Tokenomics 101: Dopex
The tokenomics of a decentralised options exchange - $DPX & $rDPX
For this article, we partnered up with Genesis Block who will be providing an overall protocol analysis and, as always, we’ll be providing the juicy tokenomic analysis. If you’re not familiar with what Dopex offers and how it works, see their analysis here. Let’s get into it!
Dopex has a fairly complicated token flow. It uses a dual token system consisting of DPX and rDPX, and also employs two other tokens – dbrDPX and dpxETH. Overall, it is made up of multiple parts which by themselves are simple, but put together require a bit of understanding, so bear with us.
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A zoomable version can be found here
Dopex uses a dual token system, and we will look at the utility of each later on in the article. Being an options exchange, it makes sense to start our journey of the token flow from the POV of the options writers themselves. They can create Covered Calls or Cash Secured Puts by locking the required capital into a Single Staking Option Vault (SSOV) and selecting the strike price. SSOVs allow depositors to earn yield on their locked capital from premiums paid by buyers, vault incentives and LP rewards (for puts that require 2CRV deposits), in turn making depositing assets more enticing for writers but at the same time this also means that the position takes on more risk. In the Dopex system, writers are essentially liquidity providers (LPs).
These options can then be bought by users who have to pay a service fee and premium, with the former going to veDPX holders and the latter going directly to the Options writers. The yield options writers can expect from premiums paid by buyers is proportional to how close to ‘at the money’ (ATM) strikes are being locked into. The reason for this is that the closer the option is to be ATM the less risk the buyer is taking on and thus the higher the price.
One risk that writers take on is that of their contracts finishing in the money (ITM). If this happens, the contract is deemed profitable and will likely be executed by the contract buyer, meaning that they will turn a profit by being able to acquire an asset cheaply or sell an asset at a higher value than market value, both at the expense of the option's writer. Thus, the writer incurs a loss. The way Dopex compensates these losses is via their rebate token, rDPX, and the magnitude of the rebate depends on the Rebate Percentage of the particular vault from which losses were incurred – each vault has a risk profile and thus governance determines what percentage of losses incurred should receive a rebate. It should be noted that the loss that the writer incurs is more akin to impermanent loss since writers don’t lose any USD notional value, however, they do have a chance of losing a percentage of their staked assets.
rDPX is distributed to the writers in a bonded form, known as dbrDPX. The only method in which the value of the rebate can be realised is via the standard bonding procedure, with the value of dbrDPX representing the required $rDPX to be bonded along with ETH. As we will see, these bonded assets serve as the backing for Dopex’s synthetic assets, such as dpxETH.
Now let's look at the other side of things. Users can bond assets in order to mint dpxETH, as mentioned above. We will dive into the utility of each of these tokens later on (i.e., why the user would even want to hold dpxETH in the first place). The reason a user would bond assets to mint dpxETH rather than just buying it on the market, however, is due to the discount they can get via bonding. If you’re interested in reading about how discounts are calculated in Dopex, see the Bonding as applied to rDPX section here.
Dopex uses a similar bonding mechanism as pioneered by Olympus. Users have to bond 75% ETH, 25% worth of rDPX and the premium (i.e the cost of the option) from one 25% Out of The Money (OTM) $rDPX ETH-denominated perpetual put that covers the $rDPX amount.
This is best understood with an example: the user wishes to bond $100. Let’s assume that the $rDPX is worth $100, $ETH is worth $1000 and the premium for the rDPX-ETH put is $5. This means that the user would have to provide the $5 premium for the put, $71.25 worth of ETH (75%), $23.75 worth of rDPX (25%).
Note that this premium goes to the writer of the ETH-denominated perp put. These bonded assets are handed off to the Liquidity Provider Module where some assets get directed to the permissioned AMM and the rest go back to the Treasury as PoL, which in turn forms the backing for the dpxETH that the user initially bonded their assets for. If you’re interested in reading about how assets get split between the AMM and treasury, see the Liquidity Provider Management section here.
As assets get bonded, an equal USD value of rDPX gets burned from the un-circulating supply that resides within the Treasury.
Then we have the Permissioned AMM. This is a fully protocol-owned, gated access AMM – only whitelisted entities can be LPs, and currently, this is restricted to the Treasury. This AMM has a 5% sell side fee on $rDPX, with the intention of acting as an incentive alignment mechanism since users do not want to incur high sell fees so they are encouraged to bond rather than sell their rDPX, thus growing Dopex’s PoL.
Peg Stability Module
One thing that isn’t depicted in the token flow diagram is the Peg Stability Module (PSM). This is responsible for keeping the synthetic assets, currently only dpxETH, at peg. There are 3 scenarios that the PSM accounts for:
Scenario 1: $dpxETH > 1.01 $ETH
In this scenario, $dpxETH can be minted with 100% ETH. This enables arbitrage, resulting in the rebalancing of the pool and the peg being regained.
Scenario 2: $dpxETH < 0.99 $ETH
The v2 Treasury has a privileged function to swap $ETH for $dpxETH on Curve. This contract can only be called by veDPX holders with > 1k veDPX and specified admin addresses. This again enables arbitrage, which rebalances the pool and allows the peg to be regained.
Scenario 3: $dpxETH < 0.985 $ETH
veDPX holders with at least 1k veDPX can redeem $dpxETH for its underlying backing in the form of 75% $ETH and 25% rDPX. This means that users can buy underpriced dpxETH on Curve and redeem it for 1 ETH worth of $rDPX and $ETH in a 25:75 ratio, again allowing arbitrage which results in the rebalancing of the pool and the regaining of the peg.
Dopex uses a dual token system (DPX and rDPX) and also offers synthetic assets (dpxETH). Let’s dive into the utility of each.
$DPX is the primary governance token of the platform. Voting rights include being able to change rewards rebates for SSOVs, SSOV DPX emissions distribution, and the strike threshold for options. Dopex has also employed the veToken model, meaning that all of the above is only possible if the user locks their DPX, in turn receiving veDPX, the token with the governance rights.
Furthermore, veDPX holders partake in fee share collection from service fees that options buyers have to pay when executing an ITM contract, but there’s a twist: upon payment, these service fees are denominated in whatever asset the SSOV is designed for (i.e., if a user buys stETH, the service fee will also be denominated in stETH), which then gets swapped for DPX on the backend and distributed to veDPX holders. Essentially, veDPX holders are growing their share of the platform, not accruing fees per se. This also means that the service fee being swapped for DPX acts as a form of buyback mechanism.
$rDPX is Dopex’s rebate token, it is issued in the form of dbrDPX (see Rebate Mechanism section above for more). The interesting aspect of this design choice is that rDPX never really hits the market since the only practical choice left to the options writers who incurred the loss is to bond it. This means that sell pressure is offset from rDPX. It also means that there is likely to be more sell pressure on dpxETH, which puts more pressure on the PSM module. The reason is that an options writer who incurs losses and receives dbrDPX as rebate will bond it, receive dpxETH and sell this on the market since they wish to recover some of the value they lost. It should be noted that if they wish to hold ETH and dpxETH is stable and provides yield via Curve then maybe they will be happy in holding dpxETH, but this is speculative.
rDPX is also used as collateral for, and required to mint, synthetic assets (dpxETH). Those of you with a keen eye may be quick to point out that having a volatile token be part of your synthetic asset backing is likely high risk, and you’d be right. The clever solution for this was to allow for a type of value backstop for rDPX backing of dpxETH. This is the reason for the rDPX ETH-denominated perpetual puts pool, as the value of rDPX decreases, the value of the rDPX-ETH put increases, thus it allows for the backstop of $rDPX to the collateral value of the purchased put.
Perpetual puts will target 25% OTM $rDPX in $ETH terms, meaning that the minimum backing of each $dpxETH will be 93.75% $ETH.
dpxETH is the first synthetic asset issued by Dopex. It is pegged to ETH, derives its price from AMM mechanics (i.e., supply & demand of liquidity on market), and is not redeemable for its underlying assets (unless there is a Scenario 3 de-peg).
The goal and reason for creating a synthetic asset is for it to be used as a collateral type in Dopex products, notably Call SSOVs, Options perpetuals, Options Scalps, and Inverse Straddles.
Distribution and Unlocks
Operational Allocation: 17%
Distributed across 5 years. This allocation is used to initially handle governance, incentivize the development of community suggestions, and help grow the platform with newer features/upgrades and account for other operational costs.
Farming (Liquidity Mining): 15%
A farming period is set to 2 years
Platform Rewards: 30%
Distributed over a period of approximately 5 years. These rewards will incentivize the use and upkeep of the Dopex platform.
Founder’s Allocation: 12%
2.4% initially staked in liquidity pools
9.6% vested for 2 years distributed using a drip system via a smart contract
Early Investors & Token Sale: 26%
Early Investors: 11%
50% Vested over 6 months
Token Sale: 15%
This distribution has a low allocation to founder's of which an average vesting period applies;, this is good especially given the pseudonymous nature of the team. However, even though the early investor's allocation is lower than the industry standard, it has a less favourable vesting period in that 50% is unlocked at TGE and the rest is only vested over 6 months. This may add early sell pressure on DPX and may lead to misaligned incentives.
rDPX does not have a fixed emission schedule since it is minted and distributed as compensation for any losses incurred by options writers, the magnitude of this compensation depends on the vault in which the loss occurred and what compensation percentage has been set to said vault via governance. This means that rDPX emissions are non-linear and somewhat dependent on market forces.
dpxETH is minted upon users bonding assets. Note that as the treasury grows, more bonds can be issued.
Value creation and value capture
The value Dopex creates is that of bringing one of the most profitable options platforms to the crypto market via their interesting design, which allows for increased cost efficiency, attractive risk profiles vs. simply holding and even LPing a token, and potential of higher ROI (if you know what you’re doing). As the DeFi space grows and options become more attractive, Dopex could capture a considerable portion of this growth.
This value is captured at two points within the system:
The OHM-like bonding allows for the accrual of PoL.
rDPX price appreciation due to the side-stepping of rebate sell pressure and favourable burn mechanic. Furthermore, since rDPX is linked to dpxETH minting, which is to be used in a range of Dopex products, it also tags along for the ride and maps Dopex’s product demand via bonding to an extent.
Lastly, there is veDPX (locked DPX) which has a less appealing value capture profile since it is primarily used in governance.
As mentioned in the DPX Utility section above, options buyers have to pay a service fee which gets converted to DPX and is then distributed to veDPX holders. This market buyback is a form of monetary policy and can be considered demand. Similarly, demand for DPX can come from users who are looking to increase their ownership of the platform via said distribution.
Furthermore, when dpxETH is experiencing a major de-peg of <0.85 ETH (see Scenario 3 in Peg Stability Module section), users who hold more than 1k veDPX can call contracts to perform arbitrage via the PSM. Thus, demand for DPX can come from users who wish to arbitrage the peg. Granted, this is a weak demand driver since if the incentive to hold a large quantity of DPX relies on dpxETH depegging frequently (i.e., performing poorly) something is amiss.
rDPX has quite a curious demand profile. It is a rebate token, but since sell pressure is offset due to it being distributed in the form of dbrDPX it takes less of a hit on the holdability front. It is also required to mint dpxETH via bonding, meaning that in some regard its demand is tied to the demand for dpxETH and how well the peg can be maintained (since in a major de-peg it can be redeemed as collateral and thus be sold). Lastly, an equal USD value of rDPX is burned upon bonding, which in turn reduces max supply. This is a meme-worthy point.
In the initial stages of its rollout, its utility to users will simply be to mine liquidity rewards on Curve. Thus anyone looking to farm yield on their ETH may deem holding dpxETH an interesting option. However, as mentioned above the goal is for it to become a major collateral type in Dopex products.
rDPX Supply & Demand Dynamic
There currently isn't a way for rDPX to actually hit the market since losses are paid in dbrDPX which can only be bonded along with ETH, and the fact that upon bonding assets an equal USD value is burned from the un-circulating supply in the treasury. Although this may sound like perfection to rDPX maxis, we find ourselves asking how dpxETH is to be minted if rDPX is in low supply on the market. It should be noted that as the price of rDPX increases due to lower circulating supply, less will be required to bond;, however, this may result in slippage problems for larger buys and could be a bottleneck for dpxETH growth. This is an easy fix as demand can be estimated and rDPX could be issued at a favourable rate so as to not hinder dpxETH growth. It seems like the goal of rDPX has shifted from rebate token to that of synthetic bootstrapping token. We assume that dpxETH won’t be the last synth that Dopex issues, thus this dynamic has to be kept in check so as to not result in any undesirable forced decisions (say, voting to expand rDPX supply to bootstrap another synth) later down the road.
There must always be a point at which value exits the system, and if there isn’t, the system is a categorical ponzi. In Dopex, the permissioned AMM is gearing up to be the most liquid place to trade rDPX/ETH. Selling rDPX on this AMM incurs a 5% fee, and this is done to incentivise the bonding of this rDPX rather than selling it. However, if the user desires to exit their position they are essentially being incentivised to translate this sell pressure to dpxETH since bonding rDPX along with ETH mints dpxETH which the user will sell on the market.
It is too early to tell if this value exit vector is better or worse than having normal sell side pressure on rDPX. If the sell side fee incurred upon selling rDPX is changeable by governance, then we assume we will find an equilibrium at which this dynamic is sustainable. For now, it remains speculative.
Options writers get compensated for losses in the form of dbrDPX (bonded rDPX). In order to actually realise the value of the rebate they have to bond ETH along with the dbrDPX representing the rDPX portion of the bond. This again translates sell pressure to dpxETH. Furthermore, dpxETH mint rate is dependent on the backing within the treasury, if there is not enough backing then dpxETH cannot be minted. This aligns rather concerningly with Scenarios 2 & 3 in PSM, in that if a de-peg of dpxETH occurs, the treasury is used to rebalance the pools on Curve and regain peg. All-in-all, this means that if this were to happen at the same time as a group of options writers finding their collateral being depleted by ITM options buyers executing upon their right, they may have issues being able to redeem the value in the rebate. Again, this is currently speculative and requires further investigation.
DPX Fee Share
As mentioned above, veDPX holders receive DPX distribution from the service fees paid by options buyers. This DPX buy back essentially re-allocates DPX to holders with strong hands. This makes sense. However, as the real yield movement has shown, yields in assets that are denominated in, say ETH, are quite attractive to users and are a considerable demand driver, meaning that there are two types of users who could see locking DPX as an attractive strategy; (1) those wishing to accumulate more DPX and (2) those wanting to earn ETH yield.
Thus, if service fees were denominated in ETH, veDPX holders who wish to accumulate more DPX would simply buy it themselves, and at the same time the fee share demand driver would entice some users to simply lock DPX to accrue ETH.
The current system feels like a missed opportunity to capture both types of users.
All in all, Dopex is on a promising path. They have some interesting products that look to help their users considerably and they are slowly (but surely) expanding into new realms with their recent rDPX v2 tokenomics update and their plans with dpxETH are ambitious to say the least.
One interesting aspect of the system that they’ve created is that, even though the tokenomic model is quite complex, it is shielded from the end user (i.e., they don’t have to worry about how it works). On the other hand, they seem to be playing heavily into dpxETH being a key component of their ecosystem (collateral token, essentially becoming the new rebate token, etc). They have a decent amount of fail-safes and backstops built in for a de-peg not to be a problem, but only time will tell.
Tokenomics Newsletter is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.