DeFi & Options
rDPX v2: System Specification
This system specification outlines the underlying mechanics of $rDPX v2. While complex in design, this will be abstracted from the user experience. Writers and bonders only need to bring the appropriate tokens and everything will be processed in the back-end.
rDPX v2 is a new system to be introduced to $rDPX that allows it to mint Receipt Token $ETH (”$rtETH”), a yield-bearing synthetic version of $ETH. $rtETH may also be used to provide liquidity on Dopex v2.
We also introduce the concept of option writer rebates in the form of decaying bondable $rDPX (“dbrDPX”), which can substitute for $rDPX in the bonding process. This allows for $rtETH supply expansion in line with incremental Dopex usage.
The rDPX v2 system is composed of several contracts, including:
- Core Contract: Contract that handles the Peg Stability Module (“PSM”), backing reserves, bonding, and the rebate system
- PSM: Functions that defend $dpxETH’s peg
- Backing Reserve: Tokens which back the amount of $dpxETH supply, composed of:
- $rDPX Backing Reserve
- $ETH Backing Reserve
- Treasury Reserve: Tokens held by the treasury for decaying bonds and bonding discount
- Algorithmic Market Operations (“AMO”) Controller: Contract that handles deployment of tokens from the Backing Reserve
- Perpetual Put Vault (“PPV”) Controller: Contract that handles operations of the PPV system including funding and settlement
Bonding is a mechanism pioneered by OlympusDAO that allows users to bond tokens to a protocol in exchange for another token at a discount over a fixed vesting period. Thereafter, the bonded assets become protocol-owned liquidity (“PoL”) with bonders receiving the new minted token.
Bonding applied to $rDPX
rDPX v2’s Core Contract uses bonding logic to mint $rtETH, a synthetic token soft-pegged to $ETH that is collateralized by bonded assets.
- 25% $rDPX (or equivalent dbrDPX)
- 75% ETH
- Premium for 25% OTM $rDPX ETH-denominated perpetual puts that covers the $rDPX amount
Bonders receive an ERC-721 token that is redeemable for $rtETH after a variable vesting period (initially set to 1 day) with a variable bonding discount (to incentivize bonding; initially set to zero). Discounts will be allocated to the Backing Reserve in the form of $rDPX from the Treasury Reserve.
Regular bonding refers to users that bond using both $rDPX and $ETH.
Delegate bonding refers to users that bond using either only $rDPX or only $ETH.
Users may deposit $ETH into a delegate pool which can be used by $rDPX-only bonders to bond. Delegates may select a delegate fee which corresponds to their bonus share of $rtETH for providing a delegate service. Delegates will receive $rtETH and their delegate fee (paid in bonus $rtETH) after the vesting period, assuming their liquidity has been utilized.
Delegates can withdraw their $ETH at any time provided it has not already been utilized for delegate bonding.
Users that bond with $rDPX only must pair their position with $ETH from the delegate pool. $rDPX-only bonders may select $ETH liquidity based on the delegate’s chosen fee.
Rebate bonding refers to users that bond using both dbrDPX and/or $ETH.
Each dbrDPX represents an $rDPX amount which it can substitute for during the bonding process. The bonder’s dbrDPX will be burned and equivalent $rDPX will be sent from the Treasury Reserve to the $rDPX Backing Reserve.
Use of Bonded Assets
Bonded assets are sent to the Backing Reserve where they may be LPed, staked, or used in the AMO to generate yield.
A user bonding 1 $ETH in value will receive 1 $rtETH and a bonding discount (assuming bonding discount >0).
Bonded tokens will be deployed as follows:
- 0.25 $ETH is paired with 0.25 newly minted $dpxETH and paired as dpxETH/ETH Curve LP tokens to generate yield
- 0.5 $ETH is sent to the $ETH Backing Reserves where it may be staked or deployed via the AMO
- 0.25 $ETH worth of $rDPX is sent to the $rDPX Backing Reserves where it may be deployed via the AMO
The below examples will assume that $ETH is $2,000 and $rDPX is $20, with a user bonding 0.75 $ETH and 25 $rDPX (1 $rDPX = 0.01 $ETH; 25 $rDPX = 0.25 $ETH).
1. $dpxETH Minting
The full value of $rDPX is sent to the $rDPX Backing Reserve which may be deployed via the AMO and equivalent $dpxETH is minted. 50% of the $rDPX value provided for bonding is burned from the Treasury Reserve with another 50% sent as dbrDPX emissions to veDPX holders.
For example, 25 $rDPX (0.25 $ETH) is sent to the $rDPX Backing Reserve and made available for to the AMO and 0.25 $dpxETH is minted and paired with 0.25 $ETH from the bonded amount as dpxETH/ETH Curve LP Tokens. The remaining 0.5 $ETH will be kept in the $ETH Backing Reserve to be staked or used in the AMO. Since 1 $ETH was bonded, 12.5 $rDPX (12.5% of total bonded amount) is burned from the Treasury Reserve and another 12.5 $rDPX (12.5% of total bonded amount) is distributed to veDPX holders.
2. dpxETH-ETH LP
The minted $dpxETH is paired with the remaining $ETH and deposited on Curve, with the Core Contract receiving dpxETH-ETH Curve LP Tokens. These tokens are then staked on Convex to earn yield in the form of $CRV and $CVX.
3. $rDPX Backing Reserves
The $rDPX is held in the $rDPX Backing Reserve where it may be used to re-LP or deployed via the AMO.
At a high level, the AMO allows $rDPX and $ETH (from the $ETH Backing Reserve) to be deployed in certain scenarios, namely:
- V2 AMM to provide/remove rDPX/ETH liquidity
- V3 AMM to provide/remove rDPX/ETH liquidity at certain price ranges
- CLAMM AMO to provide/remove option liquidity
Re-LP is the process where rDPX/ETH is removed from the liquidity pool and re-added at a new ratio.
A whitelist function will be added on a contract level to the $rDPX token contract that will charge fees on transfers to predefined AMMs. This will allow sell-side fees (initially set to 5%; variable) to be added to whitelisted AMMs (e.g. Uniswap and Camelot) and blacklist functions for contracts that aim to circumvent the sell-side tax (this is the same logic used by tax-based token contracts such as $UNIBOT).
4. $ETH Backing Reserves
The $ETH remaining after the creation of dpxETH-ETH LP (i.e. 0.5 $ETH per 1 $ETH bonded) is sent to the Backing Reserves where it may be used in the AMO or Staking.
As per the above including the the Peg Stability Module (”PSM”; explored in more detail below).
$ETH that is not utilized for the AMO may be staked with a liquid staking protocol such as FraxFerry or Lido Finance.
5. $rtETH Minting
A user receives 1 $rtETH for every $ETH bonded and a bonding discount if applied.
$rtETH represents PoL residing in the $ETH Backing Reserves and $rDPX Backing Reserves which may be deployed to Convex, AMOs, re-LPed or staked to earn yield as per the above.
$rtETH can be staked on Dopex to earn 70% (variable; assuming Core Contract split of 30%) of the underlying yield. Stakers are also eligible for additional incentives such as $rDPX, dbrDPX, and external rewards.
$rtETH may be redeemed for 75% $ETH and 25% $rDPX based on the new rDPX/ETH ratio at any time in exchange for a variable redemption fee initially set to to 2%.
During the redemption process, 50% of the redeemed value in dpxETH/ETH liquidity will be removed. The $dpxETH will be burned and the redeemer will receive the $ETH with the remaining $ETH and $rDPX amounts coming from the Backing Reserves.
$rtETH staked on Dopex will be eligible for a share of the yield from the underlying tokens.
$rtETH, rather than $dpxETH, will be usable as option collateral on Dopex v2. Since Dopex v2 introduces a portfolio margin system, this will allow $rtETH to write or sell options in a cross-collateral manner. Pricing of $rtETH will be based on the virtual pool balance of the dpxETH-ETH Curve Pool.
An rtETH/ETH liquidity pool will be created allowing users to provide liquidity and earn fees and rewards and/or $rtETH holders to exit positions at any time without redeeming. Note that the $rtETH peg is market-derived and may not necessarily be 1:1 with $ETH.
The rtETH/ETH pool will be incentivized with 15 $DPX/day (migrated from the original rDPX/ETH pool).
The $rDPX PPV is an option liquidity pool used to backstop rtETH’s $rDPX portion of its collateral value (25% at time of bonding).
Deposit Process and Incentives
The PPV allows users to deposit $ETH to write 25% OTM rDPX-ETH perpetual puts to receive funding fees sourced from protocol revenue as well as additional rewards. Funding fees are set at the beginning of each week and may be sourced from Core Contract rewards and $rDPX trading fees.
Use of Idle Liquidity
$ETH deposited in the PPV may be deployed to a liquid staking service such as FraxFerry or Lido Finance to earn yield.
When a user bonds into the rDPX v2 system, $ETH corresponding to the $rDPX committed will be reserved from the PPV. This $ETH is used to write 25% OTM rDPX-ETH perpetual puts - in the event that rDPX/ETH falls to the strike price, $ETH from the PPV will be swapped for $rDPX from the $rDPX Backing Reserves.
PPVs provide a backstop collateral value for $rtETH of 93.75%, composed of:
- 75% $ETH
- Variable percentage $rDPX with a minimum of 18.75% (25% * (1 - 25%)) $ETH value assuming the PPV is fully triggered.
Note that PPV positions are pooled against total $rDPX bonded and thus may have exposure to multiple strike prices.
$rtETH Circulating Supply Scalability
Since $dpxETH’s collateral value is backstopped by PPVs, its circulating supply is limited by available put liquidity. As a result, circulating supply of $rtETH will target a maximum of four times total $ETH liquidity in the PPV. If this amount is not met, no additional $rtETH can be minted until additional liquidity is added.
AMO is a stablecoin design approach pioneered by Frax Finance that consists of a series of autonomous contracts allowing for arbitrary monetary policy so long as it does not affect the peg - in our case, $rtETH’s peg to $ETH. This is done in the context of a collateral ratio (“CR”), which is simply the ratio of capitalization of assets in the Backing Reserves compared to the total capitalization of $rtETH.
For $rDPX v2, the AMO methodology has been adjusted as follows:
Market operations refer to strategies run at equilibrium that do not affect the CR.
AMM v2 AMO
This allows adding or removal of liquidity from the rDPX/ETH AMM v2 pool. This could include AMMs such as Uniswap v2 and Camelot v2.
AMM v3 AMO
This allows adding or removal of liquidity from the rDPX/ETH AMM v3 pool and compounding of any fees earned. This could include AMMs such as Uniswap v3 and Camelot v3.
$rDPX and $ETH from the Backing Reserve may be used to provide liquidity in the Dopex v2 CLAMM.
Decollateralization and Recollateralization
Decollaterization and recollateralization refer to the portion of the strategy that lower and increase the CR respectively. These have been combined under the treasury’s singleton Peg Stability Module (“PSM”).
PSM-Up may be enacted if $dpxETH > 1 $ETH.
This allows the swapping of tokens from the Backing Treasury for $ETH to rebalance the pool.
PSM-Down may be enacted if $dpxETH < 1 $ETH.
This allows the Backing Treasury to buy back and burn $dpxETH from the Curve pool to return peg to 1 $ETH.
Settle may be executed if $rDPX PPVs are ITM.
Upon exercise, $rDPX from the Backing Treasury will be swapped for $ETH in the PPV at the strike price.
rDPX1559 is an adaptation of Frax’s FXS1559, which allows for the buyback and burn of $FXS (in our case $rDPX) with profits above the target CR.
Option Writer Rebate System
rDPX v2 introduces an option writer rebate system, allowing dbrDPX to be distributed as incentives, such as to compensate writer losses.
Dopex LPs are eligible for rebates in the form of dbrDPX in the event of writer losses. The compensation amount will be a variable percentage of total losses.
Decaying Bondable $rDPX
dbrDPX is given as an ERC-721 token to option writers depending on the rebate percentage of the option pair from which losses were incurred.
“Bondable” refers to the fact that dbrDPX can be bonded in place of $rDPX via rebate bonding. “Decaying” refers to the fact that dbrDPX has a fixed expiration of two weeks. If users fail to bond before expiration, dbrDPX will expire worthless.
Upon bonding, dbrDPX is exchanged for equivalent $rDPX from the Treasury Reserve which is sent to the $rDPX Backing Reserve, with the bonder receiving $rtETH in the process. The $rDPX may be used according to the AMO.
rDPX v2 provides utility for existing $rDPX holders while creating a sustainable incentive system for the entire Dopex platform while creating deep liquidity for rDPX/ETH and dpxETH/ETH. In exchange, bonders receive $rtETH which benefits from the underlying yield of bonded tokens. The PPV creates a backstop for the $rDPX backing of $dpxETH, preventing an unwinding scenario seen in other stablecoin designs.
$rtETH in itself allows holders to earn multiple layers of yield while maintaining exposure to $ETH. As its on-chain liquidity and supply scales it will be integrated into Dopex v2, allowing $rtETH to be used as cross-collateral to buy or sell options on any token pair or be integrated with external DeFi protocols.
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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