Maybe we’ve been approaching options the wrong way. Does the average user constrained by time they can put into educating themselves, really care about puts/calls, complex greeks etc.? Not really.
Quite a few begin to dabble in options after seeing extreme outlier PnL screenshots usually from WallStreetBets and other communities that treat them more like gambling.
Maybe we should be switching it to be background infrastructure to help users attain certain benefits in their trading / capital management journey within the DeFi space. It’s probably a better fit to term this new suite of products with something that has a better ring to it — OpFi probably?
Enter OpFi
The idea is rather than educating users about how options work and how they could be used to achieve certain goals within their trading / risk management strategies, we abstract the work away from them by offering products that achieve their goals by using options in the background — without them even knowing they’re using options.
In short, OpFi is DeFi infrastructure powered by options.
Dopex has been actively building OpFi products and solutions over the last few months. To make it easier for everyone, here’s a list of them:
- Atlantic Straddles
- Atlantic Insured Perps
- Put based Lending
- Synthetic Option Perps
- Stablecoin Option Vaults (not really named yet)
Let’s break them down one-by-one:
Atlantic Straddles
Most users love to speculate on volatility but aren’t fans of picking direction. This is where straddles come into play. It allows anyone to purchase a straddle and profit when price moves in either direction.
The profit for a straddle is the difference between expiry price and price at purchase minus the premium paid to open the position.
Unlike regular straddles where a call and a put is bought, Atlantic straddles work in a different way since it’s powered by Atlantic Options.
Writers deposit USDC and when a buyer purchases a straddle, it purchases an ATM put, borrows 50% of the collateral and purchases the asset. This means that for the buyer we end up with a long straddle payoff. However, with the writer is a short put payoff.
Dopex makes it trivial to LP and hedge this by adding a +5% IV premium for buyers, meaning that LPs can run scripts that insta-hedge their short put exposure on Deribit, Bybit etc. as soon as a purchase happens.
We’ve provided scripts that help anyone simulate or set this up today.
https://github.com/tztokchad/straddles-hedge-sim
https://github.com/tztokchad/straddles-hedge
The cool thing about straddles from a user experience perspective is that it’s a one-click buy/write process for anyone. Making it arguably the simplest to use product on Dopex.
Atlantic Insured Perps
High leveraged perpetual futures are probably the largest crypto-native product with PMF. Everyone loves to speculate on assets with position sizes far greater than what they could technically afford without leverage.
The problem usually when using leveraged perps is that users are susceptible to wicks in either direction that could knock their position into liquidation before price action eventually trends towards the direction they rightly bet on.
Plenty of leveraged longs have been liquidated this way and it’s been a constant cause of worry for traders with 3x+ leveraged positions open. Either they set a stop-loss and watch it get hit before their trade idea actually plays out, or they have no stops and lose all their margin.
Either scenario playing out usually leads to traders losing their sleep. This is where Atlantic insured perps come in.
Insured perps are initially set for launch with a GMX integration, considering it’s the #1 on-chain perp DEX today and a natural fit considering it’s deployed on Arbitrum.
The way it works is, as writers you simply deposit USDC into “max strikes”. Max strikes are strikes at, or below which you would be comfortable writing puts at. Or in simpler terms, you are okay with buying the base asset (ETH here) at a price less than or equal to the max strike.
Now, when a user inputs the size and leverage for opening a long on the insured perps interface, it automatically calculates the following:
- Amount of puts to purchase based on leverage (and delta)
- Strike prices for puts based on liquidation price
- Premium + funding + fees to be paid
If the user is okay with the costs involved, they can open the position. Insured perp keepers now unlock collateral from the Atlantic Options and add it to the position. This collateral remains in the position until either the position is closed or expiry.
The amount of options and strikes selected result in the borrowed collateral leading to the position’s liquidation price moving to near 0. This means that for the entire term of the puts, the leveraged position cannot be liquidated.
Meaning that our users can sleep in peace while having large 10x positions opened without worrying about 10% downward wicks.
Insured perps have been tested successfully and are launching for ETH/USDC and initially with only long positions, however this will change in the future.
For LPs and MMs, we also have the +5% IV premium. Allowing them to instantly arb against AP purchases on other venues and earn funding while their collateral is borrowed to keep their positions open — which is potentially very lucrative.
Put Based Lending
Current lending market models have been susceptible to illiquid collateral price manipulation, oracle attacks, bad debt and so on. Fortunately we have a better model based on — you guessed it, Options — that allows you to avoid all the issues above and not even have to worry about liquidations!
Of course there are caveats and it’s a slightly more rigid model but we can go over it in simple terms here.
In traditional DeFi lending markets such as Compound and AAVE, a user supplies an asset and borrows another asset against it up-to a max LTV (loan-to-value ratio)
Here careful consideration must be made with what collateral is allowed to be lent/borrowed along with what the maximum LTV ratio would be for each asset.
With Dopex’ put based lending pools, the entire lending book may look similar to existing lending markets (intentionally to avoid confusion and keep things consistent). However in the background, SSOV puts are used to lend out USD (and ETH in the future) against supplied collateral.
Let’s take an example of ETH/USDC today and assume that ETH is @ $1200.
Now if put SSOVs have a strike of $1000, a user can purchase a $1000 put, supply their ETH and insta-borrow the $1000 collateral to do whatever they prefer on-chain. This would result in a 83% LTV ratio without the need for liquidation — however at expiry if the collateral isn’t returned to the option it’s considered as exercised.
This would even allow for under-collateralized lending where ITM puts are used to borrow the collateral in the option and users getting a greater deal of capital efficiency with the underlying assets that they own.
Of course, the difference with this model is LTV ratios are fixed (dependent on SSOV strikes) and borrowed collateral must be returned by expiry. However users do not have to technically worry about getting liquidated during the option term and could potentially get access to cheaper short term loans considering decay.
Most attack vectors and exploits today are avoidable with this model and lead to an alternative source of lending/borrowing that would be safer and have competitive advantages over existing behemoths once launched, especially allowing for less liquid assets to be listed without worrying about attack vectors leading to bad debt.
Also as per the other products, the +5% IV premium can be used to insta-arb short put exposure when an LPs’ puts are purchased.
Contracts for Lending are being re-written to circumvent the 24kb limit.
Synthetic Option Perps
I’m repeating myself here but perps are by far the highest PMF product within crypto. There’s always a market for it regardless of the amount of competition.
The difference with synthetic perps is how risk management and minimum collateral requirements change versus existing perp systems.
The basics of how this works is pretty simple, we can create synthetic perps using options by combining a long and short option at the same strikes.
So in our case — for a user looking to long, they long a call and short a put. And for a short, they’d long a put and short a call. These perps are restricted by expiries however they can be rolled over onto the next expiry considering sufficient collateral posted as margin in the position.
From a writers perspective, they can provide single sided liquidity for a pair and all perp markets are silo’d into their own liquidity.
The cool part from a users’ perspective is that on liquidation — i.e when they don’t have enough margin to back their short option position, their long option position still remains and isn’t lost.
Which means that users can “degen long” and keep their bias even if they do manage to get liquidated. Also, considering decay — minimum margin requirements drop closer to expiry allowing maximum leverage to drastically increase versus other venues.
This leads to pretty interesting dynamics to retain price exposure versus other venues while keeping capital efficiency at a maximum.
Contracts for perps are still in active development and are slated to be ready in February.
Stablecoin Option Vaults
This one’s probably the least descriptive name (for now) among all the OpFi products considering what it’s capable of.
Nonetheless, here’s a simple breakdown of how it would work and what it’s capable of.
From an implementation perspective:
- Writers deposit curve LP tokens — let’s use 2crv (USDC + USDT) for this example
- Buyers can purchase ATM puts for one underlying versus another token within the Curve pool.
- Purchased puts do not require the entire premium paid upfront and instead have a smooth payout mechanism based on time held — with a minimum funding based on 1 day’s premium.
- The put can be swapped, swapped back or exercised post expiry.
- A swap would entail swapping the underlying for another token within the Curve pool — which could theoretically lead to lower fee swaps than curve.
- A swap back would entail posting the underlying as collateral, swapping an equal amount of underlying to another token within the Curve pool and swapping back prior to expiry. This would allow for fixing curve rates for a fixed time period.
- An exercise would work like a vanilla put option exercise.
This product could be used for a variety of purposes such as:
- Speculating on de-pegs — by buying puts
- Getting access to cheaper swaps (after factoring-in decay + volatility) and lower fees than Curve
- Fixing rates on Curve with the swap back feature — which would theoretically help in arbitrage, MEV etc.
- Getting an additional source of income for Curve LPs — especially ones who can redeem tokens from the Curve pool for $1.
MMs who have access to redemption process with stablecoins simply deposit their Curve LP tokens here and on de-peg pull out X amount of liquidity in the de-pegged token, redeem it for $1 each and repeat. All whilst earning a probable 3–6% boost (at full utilization) on their deposits.
These contracts are a mix of SSOVs and straddles (with ATM prices + rollovers) and have just been added to development.
Sweetening the deal
Of course getting everyone to use OpFi requires some effort, but we make things a little easier in the form of fee discounts, boosts etc. for users by simply holding a small amount of veDPX. This would potentially make OpFi products cheaper to use than existing alternatives.
The idea is to have long term aligned users of Dopex to benefit from our products and have them cheaper to use and more capital efficient to use versus other DeFi products available.
Conclusion
OpFi — Options can power DeFi. Dopex is actively developing and working on OpFi innovation. All current realms of DeFi are eventually going to be covered. Plenty of opportunities for LPs and MMs to earn from arb-ing. Perps, lending and stable-swaps are going to get an options focused approach to them very soon. veDPX (in relatively small amounts) will have utility in the form of fee discounts and boosts.
