissions stop in 2026, as voting on the emissions is a major selling point for long term lockups. There would still be the multiplier for fees generated on the platform, but will this be sufficient to convince people to lock up their DPX for years at a time? It is possible the emissions would change from DPX to rDPX, but this could have negative effects on the price of rDPX, which would impact the protocol massively.
There are plans in place to allow veDPX holders to use the token as collateral for minting Synths and borrowing DPXUSD, but nothing has been confirmed yet.
Heralded as the magic that makes the tokenomics model work, synthetic assets are the ‘special sauce’ giving value to the rDPX token (which will be covered later). They will include stocks, commodities, ETFs, indices and cryptocurrencies.
Dopex will use the UMA protocol, an Oracle service, to get prices for the synthetic assets, and rDPX will be used as collateral to mint them. It is unclear if this will be rDPX alone, or in combination with stablecoins and other established assets.
There is a lot more to synths, some of it is covered in the Dopex and Uma docs, but until we have more details from Dopex on how exactly they will be structured, there is little point speculating.
rDPX, being a token with an unlimited supply, is volatile in price. This could cause issues, as synth positions will be liquidated if there is a sudden drop in rDPX price. In an effort to combat this, Dopex has revamped the rDPX tokenomics, hoping to make the asset more stable.
rDPX is a rebate token, designed to incentive deposits into the options pools, it’s given to depositors when the pools get a negative return. The % of losses that are covered is decided by DPX holders through voting and currently sits at 30%.
One thing that many people don’t know, is that when rDPX is given to depositor as a rebate, the Dopex reserves/treasury are issued with the same amount of rDPX (the total given to depositors also goes to Dopex reserves). More on this later…
rDPX, necessarily, has an unlimited supply. This brings questions about its sustainability. In an attempt to combat this, Dopex has thought up an array of initiatives to bring value and longevity to rDPX. Initially, the idea was to use rDPX as collateral to mint synthetic assets, however, the tokenomics were clearly unsustainable.
As rDPX would have been hugely inflationary, anyone who had minted synthetic assets could be liquidated, losing their holdings, every time rDPX had a burst of inflation and therefore selling pressure (number goes down, collateral loses value, positions get liquidated). In an attempt to prevent this, Dopex is introducing a stablecoin, DPXUSD, which has a bond and burn mechanism, burning rDPX each time it’s minted. Let’s dive in…
The Dopex Stablecoin – DPXUSD
This gets pretty complex, and could easily have a stand-alone report. Also, many of the details are yet to be finalised, so much of the inner workings, such as how the stablecoin reserves will be structured and where they will come from (obviously a vital piece of information) are not yet decided. Once this information becomes available, and we see the stablecoin in practice, an updated report will be released.
For the purposes of this report, I’m going to keep it as simple as possible (which, unfortunately, is still pretty complex).
DPXUSD is Dopex’s own stablecoin. Created to give rDPX value, and fight the inflationary pressures, by burning rDPX when DPXUSD is minted.
To mint DPXUSD, you bond (deposit) 75% USD (in the form of a recognised stablecoin) and 25% rDPX. The bonded funds then go into Dopex’s treasury/reserves, and you receive DPXUSD. I’ve been told there will likely be an options to swap 100% stablecoins, or other accepted assets, directly to DPXUSD, but again, this is yet to be finalised.
Clearly, it would be easier for rDPX holders to simply swap their rDPX to USD (which would drive down the price of rDPX). To make bonding attractive, Dopex offers incentives, in the form of a discount on the DPXUSD, which is released over a 5-day period (to prevent instant arbitrage). See the example below for a breakdown of how it works:
The 75% USD deposited into the treasury will be used to provide liquidity to put options pools on Dopex, and the DPXUSD Curve factory pool. Dopex hopes this will earn the treasury additional yield.
Dopex state this put liquidity also acts as a backstop for rDPX. Where rDPX’s value falls too low, the treasury will remove the put liquidity and buy rDPX with the stables. This does create risk factors, as if the treasury is backing DPXUSD, and it sells stablecoins to buy rDPX when the price falls, there is systemic risk to the entire protocol. If rDPX continues to fall, the stablecoin backing value drops, and the entire system could capitulate.
As seen in the example above, when DPXUSD is minted, an equal dollar value of rDPX from the reserves is burnt.
As mentioned earlier, when losses occur in the pools, the Dopex reserves are issued with the same amount of rDPX as is given out to the pools. This means that every time someone bonds rDPX and USD to create DPXUSD, 50% of the rDPX burnt comes from the rebated amount (25% from the person who suffered the losses, 25% from the reserves). The other 50% comes from Dopex’s reserves.
As 75+% (depending on the discount factor in bonding) of what is burnt comes from the treasury. That means initially, only around 30% of the actual circulating supply (the around 1m rDPX held by the community) will be able to be burnt, as that would also require burning around 900,000-1.25m from the treasury (which holds around 1.25m).
The supply burnt from the treasury isn’t actually circulating supply, so adds little value to rDPX holders. Especially as the treasury is constantly being topped up, and if needed, more can always be minted into it.
Rather than being deflationary, the bond mechanism would simply reduce rDPX inflation slightly. The amount it is reduced by depends on a few factors.
Firstly, the amount of rDPX in the treasury. The more in there, the bigger the discount, and the more incentive to bond and burn rDPX for DPXUSD. If and when the treasury runs out of the initial amount (meaning around 300,000 has been burnt from circulating supply, and the 1-1.25m from the treasury has mostly been burnt), the treasury still needs 3 rDPX for each 1 bonded by holders. As the treasury only receives 1 for each one distributed, there would need to be 6 (1 to community, 1 to treasury, 3 times over) rDPX minted for bonding to be able to take place. This means that every 6 distributed, it’s possible to bond 4. Leaving the asset still inflationary, but reducing this rate by 66.66%.
Now, consider that when reserves are low, the discount for bonding rDPX and DPXUSD is also low. This makes a swap from rDPX to DPXUSD, or another stablecoin on an exchange, more attractive, especially as you don’t need to bond 75% other stablecoins, you can straight swap rDPX to DPXUSD. That means inflation would be higher, until the treasury gets a good balance again, bring the discount up, and incentivising bonding. That would take some time, and it would mean that 66.66% inflation reduction is, in practice, much lower.
Whilst a very clever system, rather than making rDPX deflationary, this only makes it a bit less inflationary.
Another vital factor to consider is what will happen with emissions. Dopex, as a protocol, relies very heavily on emissions to incentive users. DPX emissions are due to stop in 2026, and are already bolstered by rDPX emissions. Combine this with the need to incentivise Curve factory pool voters to vote for DPXUSD, so Dopex benefits from the CRV emissions, and it is clear Dopex is going to require significant emissions to maintain and grow the platform. It is logical that these will come in the form of the unlimited supply rDPX. This, alongside the slightly reduced inflation caused by DPXUSD bonding, will in fact mean that whilst much better than without the bond and burn, rDPX will still be highly inflationary.
Now, let’s dive into the Curve factory pool.
DPXUSD Curve Factory Pool
Curve factory pools
Curve factory pools are pools that anyone can deploy for their stablecoin, and set their own fees for swaps (between 0.04 and 1%). 50% of fees gathered go to the Curve DAO, the other 50% to LPs.
DPXUSD holders will be able provide liquidity to the Curve factory pool by putting up 50% DPXUSD, and 50% another stablecoin. They would earn fees from swaps between the pair, and hopefully CRV emissions (if Dopex can incentives veCRV holders to vote for emissions to the DPXUSD pool). It is likely the Dopex treasury will also incentivise deposits in some way, at least to seed the initial liquidity. If they can sway veCRV holders to vote for emissions in the DPXUSD pool, the need for Dopex treasury incentives for LP will stop, as the CRV rewards will be incentive enough (however emissions will be needed to bribe voters).
The long-term plan here seems to be building up a huge position of protocol owned liquidity (POL). When people mint DXPUSD they will be depositing USDC and other stablecoins into the Dopex treasury. This can be used in the Curve factory pool to earn the CRV emissions.
It also makes sense, as Tetranode owns around 4% (rough calculation including a lot of assumptions, but a figure to work with) voting power in the Curve wars; which is a significant chunk. If Dopex can sufficiently incentivise people to vote for high CRV emissions in the DPXUSD pool, and they owned most of the liquidity in that pool, it would be massively profitable for the protocol, and would more than make up for the spend incurred by bribing for those votes (especially as the spend will likely simply be in the form of rDPX emissions!).
DPXUSD holders are able to bond DPXUSD Curve pool liquidity pairs on the Dopex platform, which will give them 2x weight on the Curve pool rewards.
They would provide liquidity on Curve, with 50% DPXUSD, and 50% another stablecoin, receiving a liquidity pair token in exchange (which benefits from fees generated in the pool, and CRV emissions). Then they can bond the liquidity pair token on Dopex’s platform, which would double the rewards received. As they bonded on Dopex, Dopex then own the liquidity pair, and collect the rewards. The bonder will receive the value of the liquidity pair and its rewards in the form of vested DPXUSD.
See the example below:
A simple version of the double bonding flow would look like this:
rDPX bonding (0.75 USDC | 0.25 rDPX) —> discounted DPXUSD —> DPXUSD CRV LP —> bonded DPXUSD + premium (also in DPXUSD).
What Does This Mean For Dopex?
As 75% stables are used to mint DPXUSD, then 50% used for the LP, if users decide to use both bonding opportunities, they are depositing 87.5% of the total amount in recognised stablecoins directly to the Dopex treasury, in exchange for 100% DPXUSD.
Dopex plans to use these stablecoins for the Curve pool, and their put pools. Them owning the liquidity in the DPXUSD Curve pool could be a huge earner for the protocol, as CRV emissions distributed to the pools can be massively profitable.
To earn revenue from the pool, there needs to be a market for DPXUSD, as fees are earned as a small % of swaps in the pool. For CRV emissions, Dopex would need to command enough CRV voting power, as the CRV emissions are split according to veCRV votes. This will be a massive challenge, as there are already huge players in the Curve Wars who command huge voting power. Tetranode, Dopex’s advisor, has pledged to use his CRV to vote for the DPXUSD pool, however this, despite being a large amount, is nowhere near enough (estimated between 3.7-4.15% veCRV voting power). To command enough power, Dopex will need to heavily incentivise voters.
The exact structure of double bonding isn’t released, and it’s hard to understand how it will work. As the liquidity pair is bonded, the bonder will receive DPXUSD instead of the actual fees and rewards generated in the Curve pool, this adds more recognised stablecoins to the Dopex treasury.
The clear end goal here is for Dopex to fully own, though their USDC and other stablecoin reserves, the majority of the Curve pool.
One sticking point is the fact they offer 2x weight in the rewards. This means they are printing additional DPXUSD without anything backing it. Now, it’s not like we haven’t seen this before, but for it to be sustainable Dopex needs to earn enough from its fully owned share of the Curve pool to pay the 2x rewards to bonders. This ties into the argument that Dopex plans to own the majority of the Curve pool themselves, and use it as a major source of protocol revenue. For this to work though, there need to be major use cases for DPXUSD, that give it major demand.
Should there be no real use cases that make the stablecoin valuable and in demand, what would happen? Could it end with Dopex owning a huge bag of recognised stablecoins, whilst DPXUSD holders are stuck with a bag that doesn’t have uses, aside the ponzinomic yield they can earn in the Curve factory pool?
Let’s consider what would happen to DPXUSD holders in the event of a depeg (stablecoin no longer valued at $1).
DPXUSD Depeg Event
Treasury / Reserves
The treasury and reserves are the same thing initially (the Dopex treasury is the reserve, therefore, the treasury is what backs the stablecoin). There are plans to potentially split them later on, preventing the destruction of Dopex should DPXUSD lose its peg, and vice versa, but that is yet to be decided.
This is an important point to stress, as if DPXUSD loses its peg, the reserves are what will prevent holders being stuck with a worthless bag. If Dopex splits the treasury and reserves, we will need to carefully study what the reserves are made up of, and if they are sufficient to pay holders back if there is a depeg event.
What Would Dopex Do?
There are a couple of steps before splitting the reserves amongst holders.
First, Dopex would remove the DPXUSD liquidity from the Curve factory pool. Through the double bonding, Dopex will have control of the majority of the Curve LP pool, meaning they have the power to remove DPXUSD in high quantities.
As the LP pools constantly rebalance to 50% of each asset, this will result in the pool buying masses of DPXUSD, to rebalance, and should return DPXUSD to its peg.
However, this would come at a cost. If it doesn’t work, all other liquidity providers in the pool would then be stuck with considerably more DPXUSD, and so would the DPXUSD reserve. It the peg is lost again; it could be the end for the stablecoin.
Now, if that fails, and the reserves are all that is left. With DPXUSD having lost its peg completely, the next step is to split those reserves amongst DPXUSD holders.
When speaking to a member of the team, I found out something concerning. If this happens, Dopex are seriously considering only allowing veDPX holders to claim the underlying assets, or, at the very least, allowing them to do it first.
This has been confirmed, as if DPXUSD falls to below $0.985 per 1, veDPX holders with over 4,000 veDPX (1k DPX locked for 4 years) will be able to redeem 1 DPXUSD for $1 worth of rDPX-LP (the DPXUSD liquidity pair token) and stables.
As this would follow a major depeg event, and the reserves would have traded their other stablecoins for DPXUSD (by removing DPXUSD from the pool, resulting in their other stablecoins being swapped for more DPXUSD – this would be in huge numbers, as Dopex will own the majority of the Curve pool), there will be significantly too little to pay back the DPXUSD holders…
This will likely mean that only the wealthiest holders, with huge amounts of veDPX, will get any money out of the reserves, leaving all retail holders rekt.
Note, 1000 DPX is equal to over $1.1m at current prices. So users who haven’t locked over $1m of DPX for 4 years are getting a bad deal out of this. That is a major sticking point, as it embodies the same ethos as TradFi, benefiting the rich at the detrement of the poor.
Curve Interest Rate Vaults
Dopex plans to launch options whose underlying asset is the APY of a specific Curve pool (note, the interest rate itself is not a financial asset, so the option would have to be synthetically constructed). The vaults would be in the same style as their existing options vaults, and as the Curve pool APYs are not very volatile, they will use 100-1,000x leverage.
Essentially, if you expect a pool will get a lot of votes to raise its interest rate (meaning it rises), you can buy a call option on that pool. If the pool APR is at or above the strike price, then you will profit. The same the other way around, if you expect less votes for a pool, you can buy a put.
This product has a lot of potential, allowing users to speculate on the Curve Wars without owning CRV or related assets, and with minimal capital.
If there is sufficient liquidity, large players in the Curve Wars will be able to hedge or leverage their exposure, minimising risk or maximising gains, for relatively low amounts of capital (making it a very capital efficient method of Curve Wars involvement).
This could open up entirely new avenues of attack and defence for Curve War participants, if there is sufficient liquidity. For example, if a large Curve Wars player is planning on issues a huge bribe for a specific pool, they could buy call options for that pool, and almost guarantee profit.
You may have realised there are some serious drawbacks here as well. If large Curve Wars players are able to control the market, which often they are, they can use the Dopex options pools to fuel profit from what can only be seen as insider trader (but may not amount to as much in the eyes of the law). Here, liquidity providers, likely mostly retail, will suffer.
How this is done is going to be an important consideration, which is yet to be released. One example consideration will be is the option synthetically constructed on, or off, chain. If it’s off-chain, that could create room for human error and attack vectors. Also, how the leverage is structured and what liquidation or similar risks arise.
As the underlying asset in this pool will be the interest rates, options will be bought and sold with $’s, if this is exclusively DPXUSD, that could be huge. However, this definitely won’t be possible to begin with, and possibly never, as many would simply go to competitors if they don’t have or want DPXUSD. Dopex would need a monopoly to make this work.
Interest rate options and swaps are likely to be a massive narrative in crypto in the coming years. They are huge in traditional markets and a vital tool for whales and institutions. Whilst not being that sexy, they will be massive in crypto.
Today has gone deep into Dopex, so I’m going to summarise the key considerations, and what I’ll be looking for going forward.
Considering Dopex as a platform is extremely difficult at the moment. It’s trying to do so many different things, without clearly stating what it’s goals or aims are. The overly complex nature of their offering seems, at times, like it is designed intentionally to confuse. Articles discuss aspects of the protocol in a manner that is extremely difficult to understand, and draw overexaggerated conclusions about the value they will add. There is considerable smoke and mirrors when trying to look into the protocol, and much of the essential information needed to decide whether Dopex has longevity, and is a good investment, isn’t available. Whether this is because it hasn’t been decided yet, as they are shipping ideas and worrying about how to do them later, or if it’s a matter of holding their cards close to their chest, is unknown. Either way, it is a major concern.
DPXUSD appears to be a means of Dopex acquiring a significant amount of USDC and other stablecoins, in exchange for DPXUSD, in order to grow their protocol owned liquidity and get involved in the Curve Wars. This bears resemblance to Redacted Cartel and Olympus style bonding, where the protocols treasury is its value. This could go either way, as if they are able to offer successful products and services, as well as generating revenue with a massive war chest of protocol owned liquidity, that will add considerable value to the protocol. However, if anything goes wrong, such as DPXUSD losing its peg, options and interest rate options not catching on with customers, Curve Wars as a phenomenon ending or suffering in some way, or a whole host of other potential issues, the entire protocol could sink.
For their involvement in the Curve wars to work, which is a large part of what they are focusing on, between their protocol owned liquidity in the Curve pool and the interest rate options, Curve must continue to dominate the stablecoin swaps market. UniSwap cutting fees to 0.01% for some pools has seen it gain significantly on Curve (which uses a 0.04% fee). If, as it seems, the DPXUSD pool will be a major source of income for the protocol, this is certainly something to keep a close eye on.
There is also the concern that whilst Dopex’s name is an acronym for Decentralised Options Exchange, it is considerably below industry standard when it comes to its options purchasing user experience and general offering.
I personally would not feel comfortable commenting on the long-term prospects of Dopex until I’m able to clearly see what it is they are trying to build, how it fits in the market and meets consumer’s needs, and where the protocol is heading over the next few years. The launch of DPXUSD will be a huge moment for the protocol, and I believe a lot will change and hopefully become clearer. Dopex, it seems, are changing the direction of the protocol, with their stablecoin and Curve Wars involvement. As of now, it is not clear what their end goal is (although I have some suspicions). Until the time comes that all information gaps and red flags uncovered in my research are addressed, I’ll avoid drawing conclusions.
Some Key Considerations:
The majority of what Dopex are doing is untested.
Will DPXUSD retain its peg and make rDPX sustainable, or will it lose it and bring Dopex down with it?
What will the DPXUSD reserves be made up of, and will they be sufficient?
Will only the richest veDPX holders be able to claim the underlying assets should DPXUSD depeg (as suggested by the Dopex articles and team)?
Will rDPX in practice actually become less inflationary, or is that simply a great marketing ploy?
Will Dopex be able to compete with the big dogs in the Curve Wars, and bribe their way to massively profitable CRV emissions, or will that endeavour prove too difficult, and a waste of time and resources?
Will rDPX emissions used to bribe Curve War vote be too high and cause negative price action?
Will Curve retain its control in the stablecoin swaps market, or will UniSwap take over from their reduced fees?
Will the interest rate options be popular and sustainable for both deposits and buyers?
Will large Curve Wars participants use Dopex’s options as a way to emphasise gains knowing they control the outcomes, and therefore cannot lose? If so, who will be the liquidity providers who lose?
Update Since Deep Dive Was Published (10/08/22)
Most importantly, Dopex has not yet launched its stablecoin.
I highlighted many potential issues with the DPXUSD stablecoin in the deep dive, which was followed shortly after by the LUNA/UST collapse.
It’s good to see Dopex haven’t blindly launched their stablecoin. Hopefully, they’re either reworking a much more sustainable model, or even better, they have scrapped the idea altogether.
We mentioned in the deep dive potential liquidity issues. Initially, they bootstrapped the liquidity for their SSOV (option vault) pools, but weren’t able to utilise it, with around $60m of $63m DPX sitting idle in the pools.
Now, TVL is down from around $100m to $3.8m at the time of writing. The bear market can of course be blamed for some of this, but in comparison to Friktion, this drop is gigantic.
veDPX is live, working in much the same way as other ve-tokenomic models. The longer you lock your DPX up for, the more veDPX you receive, which benefits from shared fees and governance rights. Great to see Dopex sharing fees with token holders, something new since we published our deep dive.
At the time of writing (20/07/22), around 23% of the circulating DPX supply had been vote-locked for an average of 3.51 years. This works out at around 9.2% of the maximum supply. That’s an impressive number, and certainly good for DPX price action.
Interest Rate Vaults
Interest rate vaults are now live and have attracted considerable TVL (around $38m in the latest vault, although Dopex offers no analytics). Perhaps the reason we’re seeing so little liquidity in the SSOVs is that Dopex and their insiders have moved their liquidity out of the options vaults, and into the interest rate vaults (this is speculation, but would make sense).
Interest rate options for Curve pools certainly have a lot of potential, and we expect that interest rate options and swaps will be a big part of DeFi in the future. However, whilst interest rate derivatives themselves are vital tooling for financial infrastructure, Dopex’s ability to deliver this is certainly not guaranteed, and their future plans are very unclear, making them a risky protocol to be involved with.
We will be keeping an eye on how this product develops, and whether it could improve Dopex’s offering and make the protocol interesting, but as it stands, with all the information discussed in the deep dive, I will remain way away until I see meaningful and sustainable developments and growth.
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