In traditional financial markets, derivatives trading volume significantly outstrips spot transactions, with options being the most traded derivative. In the crypto market, there’s substantial room for decentralized derivatives to grow, and decentralized options bear the most potential.

With the recent advent of layer-2 networks, projects are no longer hindered by Ethereum’s sluggish speeds and exorbitant transaction fees, leading to a proliferation of derivative protocols. Dopex has emerged as a representative options protocol on Arbitrum. What makes this project stand out, and can it set the tone for future options protocols?

What is Dopex?

Dopex is a decentralized options protocol in the Arbitrum ecosystem, striving to maximize liquidity and returns for both buyers and sellers of options. The key offerings from Dopex include:

Single Staking Option Vaults (SSOV)

Dopex has developed its unique Single Staking Option Vaults (SSOV) model, which allows users to lock tokens for a specified period and sell call or put options at a specific strike price to buyers based on different maturities. Token lock-ins passively generate diverse earnings sources, enhancing the overall liquidity of DeFi options.

Options Liquidity Pool (OLP - Secondary Options Market)

The OLP is a construct built upon the SSOV product (a secondary options market). As the name suggests, OLP offers a pool where SSOV options tokens can be bought at a discount to implied volatility, providing options buyers with liquidity that they can exit at any time. Essentially, it allows SSOV options buyers to exit their positions from the options liquidity pool at a discounted price whenever they wish.

Long Straddles

Straddles are a popular options strategy that allows traders to profit from significant price movements of the underlying asset. To implement a straddle, a trader buys both a call and a put option on the same asset with the same strike price and expiration date, allowing the trader to profit from any price movement (up or down).

Atlantic Perpetual Contract Insurance

The Atlantic Perp Protection is a product designed to provide liquidation protection for leveraged traders on GMX. It allows them to maintain their trading position if the mark price of the target asset falls below the liquidation price (where the trader’s margin is zero, and their position should be automatically closed out).

How does Dopex Function?

Dopex operates on a straightforward mechanism: users lock collateral in contract vaults, selecting a fixed strike price for the options they wish to sell. The contracts then deposit the collateral into various DeFi protocols to earn additional returns. Through this method, users can sell covered options with minimal risk, without requiring in-depth knowledge of option risk metrics (Option Greeks).

By default, all options in Dopex are automatically exercised at expiry and can be settled anytime post-expiry. The exercise of options is net-settled, requiring no underlying assets. The calculation of option PnL is achieved by burning option tokens and transferring the PnL from the settlement assets to the users. The precise calculation of PnL is as follows:

Dopex’s SSOV model employs a fee multiplier structure. The fee multiplier is a simple percentage-based multiplier that multiplies the out-of-the-money (OTM) strike price fee to account for higher volatility. For instance, when the asset’s strike price is $1000, and the spot price is $500, the fee multiplier is 1 + ((1000/500) - 1). The user’s final fee is the basic Dopex fee multiplied by their fee multiplier.

The Dopex protocol charges fees from its products and allocates them to the holders of the native token, DPX, in a locked position. Additionally, rDPX compensates for the risk losses accumulated by options sellers during periods of high volatility. This rebate mechanism for options sellers can serve as a passive income source for seller users, rendering it more appealing compared to traditional options markets.

How to Utilize Dopex?

Step 1: Navigate to the Dopex application at https://app.dopex.io/

Step 2: Ascertain your connection to the correct network. This can be achieved by opting for a network from the ‘Change Network’ choices besides the wallet button. Post connection, you can view all Dopex products in the top menu.

Step 3: Proceed to the SSOV page under the ‘Options’ menu.

Step 4: Peruse through all Dopex Single Staking Option Vaults that mature weekly or monthly. Each vault possesses its distinct details:

• Vault Type: CALL (Long Option) / PUT (Short Option)
• APY: Annual Percentage Yield for depositors
• TVL: Present liquidity available, valued in USD
• Deposits: Quantity of tokens deposited
• Epoch: The current epoch number of the vault
• Duration: Start and end dates of the epoch

Step 5: Scroll to the token you wish to deposit (write options) or procure options for, and select the ‘Manage’ button.

Step 6: Review the breakeven price and calculator to ascertain the strike price, opt for the strike price, and submit to confirm your purchase.

Step 7: Your transaction records can be viewed in the options section post-transaction.

Understanding DPX and rDPX Tokens

Dopex employs a dual-token model, using DPX and rDPX, two distinct tokens, to build a well-rounded and perpetually cycling ecosystem.

DPX is a finite supply governance token, with the total supply capped at 500,000 (500k). DPX holders have the power to vote on crucial proposals for the protocol and applications, thus giving them a say in the direction of the Dopex ecosystem. Additionally, DPX accrues fees and income in liquidity pools, vaults, and custodial accounts. DPX holders will benefit from the protocol’s success and will be rewarded for their contribution.

(DPX Allocation Chart)

rDPX is a rebate token designed to compensate option sellers for their losses. Rebates are calculated based on the percentage loss sustained by option sellers during each weekly cycle and paid out in the protocol’s rebate token, rDPX. Option pool participants receive rDPX relative to the value of their loss. Through this rebate system, option sellers can achieve higher returns and lower losses than with hedging strategies.

Moreover, rDPX can be used to mint synthetic assets like index funds and stocks, akin to the intermediate token in the Synthetix synthetic asset protocol. While synthetic assets have not been introduced yet, they have always been part of the project’s future plans.

The supply of rDPX is determined based on the net value of the losses incurred by option sellers and is minted for sellers at a proportion decided by governance. As there won’t initially be a fixed emission curve for rDPX (which might change in the future via governance voting), rDPX could become scarce if buyers don’t make a net profit.

Milestones in Dopex’s Evolution

February 4, 2023: The decentralized options protocol Dopex announced support for Polygon, deploying Atlantic Straddles natively on the Polygon chain. The option sellers of Atlantic Straddles also received additional rewards provided by Polygon.

January 17, 2023: The decentralized options protocol Dopex launched the Options Liquidity Pool (OLP).

January 10, 2023: The decentralized options protocol Dopex, in collaboration with the liquidity staking protocol Lido Finance, introduced the stETH Single Staking Option Vaults.

September 20, 2022: Thales, the options protocol in the Synthetix ecosystem, received committee voting approval to deploy the Thales marketplace platform on Ethereum’s Layer 2 solution, Arbitrum, and added support for the Dopex token, DPX.

August 23, 2021: The decentralized options platform Dopex (DPX) announced the beta launch on the Arbitrum testnet.

May 17, 2021: The decentralized options trading platform Dopex successfully concluded a seed round of funding, led by Debaseonomics.

Is Dopex a Worthy Investment?

Dopex, with its innovative Single Staking Option Vaults (SSOV) model, has redefined the conventional management of collateral vaults and automated market maker (AMM) vaults. Option sellers can deposit assets into the corresponding SSOV, after determining the underlying asset, expiry date, and strike price. The SSOV then offers prices based on appropriate implied volatility (IV) given market conditions. For option sellers, Dopex provides an intuitive and seamless user experience. The ability to simplify options, which are complex products typically employed by institutions for market hedging, into user-friendly products is a significant innovation credited to Dopex.

Furthermore, Dopex introduces Curve’s ve-staking model, generating the veDPX token. Stakers can exercise governance and voting rights, contributing to effective project management.

(DeFiLlama Data)

As of April 11, 2023, according to DeFiLlama, Dopex ranks third in the options category regarding total value locked (TVL). Dopex has also revealed that the team is developing institution-oriented products and plans to expand the stablecoin ecosystem in the future.

Conclusion

The Dopex ecosystem is rapidly growing. Its current suite of comprehensive crypto market products can be broken down into individual products for options, perpetual contracts, lending, stablecoin exchange, and volatility. This diversity triggers paradigm shifts at multiple magnitudes, making Options Finance (OPfi) a reality. Dopex’s affordable liquidation protection mechanism has provided it with a significant edge, and more decentralized exchanges (DEXs) are looking to integrate it; GMX has already done so.

In conclusion, Dopex is an innovative product that can enhance the DeFi ecosystem. However, as an options product, it currently operates on the vaults model, which limits capital utilization. Thus, there is considerable room for improvement in trade depth and transaction costs.