DIPs, which are effectively covered call (upside) or put (downside) positions, are created to give users more yield than HODLing in volatile markets. The instrument might be referred to as Dual Currency Deposits in conventional finance, most specifically foreign exchange. Even though these products are built on straightforward derivative structures, Dual Finance’s use of Upside DIPs and Downside DIPs has a number of important advantages over earlier iterations.

The execution of current SPPs is done so shoddily that there is a lot of slippage. The SPP administrators presently hold their own weekly Friday auctions in which they all offer 1-week options. Prior to the start of the auction, market participants are aware of the schedules, sizes, maturities, and strikes for each SPP. By selling volatility OTC or across screen markets before auctions, it is inevitable that these order flows will be front-run to some extent, which will lead to poorer pricing for users. Additionally, if you invest money in SPPs, you could not see a return until the first Friday after your deposit, when your investment is first put at risk. The current SPPs can also be manipulated, allowing you to take money out of a vault early to prevent losses if you know it is at risk of losing money. Ironically, consumers are responsible for paying set management fees for all of these bad habits.

Instead, Dual Finance uses a stated APY% and its stablecoin premium to stream DIP pricing. This quick access to liquidity is a critical product advancement. DIPs offer a live executable price that may be sold at any time, as opposed to all users pooling into a single strike, maturities, and price that is sold all at once. Due to this, Dual Finance uses streaming prices rather than weekly auctions to provide rolling subscription periods. In order to gain a spread, Dual Finance may take principle risk positions on the DIPs or outsource risk to partner market makers.

Users who can better time movements in the underlying asset and more quickly trade delta neutral positions thanks to the streaming nature of the DIP prices are able to better manage risk. In the end, users have a lot more control and flexibility over their yielding DIP placements than SPPs.

The APYs provided by SPPs are only a rough indication of their goal yield; the actual return will depend on changes in the underlying price over the auction period as well as the general level of volatility demanded for each underlying product. SPP just modifies the 1-week option strike prices to determine the target yield for auctions. Over time, this has the impact of lowering aggregate APYs and front end implied volatility. Furthermore, concentrating risk on a few strikes might lower their relative demand and raise pin risk.

The benefit of this approach is how straightforward it is. Dual Finance stresses that all users should be fully aware of the risks involved, and while if APY quotations will be offered, they are just meant to be helpful in comparing comparable premiums across strikes, maturities, products, and other protocols. In contrast to SPPs, users are also compensated for premium at the time of subscription. Given that it is unencumbered and may be used right away to redistribute yield farm somewhere, that instant liquidity has tremendous value.

To prevent the dDelta risk that exists in all cash settled SPPs, DIPs are physically settled. If they wish to keep their delta risk flat at expiry, both manufacturers and users must hedge the fixing price. In practice, this can occasionally be challenging, particularly when dealing with less liquid underlying items that are vulnerable to significant slippage, which affects the original option pricing. Since physical settlement does not require an index or oracle price feed to settle, which can be manipulated against users, it more easily widens the universe of assets that are eventually available. 

Staking Options (SO)

Staking Options, a ground-breaking liquidity incentive mechanism, is being implemented by Dual Finance. By offering free upside optionality on DUAL, SOs match the incentives of users, liquidity providers, and the treasury, in contrast to present yield farming and liquidity incentives, which grant users a percentage of the token rewards for free based on their share of a pool or other participation variables. Instead of free tokens, there are now free token options. By requiring rewards to come with longer term right-way skin in the game, SOs ameliorate any protocol tokenomics that artificially inflate the token value and deplete the treasury. Within Dual Finance and more broadly across all of Decentralized Finance, this innovative SO concept has many benefits.

There are two SO subcategories offered by Dual Finance. First, users that lock up DUAL for predetermined amounts of time are given General Staking Options (GSOs). Stakeholders are rewarded with complimentary OTM DUAL American call or put options. Users will pay the exercise settlement amount in stablecoins to the treasury and in exchange will receive DUAL at the strike price if the protocol token performs well and an Upside GSO is worthwhile exercising at any point. In contrast to DIPs, which really pay a premium that is modeled as an APY, the GSOs present value or premium can be treated as an APY.

Dual Finance offers two subcategories of SOs. First, General Staking Options (GSOs) are issued for users who lock up DUAL for fixed periods of time. As a reward, stakers receive free out-of-the-money (OTM) DUAL American call or put options. If the protocol token performs well and an Upside GSO is worth exercising at any point, users will pay the exercise settlement amount in stablecoins to the treasury and in return receive DUAL at the strike price. The GSOs present value or premium can be modeled as an APY, opposite to DIPs which actually pay a premium modeled as an APY.

The second way that SOs are used by Dual Finance is as liquidity incentives on specific DIPs, or liquidity staking options (LSOs). Users that have staked to a DIP will earn free DUAL LSOs. Whether a DIP is upside or downside, the LSOs will correspond to that type. When it comes to Downside LSOs, the Treasury will purchase back DUAL tokens, increasing income for users and letting them assume some of the risk when token performance is subpar.

The SO idea inherently encourages protocol token liquidity as a positive byproduct. Owners of these SOs are motivated to gamma trade the options as a result of being granted long optionality on DUAL, basically market making for the DUAL token. You would have options on DUAL if you had directly joined the GSO pool or any DIP. You are naturally motivated to sell DUAL into the market to hedge your long delta during DUAL rallies, and you are similarly motivated to purchase your short DUAL delta back from the market during any sell-off.

Rehypothecated Lending Pools (RLP)

Rehypothecated derivatives trading, in which banks use client collateral for their own objectives, is a frequent practice in traditional finance. While Dual Finance requires stablecoins or the token for Upside DIPs or Downside DIPs to properly collateralize user deposits, additional yield lending those assets is still achievable through Dual Finance via RLPs. Market makers will pay to borrow tokens from the RLPs in order to hedge their delta if they desire to engage in Dual Finance by acquiring DIP risk.

The greatest amount market makers may borrow will be limited by their long exposure to any DIP. However, borrowing DIP tokens from RLPs will not require collateral. Any market maker’s inclusion on a whitelist for RLP participation and authorization to obtain collateral from DIPs will require DAO approval. If RLP borrows are not returned prior to option expiration, fees will be assessed. A market maker must also repay any borrowed tokens to the RLP in full before they may use any DIP.

This procedure will be backed up by DUAL tokens, which will be used to always return DIP monies in full by buying any necessary tokens. RLPs increase market makers’ capital efficiency by motivating them to create tighter markets and providing customers with a second, entirely positive variable yield component on their DIPs.

DUAL Tokenomics

The governance token and de facto DAO of the Dual Finance ecosystem are Dual Finance (DUAL) tokens. Holders of DUALs may suggest modifying the strike and maturity selection as well as any other optional element, including the addition of new goods. DUAL tokens, which Dual Finance may use to inventory risk rather of hedging every DIP with market makers, indirectly represent long option exposure to the DIPs. The DUAL holders may decide to burn DUAL with any proceeds from the protocol.

Voting escrow rights will be included in DUAL tokens, allowing emissions of DUAL Staking Options to be directed based on the products that receive the most votes, encouraging increased participation and APY. In the end, the use of DUAL tokens enables the control of the Dual Finance treasury to be utilized to incentivize all project-related tasks, including technical development, code audits, bug bounties, administrative, legal compliance, business development, marketing, and liquidity provisioning.

Joint Finance DAO is going to create a DUAL Constitution. The DUAL Constitution will set up the parameters in a way that is long-term beneficial to the Treasury. The parameters will take into account the minimum and maximum DIP and SO size ranges, moneyness, maturity, and boundaries for incentive systems. The Constitution’s limitations are meant to be unchangeable, although they can be changed by unanimous votes with strict quorum requirements. 

To maintain Dual Finance flexible and creative, the DAO will also implement a second, less demanding barrier for business-as-usual ideas. These steps will make sure the protocol can continue to function even in the absence of early contributors. The objective is to build a self-sustaining, rug-pull resistant DAO and treasury.

Conclusion

Future projects for Dual Finance have a vast and audacious reach. Options can be used to replace any existing incentivization or compensation mechanism with one that more closely aligns aims. Dual Finance aspires to be a driving force in the conception, execution, and dissemination of novel option-based ideas since it believes Decentralized Finance offers the ideal experimental environment for their proliferation. The Dual Finance DAO will lead and manage the DUAL token as a necessary asset in any options-based incentive scheme for new protocols during this developmental process.

Reference: https://docs.google.com/presentation/d/1YxNwRCoKq1xcWRai-6g_HJjnegQXv5Dlhz0eCa8932g/edit#slide=id.g12c20ff2256_0_51 

https://beta.dual.finance/docs