The Edge Podcast - Dopex V2: Scaling On-chain Options - Revelo Intel

The Edge Podcast – Dopex V2: Scaling On-chain Options

In this episode of The Edge Podcast which took place on November 17, 2023, DeFi Dad and Nomatic hosted BossImp from Dopex to discuss Dopex’s Journey, innovations, challenges, future strategies, crypto options trading, and more! Read our notes below to learn more.

Background

DeFi Dad (Host) – Host of Edge Podcast 

Nomatic (Host) – Co-Host of Edge Podcast

Bosslmp (Guest) – an anonymous advisor to Dopex

Dopex – a decentralized Options exchange that uses blockchain technology to provide permissionless and non-custodial access to Options trading

Evolution of Dopex in DeFi

  • DeFiDad introduces Bosslmp, an anonymous advisor to Dopex with a background in traditional finance focusing on risk management, interest rate derivatives, FX investment banking, and options in FinTech. Bosslmp is also a CFA charter holder, a DeFi trader, and an investor, and has been an advisor for three years.
  • DeFiDad discusses Dopex’s significance during the last bull run in the crypto market and its innovative contributions to the options sector. He mentions the recent bear market in crypto and the resurgence of interest in DeFi, suggesting Dopex V2 as an important component in the evolving DeFi sector.
  • Bosslmp recounts his introduction to crypto in 2013 through a coworker, leading to his first experience of a rug pull. He explains his return to crypto in late 2020, initially through liquidity provision (LP) and then deeper involvement in blockchain projects and risk management. He mentions his work in Jones DAO as an option strategist and his involvement with Dopex from its early stages as an investor to eventually joining the team.
  • DeFiDad expresses interest in Bosslmp’s background, particularly his early experience with Bitcoin and the importance of the trustless nature of DeFi. He asks if Bosslmp ever managed to track down the coworker who disappeared with his Bitcoin.
  • Bosslmp explains his unsuccessful attempts to track down the coworker who took his Bitcoin. He reflects on the trust he had in this person and the loss he experienced but also notes his recovery in the crypto space since then.
  • Nomatic recognizes the anticipation for options to gain traction in crypto, comparing it to the significant role of derivatives in traditional finance, and seeks Bosslmp’s perspective on what might be inhibiting their widespread adoption in the crypto market.
  • Bosslmp says that the complexity of options trading is a key point, contrasting it with perps which are simpler and more straightforward. He mentions that options, with features like maturity and strike, are more complicated and often misunderstood in terms of their volatility and management. Bosslmp says that despite studying options academically and in CFA, it took him practical trading experience to fully grasp them.
  • Bosslmp identifies capital efficiency as a major flaw in on-chain options trading. He says that market makers were disinterested due to low returns on investment relative to risk. He explains that the requirement for full collateralization limited the development of options on-chain. 
  • Bosslmp says that the bear market further impacted on-chain options due to these capital efficiency issues. He suggests that on-chain options could compete with centralized exchanges if they improve capital efficiency, leverage security, and offer competitive fees.
  • DeFiDad agrees with Bosslmp, recalling the initial excitement and subsequent challenges faced by protocols like Dopex. He recognizes the problem of capital efficiency and the uphill battle against centralized exchanges. DeFiDad expresses optimism about the potential for DeFi to reduce fees prevalent in centralized exchanges.
  • Bosslmp discusses the evolution of Dopex, starting from its initial Single-Staking Option Vault (SSOV) design, where users deposited assets and received incentives. He notes the limitations of this system, such as the requirement for full collateral before selling an option and the inability to sell options before maturity. 
  • Bosslmp mentions that liquidity issues led to challenges, with centralized exchanges becoming more appealing to option buyers. He talks about other products developed by Dopex, like betting on volatility and short-term, high-leverage scalps. Bosslmp says these projects didn’t perform well due to fragmented liquidity and suggests that consolidating products and liquidity might have improved their usage.

Exploring Dopex V2’s CLAMM Options and rDPX V2

  • Nomatic asks for a detailed explanation of the Dopex V2’s main components, namely CLAMM options, AMM, and rDPX V2.
  • BossImp talks about Uniswap V3 to understand the foundation of CLAMM options. He describes how liquidity is deposited in a specific price range on Uniswap V3, divided into ticks, and how these ticks react to market price movements, converting assets based on price changes.
  • BossImp explains call options, describing them as the right to buy an asset at a specified price and date. He uses an example to show how profits are made when the market price moves favorably about the option’s strike price.
  • He relates this back to Uniswap V3, explaining how Dopex replicates the payoff of a call option using Uniswap V3’s liquidity ticks. He mentions how this benefits both the liquidity provider (who receives premiums) and the option buyer (who gains from the option’s performance).
  • BossImp explains the advantages of the CLAMM system, highlighting its ability to utilize a broader range of ticks for selling options. This maximizes yield by generating option premiums for ticks that would otherwise be inactive in Uniswap V3, leading to potentially higher overall returns.
  • Nomatic summarizes the explanation, noting that CLAMM offers higher potential yields than just the Uniswap V3 LP position, by utilizing liquidity for option trading. He asks how this would be advantageous from a user perspective.
  • BossImp says that the benefit of CLAMM depends on market volume. He explains that while some days might yield higher fees from Uniswap V3 due to high volume, on average, CLAMM provides more consistent and potentially higher returns. This is due to premiums earned on a broader range of ticks and increased liquidity utilization, even for ticks outside of the active trading range.
  • Nomatic asks if Bosslmp is engaging with major Uniswap V3 LPs and if they’ve shown interest or tested the new system, highlighting its appeal to Uniswap V3 LPs.
  • Bosslmp says that while their initial Minimum Viable Product saw limited use, they are partnering with entities like Orange Finance and market makers for liquidity provision. He notes ongoing discussions with unnamed projects to leverage various types of liquidity, including Uniswap V3, for integration into their platform.
  • Bosslmp explains Dopex’s ability to integrate complex decentralized exchange liquidity and its value for users managing property companies. He shares that market makers are enthusiastic about the project due to its potential to optimize payoffs and enhance liquidity management.
  • DeFiDad asks Bosslmp to identify the ideal users for their product, specifically mentioning characteristics of Uniswap V3 LPs who might be most interested.
  • Bosslmp identifies two main user groups: active and passive. He explains that active users with strategies on Uniswap V3, such as those using delta-neutral strategies with Aave, would find the platform beneficial. Passive users, like those seeking superior yields, would also benefit. He gives an example of a strategy involving depositing in Uniswap V3 and using options to manage risk.
  • Nomatic asks about the timeline for CLAMM and strategies for attracting early users and liquidity.
  • Bosslmp says that they secured 1.5 million $ARB from an STIP, with a portion allocated for incentivizing users on CLAMM. 
  • Bosslmp explains their plan to offer high APRs for three months on assets like $ETH, $CRV, and $BTC to users depositing their LP Uniswap V3 with them. He expects to attract both liquidity providers and option buyers, hoping to demonstrate the profitability of their system and establish a loyal user base.

CLAMM’s Design, Strategy, and Future

  • DeFiDad asks about the shortcomings of the new design for CLAMM, specifically regarding its pool-based mechanics and potential drawbacks.
  • Bosslmp recognizes a major drawback of CLAMM’s design: the pool-based system where deposits are pooled, and liquidity might be locked until the option is settled. He mentions they are working on a solution for this issue.
  • Bosslmp explains their future strategy includes targeting certain utilization rates, similar to Aave’s model, to prevent 100% utilization and allow people to always withdraw. He says that incentives and high premiums will encourage liquidity deposits.
  • Bosslmp adds that they are aware of CLAMM’s shortcomings and are working to iterate and improve it. He highlights that despite these issues, CLAMM remains a great product that is attractive for those aligned with its long-term vision.
  • DeFiDad asks about the expiry dates for future options through CLAMM and potential support for other crypto assets.
  • Bosslmp says that initially, CLAMM will have a maximum maturity of 24 hours, with plans to extend to one week and one month. He says that the first markets will be $ETH-$USDC, $ARB-$USDC, and $BTC-$USDC and that more assets might be added based on demand and liquidity.
  • Bosslmp also hints at ongoing discussions with other protocols to potentially include their tokens in CLAMM, suggesting a flexible and expansive future for the platform.
  • DeFiDad expresses excitement about the potential for offering options markets for long-tail assets, comparing it to the versatility of Uniswap’s liquidity pools.
  • Bosslmp says that to build complex financial products, one must start with a simple, solid base. He sees CLAMM and Options AMM as these bases, allowing for the creation of more structured and tailored financial products. He envisions a future where users can build upon these bases, adding their unique elements to the DeFi space.
  • Bosslmp explains the AMM’s focus on capital vicinity, highlighting its efficiency for active traders who want to sell options immediately and control their payoffs. He says the AMM allows for complex strategies involving simultaneous buying and selling of options.
  • He describes how traders can manage their risks and margin requirements using portfolio margin, mentioning the option of liquidation and liquidity dependencies for increased risk strategies.
  • Bosslmp says that the option AMM caters to sophisticated traders seeking to implement complex strategies. He highlights its role in attracting volume and market makers through matching buy and sell orders, thus reducing exchange risk while earning fees.
  • He mentions plans to enhance liquidity by relying partly on CLAMM liquidity and integrating a portfolio margin system distinct from clam.
  • Nomatic finds the concept of borrowing against passive CLAMM deposits particularly intriguing, noting it expands options for users. He summarizes the CLAMM as suitable for passive users seeking better yield, while the option AMM targets sophisticated users and market makers, highlighting the synergy between the two products.
  • Bosslmp observes many players in the space using Uniswap V3-based strategies but differentiates his approach by using tick-level strategies. He recognizes a trend towards portfolio margin for capital efficiency and distinguishes his protocol’s unique use of tick usage.
  • Bosslmp comments on the challenges of the vault system in market making, pointing out the necessity of financial expertise and tools. He says that many market makers profit more from exchange rebates and fee adjustments in other business areas than from market making itself.

Dopex Ecosystem Updates: $rDPX and $DPX 

  • Nomatic asks Bosslmp about the changes for $rDPX holders in the recent medium post, expressing personal interest as an $rDPX holder.
  • Bosslmp explains that $rDPX, initially a rebate token in the Dopex ecosystem, aids option writers by compensating losses. He explains a new bonding mechanism for $rDPX, involving a 25% $rGPX and 75% bond, yielding a receipt token. This token allows holders to earn yield from various sources, including incentivizing the Curve pool. The aim is to use $rDPX to compensate option sellers, encouraging bonding as loss compensation.
  • Bosslmp mentions potential returns for $rDPX holders, including a minimum 12% return on $ETH. He talks about redeeming the receipt token for $rDPX, describing the multiple rewards for receipt token holders and their role in the Dopex V2 ecosystem.
  • Nomatic asks about the transformation of the $DPX token into a vote escrow, ve token style, and its role in fee capture.
  • Nomatic expresses surprise about the existence of $veDPX, focusing mainly on $rDPX V2.
  • Bosslmp advises on the advantages of both $rDPX and $DPX, suggesting exposure to both for different risk and reward balances. He highlights the systems’ distinct yet synergistic nature and their potential performance in the coming months.
  • DeFiDad also mentions a Medium post about Dopex V2 and suggests following Dopex on Twitter and joining their Discord. 
  • Bosslmp gives a heads-up about upcoming releases, including the CLAMM and the Dopex in the next 10-20 days, and the option AMM in Q1 2024. He discusses plans to develop the Dopex ecosystem, increase liquidity, partner with more protocols, and consider new features for the second half of 2024. 
  • Although future plans are not yet finalized, he hints at more tokens, potential presence on different blockchains, and a variety of products. He reflects on the product development in 2023 and plans to continue or increase this pace in 2024, depending on market conditions.

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Show Information

Medium: YouTube (Video)

Show: DeFi Dad (The Edge Podcast)

Show Title: Dopex V2: Scaling On-chain Options

Show Date: November 17, 2023