May 26, 2022: Most Interesting 🐂💰
Dopex Launches Curve Pool Interest Rate Options
Okay okay okay, I need the price to go up. I can't take this anymore. Every day, I'm checking the price and it's dipping. Every day, I check the price - bad price. I can't take this anymore, man. I have overinvested - by a lot. It is what it is. I need the price to go up. Can devs do something?
Good news, the devs are doing something. Dopex (Decentralized OPtions EXchange) has been steadily building an options empire off of mainnet. If you are tired of price going down, you can build hedges to speculate on short term price movements of $BTC, $ETH, $CRV — all of your favorite tokens.
Here’s how it looks for the fourth weekly epoch of $CRV puts, which expires tomorrow at strike prices ranging from $1.40 and $0.95.
If you don’t know what options are, you simply have no business playing around with them. The good news is they’re not that difficult for the casual ape to understand. Ask your registered financial advisor if they’re using confusing jargon just to scare you off and keep you beholden as a client.
To borrow an analogy from The Money Plot, (a great read in its entirety), the author considers hosting a large barbecue in a month’s time. He considers how best to purchase the meat, while preparing for the chance it may get cancelled due to rain:
Structured this way is a good deal for all parties. The meat vendor gets some money if you cancel and can still sell the meat. You get some assurance at a discount.
The book extends the analogy in several ways. If it looks as though rain is likely as you approach the BBQ date, you can try and resell your option to other interested parties, possibly recouping the down payment. The existence of this arrangement allows for increasingly complex strategies.
If you want to speak the language of options, there’s only a few pieces jargon you need to memorize:
Call option: the right to buy an asset at some time in the future at a specific price (ie you think number will go up).
Put option: the corresponding right to sell an asset (ie you think number will go down).
Strike price: the price you’re gambling on at the expiration date
Options form the basis of financial engineering — by combining various types of options you can often build strategies to gamble on pretty much any eventuality you like — ie a straddle strategy if you expect high volatility, or a butterfly strategy if you expect low volatility. The options (har har) are endless, hence why the global derivatives market is estimated to be in the range of the trillions to quadrillions.
Sounds like a big opportunity! So why aren’t more people doing this on-chain? For starters, it requires galaxy sized brains. Large parts of web3 are still microbrains obsessed with trading pictures of monkeys.
There’s also engineering challenges. Theoretically, the seller of an option is on the hook for an infinite loss. If you are selling a call option on the price of $DOGE, and it jumps from $0.10 to the millions of dollars, as the seller you are on the hook for the entire amount.
In real life these things explode all the time. Fortunately big banks have a helpful cheat code in being deemed “too big to fail.” They can just get the government to bail them out by simply rebooting the economy and soaking the poors in the process. Democracy in action!
In blockchain programming there’s no such cheat codes allowing you to fake it, so building on-chain options require you to be crafty in how you engineer things.
As it turns out, the team behind Dopex are geniuses. Here’s a high level overview of their architecture, the full description of which is beyond the scope of this article.
They’ve been running their options game on the prices of crypto assets for a few epochs now, mercifully without any catastrophic explosions.
Just yesterday, they announced the launch of Interest Rate Options, allowing degens to gamble on changes to Curve pools’ interest rates. They expect these strategies will permanently affect the landscape of the Curve Wars.
They’ve published both non-technical and technical papers on the mechanics of rate options, both of which are quite accessible to casual readers and mandatory reading. I’ll be excerpting from them liberally for the remainder of this article.
With Dopex’s Interest Rate Options (IROs), users can speculate on changes to your favorite Curve pools’ rewards APY. They’re launching first with the MIM pool, with plans to roll out more pools as users get the hang of it:
MIM is earning 2.7% to 6.8% boosted APY. If you think this number is going to fluctuate significantly in the next week, you have some strategies available to capitalize on these changes:
Think of it simply as allowing users to bet on the outcome of the Curve Wars each week. This can be extremely useful for players in the Curve Wars. Their posts outline three potential use cases: hedging, speculation, and strategic vote allocation.
Hedging can allow LPs to lock in a specific interest rate instead of having to worry about pool weights shifting as the Curve Wars rage. Here’s how:
Similarly, speculators can use similar strategies to bet on the outcome of Curve gauge weight votes.
Finally, for strategic vote allocation, Curve whales with access to large chunks of veCRV can simply move their votes and make money on the swing.
“Unfair?” you might say. Yes, life’s always better for the extremely wealthy looking to get wealthier. Some would call it “insider trading,” others would call it a “free market.” A whale might simply call it “free money lying on the table.”
So the prospects of Dopex’s IROs and as such the Curve Wars hinge on two simple questions:
Do you expect one whale will be greedy enough to pick up this free money?
Will other whales follow suit?
If so, you might be able to piece together some idea of where the Curve Wars are headed.
As you can see from this article, options are a tricky business. Impressive work by the Dopex team to not only build out a working options platform, but also to productize it in such a way that is highly useful to the active Curve Wars.
For further research, one additional paper worth is their primer on Atlantic options, which really unlocks the value of the Dopex platform as a foundational layer of DeFi.
Another important protocol to research is Plutus DAO, which is shaping up to be the Convex of Dopex. They’re also shipping quite actively!
For all these reasons, I count myself as a believer in the potential of Dopex. As they call out themselves in their article, there’s lots of whingers bemoaning the lack of innovation in DeFi. Yet there’s really a ton of active innovation if you’re willing to look past the first page of CoinGecko. It’s largely a question of when the broader market catches up.
As a non-genius, my default strategy is to simply give my money to geniuses and pray they’re not smart enough to simply steal it for themselves. Hence my bullishness on $CRV, which frequently applies advanced mathematics to their various products. (Result: down 85%).
Risk factors with Dopex are of course substantial. Consider everything here to be educational and not financial advice. Note that poorly architected options platforms carry major risks of exploding. More time may tell if they are at risk. Also, you’re gambling with imaginary 1s and 0s dreamed up by kids living in their parents’ basements. So be super careful lest you get burned.
Final addendum…
When you’re trying to decide if there’s at least one whale willing to pick up the free money, it’s worth noting that mega-whale Tetranode holds a large stash of $CRV/$CVX, and also happens to be a Dopex investor and fierce advocate.
He also penned this wonderful endorsement:
This endorsement happened to drop just a few hours before we dropped this article pumping his bags. What a wonderful “coincidence.”
Disclaimers! Author has exposure to assets mentioned including $MIM, $DPX, and $rDPX.
The timing of Tetra’s endorsement actually was a complete coincidence. Author has never taken compensation by anybody for these articles, except paid subscribers (whose money is strictly to support PAC DAO crypto activism).
But since nobody would believe it anyway, let’s just go for maximum kek.
Thanks also to stablefren Degen Spartan for the shoutout, though this is arguably redundant with the Tetra endorsement.
