Nothing I’ve talked about on Twitter & Discord has been as misunderstood as Atlantic Options. I was talking about the lack of DeFi innovation in my previous Rate Vaults article — to continue on that topic, I’d say Atlantics by design help solve a multitude of problems faced by DeFi/Crypto users whilst also solving the problems of Options adoption in the process.
Like the previous article, I’ll aim to keep it as readable as possible for anyone. Even those with *no* context of Options, Dopex and of course Atlantics.
The Basics
This has probably been explained a few dozen times within articles in the Dopex ecosystem. But i’ll write (or copy-paste) them here again. If you’re up to speed, feel free to skip this section.
- Dopex: is a decentralized options protocol which aims to maximize liquidity, minimize losses for option writers and maximize gains for option buyers — all in a passive manner for liquidity contributing participants
- Options: There are two types of options — call options and put options. A call option is the right to buy the underlying asset at the strike price on the expiry date.
The buyer of a call option is betting on the price of the asset going up.
A put option is the right to sell the underlying asset at the strike price on the expiry date.
The buyer of a put option is betting on the price of the asset going down.
Read more here. - European Options: An option which gives buyer a chance to exercise the contract only at the expiry date
- American Options: An option which gives buyer a chance to exercise the contract anytime prior to the expiry date
- SSOVs: Dopex’ flagship product — SSOVs allow users to write options for a specified period of time and simultaneously earn a staking yield on their deposited assets.
If you’d like to learn more about the wonderful world of options, we’ve two highly educational resources that I recommend:
Now that we got that aside, let’s skip to the focus of the article.
What are Atlantic Options?
So with regular European call and put options — the collateral within the option is locked up until expiry. With Dopex SSOVs, this collateral is staked in other staking protocols to earn a base yield on top of premiums earned from selling options to buyers.
With Atlantic Options the collateral is moved out of the option at any time prior to expiry and used for other purposes within DeFi, such as:
- Liquidation protection for leveraged perps
- Liquidation protection for leveraged bonds
- Creating option spreads
- Liquidation protection for CDPs
- Backstopping token prices
- Creating synthetic straddles
- Insured stablecoins
And a whole host of other applications which are pretty hard to perform in as capital efficient a way as Atlantics allow you to.
Wait. If the option buyer can withdraw collateral from the option at any time prior to expiry, how do Atlantics make sure the user doesn’t default on the borrowed funds by not repaying?
It’s simple. Atlantics aren’t accessible directly from user wallets. They are sandboxed within Dopex managed contracts that are written specifically to handle funds for different use-cases.
This allows Dopex to ensure funds are always “safe” from running into situations where it may end up in a shortfall.
Okay, so Atlantics allow you to use option collateral for certain use-cases within DeFi. How’s that revolutionary?
I’ll illustrate with a few examples. First with Dopex’ initial integration on the best on-chain perp exchange, conveniently available on Arbitrum — GMX.
Insured Perpetuals AKA non-liquidatable leveraged perps
GMX allows users to trade on-chain perpetuals with up to 30x leverage. Dopex’ Atlantic solution allows users to 1-click insure their leveraged positions against liquidation. So how does it work?
Let’s illustrate it with an example. Say we open a 2x ETH long at 3000 USDT with 1500 USDT margin. Our liquidation price would be 3000/2 => 1500 USDT.
That is, without Atlantics. With Atlantics, your liquidation price would be 0.
How? A simple click on the GMX interface to insure your position. You’ll be displayed a breakdown of the cost in terms of premium and funding required and voila you’re insured.
Now for the actual how — we’ve two ways to do this.
- By purchasing an ETHUSD Atlantic put (AP) with a strike right above your liquidation price and depositing the underlying, which in this case would be ETH. We deposit the underlying for the sole purpose of unlocking the USD from the AP.
- By purchasing an ETHUSD AP like above, but purchasing a corresponding ETHUSD Atlantic call (AC) instead of locking in the underlying. We use the ETH collateral from the AC to unlock the AP collateral.
Okay, why do we need the AP, the underlying or the AC? I’ll explain it based on the previous example and how the Dopex managed contracts handle this case.
First case: With the underlying
Say in the first case and our liquidation price is 1500. The managed contract receives 1 ETH (the underlying) from the user, buys a 1600 AP and pays a premium. If the price of ETH drops to or below 1600, the collateral is unlocked from the put and deposited into the GMX position. How? via bots that continuously monitor open positions — and earn a fee to incentivize them to do this.
Now the position’s liquidation price drops to 0 since it’s fully collateralized and the user never has to worry about his position being liquidated until expiry.
If at any point the price goes back above 1600 plus say a threshold of 10%, the collateral is moved back from the position into the AP.
Throughout the duration of the collateral staying unlocked, a funding fee is set aside to be paid for the AP writer using the position margin.
Now at expiry if the price is below 1600, the AP purchased is in the money (ITM). Which means it must be exercised and the writer, which’s the AP pool here - must receive 1 ETH while the USD collateral remains in the position leaving it 100% collateralized.
Of course the downside here is being limited by time. However, in terms of costs its pretty cheap to purchase this kind of insurance considering how risky leveraged trading can be.
In this case where the user adds their own underlying to the position, the premium + funding for 2 AP (2x leverage) with a 1 week expiry costs about $40. For a 5x position with 1 ETH margin, this comes about to around $110.
$110 seems pretty high as insurance cost for a simple 5x position doesn’t it? Not really assuming ETH is $3k and you open a 5 ETH position, ETH needs to move only (110/5) => $21 or 1.4% to breakeven.
And instead of worrying about a 2.4k liquidation price, you can sleep well all week knowing your ETH is safe from pretty much disappearing.
And now to what’s a lot more exciting to me personally:
Second case: With an AC
In the previous example I explained how the underlying was needed to unlock collateral from the AP and the need for it i.e to send it over to the writer (the AP pool in this instance) in case the option expires in the money.
Well, that makes it quite a bit more pricey doesnt it. What if I just have 1 ETH and don’t have the underlying (say 4 ETH for a 5x position) to unlock the remaining USD I need from APs.
We use Atlantic Calls. What are they? OTM call options that are used for the sole purpose of unlocking collateral from ACs.
Why would anyone write them? To earn an almost risk-free yield on your ETH, BTC etc. Risk free? Yes, almost. They’re written at 33% — 50% strikes over daily and weekly time frames. It’s pretty rare that majors make such large moves on short timeframes and honestly, if it does, it’s like a take profit order for your coins.
Okay, so how do these work? Simple. If you click an additional checkbox while insuring your position, ACs are purchased from the pool based on your position size, leverage and expiries.
From then, anytime the AP collateral has to be unlocked, the managed contracts use ETH from the AC instead.
Now at expiry, since the AC writers need their ETH back — if the put option is ITM, the position is unwinded/closed. ETH is transferred from the AC to the writer (AP pool). Stables from the position are used to purchase the asset and return it to the AC. Everything is handled gracefully by Dopex managed contracts to ensure everyone receives what’s expected. Nothing more or nothing less.
Okay, so what kind of extra cost would using ACs incur for insurance? It would be about 2x thanks to funding costs (premiums are near negligible). So for a 2x leveraged position over a week, about $80 and for a 5x about $210.
The yield — and incentives to use Atlantics
And how much do AC writers stand to make? Honestly, its very lucrative considering the lack of risk. And probably one of the better ways to increase your BTC, ETH stacks.
Funding rates target about 35% APR. Assuming even average 50% utilization, that’s about 17-18% native yield on your ETH and BTC.
AP writers also stand to earn somewhere around the same ballpark in funding but even higher after factoring in premiums.
Taking the same assumptions as ACs utilization, it would also be one of the highest native yield on stables. Even more than Anchor yield on Luna.
Of course, there are risks of buying assets that you’re already bullish on — but we’re assuming AP writers intend to buy these assets, which’s why they’re physically settled at expiry.
Writer & Buyer Flow
Atlantic writing is meant to be easy. For APs, you select a max strike that you’d like to write at and lock your stables in. Ideally, it’s the highest price you’re comfortable buying assets at. Usually, higher the price would equate to higher premiums (and higher risk)
For ACs, you simply deposit your assets in and you’re done. The contracts always sell them at a fixed % OTM to the mark price, which will be displayed within whatever UI is being used.
For purchasers, depending on use-case it’s usually completely abstracted from the user and only costs are displayed.
UX wise it couldn’t be any simpler for all parties involved. Nobody involved really needs to know their greeks. Buyers don’t need to know they’re purchasing options at all. Of course, knowing option basics helps them understand everything’s fine — however the fact that options are being used is abstracted away by default.
Fee accrual
Insured perps on GMX are the first application of Atlantics. The rationale behind this was due to its instant product-market fit and the fact that it solves an issue faced by every leverage trader. Also the potential fee accrual from an Atlantics integration here should be significant.
For every 1000 ETH insured, this would amount to about $40,000 in fees or 1–1.5% of the notional amount. GMX has been live for about 10 months on Arbitrum with a total trade volume of $35.4B so far.
Conservatively assuming about $3b volume on average every month, for every 10% insured by Atlantics this would amount to about $4m in fees for Atlantic writers and Dopex. Of this, Dopex would collect around $1.5–2m in fees for veDPX holders. And that’s just one application of Atlantics.
Other applications
Atlantics aren’t limited to one singular use-case. The concept can be applied to a variety of different applications — like the ones mentioned at the start of the article. I’ll elaborate on a few of them and how they’re meant to work.
Liquidation protected leveraged bonds
The concept of bonds in crypto is simple. You deposit LP tokens or non-protocol tokens into a bonding contract, the protocol gives out native tokens vested over a set time period at a discount to market.
So for example, say you have 1 LP token worth $1k. You bond it and over 5 days you get a guaranteed 5% discount — meaning you earn $1050 in tokens.
This is an ideal use-case for Atlantics consider they’ve fixed expiries.
In the case of Reserve bonds with OHM, where users can bond ETH or DAI to receive OHM at a discount to market — users could use Atlantics to leverage up their bond by looping supply + borrows from lending protocols like Compound.
The flow is as follows:
- Dopex Managed Contract supplies (deposits) the users’ selected asset to lending protocol and borrows more of the same asset and re-supplies. This is looped to obtain multiples of the asset based on leverage selected by the user.
- The managed contract purchases an AP based on the liquidation price and supplies collateral from the AP to bring effective liquidation to 0
- The asset is now used to bond OHM and receive vested OHM at a discount
- The vested OHM once received is sold back into OHM POL to re-obtain the AP collateral.
- Lending positions are re-paid and the user keeps profits from bonding along with OHM that was bonded. In case of shortfalls for the AP collateral this is covered by the user’s deposit.
This strategy is best used for risk-on market conditions. However in cases like rDPX v2 where users receive DPXUSD from bonds and with DPXUSD collateralized APs, this will be extra efficient with no need to sell the asset back into POL.
Option Spreads
Atlantic puts can be purchased and used to write puts at strikes lesser than the AP strike.
For example, an AP bought at a $2k strike can be used to write $1.5k strike puts — creating put spreads.
CDP Liquidation Protection
Similar to insured perps, borrowers can use collateral from APs to protect against liquidation.
For example, assuming ETH @ $3k. A user loops -> supply ETH -> borrow DAI -> purchase ETH -> supply ETH to create a 3x leveraged CDP position. Assuming the user’s liquidation price is at ($3k -($3k/3)) => $2k.
The managed contract buys an AP at $2.1k and supplies the collateral into the protocol bringing the effective liquidation price to 0.
At expiry, if the option is ITM. The position is unwound and 1 ETH is returned to the writer — which in this instance is the AP pool.
Backstopping Token Prices
With rDPX v2, Dopex allows users to bond their rDPX with a combination of 50% rDPX/USD LP + 50% USD + one 25% OTM rDPX/USD perpetual AP. A perpetual AP doesn’t expire, but earns funding in perpetuity until exercised.
The DPXUSD is initially 75% backed by USD but thanks to the AP, when prices drop it gets backed by (75% + (25 * 0.75)%) => 93.75%
This allows for DPXUSD to be anti-fragile i.e resistant to price drops as it gets more stable when price goes down, allows for the protocol to gauge demand for rDPX based on amount of USD writing APs and re-adjust parameters to change bonding factors to reflect ideal supply/demand.
Also while the AP is owned by the rDPX treasury, it can use the collateral for other purposes such as yield farming.
Synthetic Straddles
APs enable short term “synthetic straddles”. Buyers purchase ATM APs and 33–50% OTM (depending on the asset) ACs (to unlock AP collateral) for a 3 day expiry.
50% of the AP USD collateral is used to purchase the asset. The payoff for this position replicates a straddle as shown in the diagram below, however is 50% more cost efficient.
This product makes more sense for higher volatility coins like rDPX considering it’s more likely to go either way than usually expire unprofitable for buyers.
Assuming $100 rDPX, 150% volatility and an ATM put bought every 3 days @ $5.4, plus 35% annualized funding. The resulting APY turns out to be (5.4/100 * (365/3) * 100) + 35% => ~680% APY.
AC writers earn annualized funding @ 35 % APY, with minimal risk on their rDPX.
Now for the PNL — assuming one purchases $1k of rDPX and it moves from $100 to $150, the buyer stands to make ((1000/100 * 150) - 1000) => $500. A return of 50%
However if Atlantic straddles were used with each straddle purchased at ~$10 would result in a PNL of ((((0.5 * 150) + 50)-100) * (1000/10))-1000=>$1500. A return of 150%.
Also this is bi-directional and results in profits even if prices drop. For example — if price is $50 at expiry, we get (((0.5 * 50 + 50)-50) * (1000/10))-1000 => $150. A return of 150% again.
These straddles are also a lot more profitable for buyers. For writers, the risk factor over 3 days is easily accountable and having them exercise at a discount (expiry price < price at time of writing) would be akin to buying and holding the asset for a maximum of 3 days while earning relatively high premium.
Farming the same token while writing straddles could be a winning strategy assuming your losses could be made up for by continuously compounding profit in the native token back into farming.
Insured Stablecoins
Certain stablecoins seem to carry a higher factor of risk compared to others. For instance — MIM and UST seem to carry a higher risk of de-pegging compared to the rest of the market.
Insured stablecoins like say, MIM-DAI-0.98 ($1 MIM insured by $0.98 DAI) can be used to insure the MIM for a fixed time period and if at the end of the expiry period if MIM < 0.98, the MIM is swapped for the DAI.
However for the period of the AP, the buyer can farm both the tokens. The writer receives premium + funding throughout the time period.
Why would someone write these? If they feel like the premium + funding accrued outpaces farming rewards in the stable. Also of course if they’re confident that the stable they’re writing for wont de-peg during the option time period.
vlCVX vaults
Convex is one of the most important protocols in DeFi today. To understand more about how it works, read more about CVX, CRV here.
vlCVX or vote-locked CVX, is a 16 week locked version of the Convex protocol’s token CVX. For the period of the lock, the vlCVX usually remains illiquid.
However with Atlantics, vlCVX lockers can borrow against their vote-locked CVX with up to 50% LTV. Borrowers are supposed to purchase an AP at the time of borrowing to keep the borrowed position liquidation-free and allows for liquidity previously never obtainable by CVX vote-lockers.
For example, if a user is locking 10,000 CVX @ $30/CVX at 50% LTV. This allows the user to borrow 10,000 * 30 * 0.5 => $150k. The borrower also purchases 10,000 $15 APs at the time of borrowing for a 16 week period. All USD borrows will be denominated in DPXUSD.
This can be kept at no additional fees in terms of dollars for the term (only AP premiums + minimal funding). However, fees could be taken by Dopex in terms of veCRV voting power. This creates a cheaper source of obtaining veCRV voting power than any other source in the market — for Dopex.
Now for the sake of not turning this article into a novel, I’ll stop with the applications here and leave the rest to your imagination. There are plenty of applications to Atlantics and “just-in-time" sandboxed collateral movements within DeFi protocols.
Tl;dr and takeaways
- Atlantics offer collateral amounts to relatively far under-collateralized positions over fixed time periods for specific use-cases within DeFi.
- Atlantic puts offer superior passive yield to stables for whoever is interested in purchasing assets at a discount to market vs current prices.
- Atlantic calls offer superior passive yield to asset holders looking for near risk-free yield.
- The combination of both Atlantic option types result in highly capital efficient loans across a multitude of DeFi use-cases.
- Atlantics will be a great source of fees for Dopex.
- Atlantics also enable Dopex to obtain veCRV voting power at the cheapest price vs the market while increasing vlCVX capital efficiency and in-turn deposits into vlCVX, making it a synergistic play between Convex and Dopex.
- Atlantics will be used heavily by Dopex with its' stablecoin, DPXUSD during the bonding process to make the process anti-fragile (lower prices lead to higher backing)
- Atlantics enable options to be used with no direct interaction by the end user utilizing them. They’re made use of in the background in a way that is beneficial to even the most non-option savvy user within DeFi.
