$rDPX Bull Thesis (Pt. 1): Undervalued or Misunderstood?
By: Team Dopex
Tags: Decentralized Finance, Decentralized Exchange, Dopex, Rdpx, Options Trading

The rDPX Bull Thesis. The article, the myth, the soon-to-be legend.

Turns out Bella locking me in a room until I finished worked out.

This article will cover what rDPX is, the theory behind it, why it exists/its purpose, its advantages, and possible disadvantages. It will also clear up as many questions regarding rDPX that have been asked.

In short, I will give you my unbiased perspective on why rDPX is extremely undervalued. Time to fade the intro, let’s get to the alpha.

rDPX Mafia NFT by Psytama, the link is at the bottom of the article

What is rDPX?

“rDPX (Dopex Rebate Token) is a token minted and distributed for any losses incurred by Dopex pool participants. The number of tokens minted is determined based on the net value of losses incurred at the end of a pool’s epoch. A percentage of the losses, which is determined by governance, is minted for all pool participants after the epoch has ended.” — see the Dopex documentation

That’s the watered-down description of rDPX but there is a lot more to it. Before we go any further we need to understand why Dopex has a dual-token model in the first place.

Dopex makes use of two tokens for the protocol to work in a synergistic manner:

DPX (Dopex Governance Token) is the Dopex vanilla governance and protocol fee accrual token

is the Dopex vanilla governance and protocol fee accrual token rDPX (Dopex Rebate Token) is the Dopex rebate token and is also used for protocol usage

The Dual-Token Model

Considering the tail risk of writing options, it was mandatory for Dopex to have rebates for liquidity providers. Initially, DPX was going to be used for both governance and for rebates; however after careful consideration and realizing that this could lead to long-term scalability issues and unpredictability at a protocol level — Dopex adopted a dual token model.

With the dual-token model, we are able to separate both the functions and simplify our governance and fee collection into one token while having the other purely for rebates, as well as synth/margin collateral, liquidity mining, and more features in the future.

How Are Rebates Calculated?

Rebates are calculated based on the total value of assets in USD along with premiums collected after an epoch versus the total value of assets in USD before the epoch. Rebate tokens are minted based on the current TWAP of rDPX on Uniswap. The rebate percentage can be changed via a governance proposal. Initially, the loss rebate percentage will be 30%.

What Gives rDPX Intrinsic Value?

So that’s pretty straightforward, right? The dual token model ensures protocol stability and genuine utility for both DPX and rDPX. When the Dopex tokenomics were published, many had no definitive idea of what would happen in practice, one could say we were also skeptical.

After the public sale, we did not expect rDPX to be trading over $1, say $3 maximum. Safe to say rDPX has outperformed our initial expectations for sure with an all-time high in the $30-$36 range.

It may be a case of unit bias, or people seeing potential, maybe both. Regardless, it’s clear to see that, at least so far — the theory is playing out positively.

rDPX 1D Chart

For some perspective on farming rewards, above is the rDPX farming emissions schedule. In total 2 million rDPX will be distributed via farming rewards over a 104 week period, as of today we are currently in weeks 9–12.

Many of the doubts regarding the value of rDPX stemmed from assumptions that “since rDPX has no supply cap, it, therefore, has no intrinsic value”.

We anticipated these doubts so we structured the tokenomics in a way that ensures that rDPX has intrinsic value and essentially stops pool participants who incur losses from dumping immediately into the market.

Let me unpack:

rDPX while having a no cap supply — has mechanisms in place to avoid it from being valueless while also providing intrinsic value to the token.

rDPX would be a fee requirement for future app layer additions to Dopex such as vaults. Dopex would support rDPX as collateral to borrow funds from margin to leverage option positions. rDPX would be used as collateral to mint synthetic assets, commodities, etc. which could further be used to create options for synthetic non-crypto assets. Fee accrual can be boosted via staking rDPX. There will be burn mechanisms throughout the protocol to have deflationary pressure on rDPX as well.

Those points are fairly vague, let’s unpack even further.

App-Layer Fee Requirements

To increase the utility of the rDPX token and give it value, we will be integrating it into multiple app layer additions in the future so there’s always going to be buy-pressure from the market as well as deflationary burns at a protocol level.

rDPX as collateral

Doubts

A lot of doubt around rDPX stems from the fact that people don’t believe it is truly valuable. For example, many people fear that if rDPX is adopted for collateral to mint synthetic assets, then there would be cases where rDPX would face extreme sell pressure due to cascading liquidations. The pressing question being — what would be the incentive to use rDPX as collateral for synthetic assets or to borrow funds from margin to leverage option positions? Won’t most people prefer to use DPX as collateral seeing as it guarantees value accrual, whereas rDPX would not?

rDPX does also guarantee value accrual but we will get to that a bit later.

In response to the above questions, you need to look at the total market cap of rDPX rather than the price. Remember that rDPX is only minted and distributed based on the net value of LOSSES incurred at the end of a pool’s epoch. This means that rDPX will only be distributed when option LPs incur net losses, i.e when traders are in net profit. This may or may not happen and even in the case that it does, there is a threshold on the amount minted in relation to the losses therefore rDPX won’t be minted to death.

Dopex Testnet Trading Competition Results

A good example of this in practice is that at the end of the Dopex testnet trading competition, option buyers were not in net-profit, meaning pool LPs incurred no losses — therefore the rDPX rebate mechanism was not initiated, and we can expect this to happen after launch as well, that’s not to say that traders will never be in net profit though.

However, giving values/estimates on how often traders would be in net profit and how often option LPs would incur losses resulting in the minting of rDPX is pretty much impossible at the moment, the market is unpredictable and anything could happen.

Hypothetical Example

Synthetic derivatives offer exposure to traditional markets apart from crypto and give rDPX tokens real value. All derivatives minted would need to be over-collateralized. This would mean for all value generated through derivatives, the rDPX token would require a minimum market capitalization to fully fund these derivatives.

Say, for example, $100m worth of derivatives are minted on Dopex and the minimum collateralization ratio for a synth is 250%, the rDPX token market cap would need to be a minimum of $250m to ensure these synths are fully collateralized and cannot be liquidated.

Moreover, the logic behind using rDPX for collateral is to ensure that there are use cases for rDPX and therefore give it intrinsic value. Like TztokChad said once, accumulating and LPing rDPX is a proxy play on the growth of the L2 derivatives market. I.e — if you’re bullish on DPX synths and margin usage growing, you would continuously LP and accumulate rDPX.

What if The Market is Highly Volatile?

The crypto market is infamous for being extremely volatile and when it comes to rDPX as a rebate token it's a valid concern that during periods of high volatility, option pool LPs may incur losses often, thus resulting in relatively large increases in the supply of rDPX.

Luckily to combat that, when deciding pricing vol, delegates will always take the DPX and rDPX distribution in mind, meaning they may quote a bit higher during high volatility periods to ensure LPs don’t go into loss, thus preventing excessive minting of rDPX and maintaining its intrinsic value.

Two more points to consider are:

1. DPX will also be used as collateral, however different collateralization limits will be in place to incentivize people to use rDPX as well/instead.

2. As synth and margin market size increase on Dopex, the rDPX market cap will likely scale to accommodate this growth.

With regards to the collateralization ratios of synths, i.e how the amount of rDPX used for collateral is determined — ratios will be similar to SNX synths and we will continuously iterate based on the real-world performance of rDPX.

How do you get the most out of rDPX?

This is the question that is most frequently asked and I believe it can be answered quite easily.

rDPX is a small microcap asset right now (mcap is only $7–$8m), and most would agree that it is still quite undervalued. The best strategy right now would be to accumulate rDPX and farm it instead of holding and speculating on the price.

Once the platform goes live on mainnet, you farm as well as provide liquidity to option pools. Why? Because this way you can ensure you absorb all rDPX inflation and still maintain your percentage of the total rDPX supply at all times. On top of that, you can sell your rDPX to users looking to use it for margin/synthetic collateral.

In conclusion

The dual token model means that although both DPX and rDPX need to accrue value, they are still synergistic in nature.

While DPX will be used to govern incentives distributed among all pools, rebate percentages, app layer decisions, etc. while collecting fees from the base protocol and apps built on it — rDPX will accrue value with synth/margin growth.

Once liquidity pools are live, we could implement synthetic futures by leveraging calls and puts. rDPX could be used for margin here as well.

Let's say we have up to 20x leverage on synthetic futures? With the rate at which regulatory bodies are cracking down on derivatives (mainly CEXs) we would be ensuring that we absorb a lot of the market share as more traders migrate on-chain.

When the platform goes live we can anticipate that rDPX and DPX will behave directly proportionally (we have already seen glimpses of this, i.e when the DPX price pumps, rDPX follows).