rDPX-ETH Perpetual Put Pool
Whilst $dpxETH intends to maintain parity with $ETH, the backing from bonded PoL is composed of 25% $rDPX and 75% $ETH. Since $rDPX may fluctuate in $ETH value, $dpxETH's total $ETH backing will also fluctuate with these changes.
As a result, bonders must also bond the premium for a 25% OTM rDPX-ETH perpetual put. Beyond the initial epoch, perpetual puts will be renewed with premiums paid as a funding rate by the v2 Treasury. This provides a minimum backstop value for the $rDPX component of $dpxETH to prevent a $LUNA-esque death spiral during a black-swan event.
Puts are a type of option that are used to hedge downside volatility for an underlying asset (in our case $rDPX). When the price of the asset falls below the selected strike price, the put holder earns the difference in settlement.
Combining a long position and a put creates a protective put strategy - as the price falls below the strike price, your losses in your long position is perfectly offset by your gains in your put position. This creates a 'floor price' for the asset you are holding at the chosen strike price.
The protective put mechanism is the basis for the rDPX-ETH perpetual puts on the $rDPX component of $dpxETH. Recall that $dpxETH is collateralized by:
- 25% $rDPX
- 75% $ETH
- 25% OTM rDPX-ETH Perpetual Puts on the value of $rDPX bonded
In the absence of the perpetual puts, the backing of $dpxETH as $rDPX's price changes can be visualized below:
As $rDPX's $ETH value increases, $dpxETH will become increasingly over-collateralized. In the inverse scenario, $dpxETH's collateral value can fall as low as 75% if $rDPX is $0.
The 25% OTM rDPX-ETH perpetual puts prevent such a black-swan event by providing a back-stop value for $rDPX collateral. A protective put strategy combining the perpetual puts and $rDPX can be visualised below:
Put protection backstops $rDPX's price at 75% of its $ETH value. Since $dpxETH is composed of 25% $rDPX, the minimum collateral backing is 18.75% (25% * 75%).
Since the remaining 75% of $dpxETH's collateral consists of $ETH, the minimum total $ETH backing of $dpxETH is 93.75% (18.75% + 75%).
Notably, upside potential of $rDPX is maintained which allows $dpxETH to become over-collateralized in an inverse scenario where $rDPX increases in value.
rDPX-ETH Perpetual Put Pool liquidity allows users to deposit $ETH and write 25% OTM $ETH-denominated $rDPX perpetual puts. Strike price is determined at the time liquidity is utilized, taken as 75% of price at utilization (i.e. 25% OTM).
Each epoch lasts for 1 month - as positions roll into the next epoch, a new strike price will be determined based on $rDPX's mark price.
Writers receive three forms of incentives:
- 1.Premium for the first epoch paid by bonders in $ETH
- 2.Funding for every epoch thereafter paid by the rDPX v2 Treasury in $ETH
- 3.Share in 3k $DPX/year for the first 3 years
$dpxETH's circulating supply will target 4 times the Perpetual Put Pool's liquidity at a maximum to ensure there is sufficient liquidity to backstop its $rDPX backing.
Written Perpetual Put positions will be represented by an ERC-721 token, allowing writers to exit their positions OTC.
Provided that there is sufficient liquidity in the rDPX-ETH Perpetual Put Pool to support outstanding $dpxETH supply, put writers may be eligible to withdraw their liquidity.
Last modified 3mo ago