Thread by @1sat1c

Atlantics 🧵👇🏻

Atlantics are a novel financial innovation, which in the context of defi have far reaching implications, not all of which could be gauged today, and hence deserve detailed, thorough attention.

This will be long, as there’s much to unpack.
Tldr: think how much capital in the world is sitting dormant, unproductive b/c it’s designated as “collateral”. Atlantics unlock all of this capital to become productive and applied to existing & future Defi primitives.

I won’t repeat the Atlantic mechanics here, as a few already did a nice job of that, see an example below:

https://twitter.com/dcaintern/status/1486912376830148614

What I will focus on is background, breaking down some key principles, elaborate some use cases, and most of all the ecosystem implications (which are huge).

Hopefully U gain an understanding not only of Atlantics as a novel financial tool, but also their potential impact on the physics of finance (yes they’r that impactful). Let’s dive in:

First, I wasn’t surprised by the initially slow grasp of Atlantics as the paper was released last week. Defi is new. Most ppl’s financial thinking was conditioned by tardfi. And novel inventions take time to settle in ppl’s mind.

I fully expect Atlantics to become a no brainer, automatically used tool of every treasury manager, CFO, or any function managing funds within the next decade. I also see it as a gradual process as ppl grasp the novelty, implications, and possibilities Atlantics provide.

So don’t feel bad if you didn’t immediately get it. Lets dichotomise together some verbiage pertaining to Atlantics, to dispel some of the confusion evident by Q’s I’ve received.

For the purpose of this thread, please apply the following meaning to the terms:

- Collateral = Stables.

- Underlying = the token of any asset the option applies to.

- Atlantic Option: mainly a put. Unless otherwise specifically mentioned, leave calls aside.

Also, pls remember options r settled on a net cash basis. I.e not a full asset exchange, what changes hands is the net difference in positional value @ the end of an epoch, settled in cash.

Finally, keep in mind that stables are treated in Defi as the denominator, the most prevalent currency and medium of exchange, the basis for calculations, & the Centrepiece of yield generation, bonding and other defi functions.

So first, why the name “Atlantics”?
B/c they are a hybrid of American & European options, as they combine elements of both. Like the Atlantic Ocean 🌊 resides between Europe and America, touching both continents’ shores.

The main difference between European and American options is the former can only b exercised at expiry, while the latter at anytime. This impacts their prices, as American provide the ability to migrate the value elsewhere at anytime.

The main feature of Atlantics, & what makes them a hybrid, is while their exercise is European, they allow migrating the collateral of the option elsewhere in Defi DURING an epoch, releasing it from its lock in the option contract.

This has massive implications, as the collateral itself is in stables, and typically of significant size.

Lets breakdown this collateral mobility: put writers deposit collateral. That collateral could be moved as long as the underlying token (to keep the put covered) is deposited in exchange.

The option writer clips a fee for allowing his collateral to be used (on top of the premium he got paid for writing the option). When 3rd party withdraws coin back, the collateral is redeposited to the option contract. All of this happens automatically via @Dopex smart contracts.

Remember, composability is a key feature of Defi, and a huge advantage over tardfi. Assets can move quickly and smoothly, and even change form, between protocols and chains, in an automatic, quick fashion.

I discussed before the relationship between capital and time, and how time is at the centre of any capital system, b/c it’s the most important asset in the world and capital is a mere reflection of it. And how options are the most efficient tool to harness the value of time

https://twitter.com/1sat1c/status/1439251478187806722

Further, remember options are all weather instruments. Bull, bear or eco, their use is steady, precisely because they’r used to account for different scenarios. This means Atlantics aren’t a specific market type instrument, they will be constantly used.

At this point, I want you, the reader, 2 step out of a speculator’s thinking for a moment, and think like a protocol team. Like a treasury manager. Like a CFO. Like any entity responsible and that’s judged based on its ability to manage capital.

I ask b/c while Atlantics definitely provide enormous value to speculators, they provide even more to other protocols. To fully grasp the value embedded in Atlantic Options, you need to adapt a thinking of a protocol.

Protocols do much more than speculate: they finance activities, growth, development, and are engaged in constant battle with other protocols for Defi footprint, dominance, access to opportunity, alliances etc.

As such, access to capital and liquidity are bottle necks. Avoiding liquidations is paramount. Capital appreciation velocity is key.

Atlantic options remove the cork from the bottle & allow the 🍾(trapped inefficient liquidity) 2 flow efficiently 2 the right counterparties who can put it to the best use.

& most of all: the most dominant determinator of winners in this protocol rich competition will b those who put their capital 2 the best use, who use it most efficiently.
Our entire world is engaged in a constant battlefield of capital management, & those battles r won by inches

With Atlantics, the same capital is used within the Atlantic construct to perform 4 different actions at the same time: buying dips, insuring, earning premium, clipping farming yield.

Lets discuss some ways by which that’s done, and some practical use cases for Atlantics within Defi:

Currently, most loans on defi are over collaterized. B/c of the volatility, lending protocols require borrowers to deposit 2x sometimes 4-5x the value of their loan size as collateral. Until the loan is repaid, the collateral just sits there, idle. That’s very inefficient.

Beyond inefficiency, at scale it makes the entire system less efficient & hence less attractive. Atlantics allow to unlock large sums in the form of collateral and allow them to flow to the most efficient parts of the system.

Atlantics solve that on a few different dimensions: A) They allow the collateral to be released and used elsewhere in Defi in a productive manner.

B) Its mobility is a boon to arbitrageurs who can utilise the collateral to “close” inefficiencies in the pricing of different lending markets. This makes the system more efficient.

C) It allows to add it and increase collateral value in loans elsewhere, broadening perimeter of eligible borrowers (expanding the ecosystem), reducing intitial capital requirements (effectively adding leverage)…

and preventing liquidations - adding to system robustness, as forced liquidations r a negative and carry systemic contagion risk.

Use case 2: A protocol wants to use its treasury assets to bond. It’s incentivised to maximise its bonding power. So it purchases an Atlantic put for the bond period.

use collateral to bond with collateral+leverage (max bonding power). The automatic contract would move collateral into the option contract if it gets below x% of liquidation.

Use case 3: Protocols who want to defend their native token price. There r many of those b/c they raised plenty of capital in 2021, sitting on rich treasuries and are under pressure from their communities to defend the price. What they currently do is buybacks at spot.

That’s a deficient strategy b/c it doesn’t allow planning and budgeting in advance, doesn’t guarantee buying a serious dip, isn’t automatic, and isn’t producing revenue.

Atlantics significantly improve this mechanism: write Atlantic put, only move collateral to contract once x% away from strike price, allowing protocols to use the capital in the meantime to earn yield, Additionally they earn premium.

Atlantics allows protocols to control their fate rather than be subject to market fluctuations and community moods, all while being productive.

Alternatively collaterise and earn fee when moves.

As a protocol: your capital is productive, you can budget more accurately, your collateral is mobile and productive, you guarantee buying only if price<value to a level you find satisfactory.

Use case 4: Options strategies. Buy Atlantic put. Take the writer’s collateral from the put and use it 2 write (sell) your own put, x% lower. Essentially u are: 1. Earning premium from the put u sold (net higher than premium u paid cause your strike is lower - u r in net profit.

2. Using the Atlantic option writer’s collateral as leverage to write your own put. This way the same collateral finances two options, but risk is 0 b/c it’s the option buyers second put on the same scale, and net net positive.

Now take this construct and apply protocol level liquidity+layers of options and perpetuals.

Use case 5: Stable coin insurance. Buy Atlantic puts on stablecoins to insure minimum value. B/c collateral is movable you can use it to get margin on your Atlantic put position.

So u essentially use the collateral 2 double the value of your position via holding: 1 Atlantic put with value of $1, and $1 in leverage u received from using the collateral in the contract.

Again - magnify to a protocol level and what protocols could finance with this capital magnifying mechanism.

Use case 6: 1 drawback of European options is they they have less capacity to serve as currency. B/c the expiry is fixed, and the option can’t be exercised at anytime, they are less liquid in and of themselves. Atlantics solve & upgrade this.

B/c Atlantic options allow to move the collateral and use it to drive financial benefits, Atlantic Options can and will be used as currency and have a market in and of themselves. Thus, an Atlantic Option holder could use his Atlantic position as a currency in defi.

For example, for bonding: Protocols will be able to use Atlantic options to bond, and on the other hand protocols will accept Atlantics instead of usd for bonding native tokens.

As a protocol, Atlantic’s are a significant benefit in your treasury as they carry built in leverage, and could enhance the treasury more than usd under certain conditions.

In an overall protocol treasury policy, having a certain % in Atlantic’s is accretive as it covers different market conditions and durations, and is a superior option to holding 100% usd.

Use case 7: use collateral of Atlantic Put to LP and earn farming rewards: release collateral from Atlantic contract and use it for the duration of the option to LP and receive farming rewards.

Use case 8: Let’s say you’r a protocol sitting on a treasury of stables. You want to earn yield. Wyd? You write a put. You get paid premium (yield) and provide insurance to buy if there is a price dip.

In the meantime, you make your collateral available to the ecosystem and used for perpetual swaps, lending/borrowing, insurance, bonding and capital raises.

Instead of the capital sitting idle, asleep, in the treasury, it’s used at turbo efficiency via Atlantic’s. Win-Win for the market, users, and protocol.

From a market perspective, the Atlantic option construct allows for a capital efficiency factor of *2, a 100% improvement to the efficiency factor of *1 achieved to date (via farming).

Atlantics are an invention that allows to create another layer of credit b/c of the underlying construct, that unlocks value and liquidity from less efficient constructs, prevelant prior to its arrival on the scene.

Use case 9: Usage within Dopex ecosystem: Atlantic pool options within Dopex will be used for internal liquidity: OTM Atlantic puts will stabilise and be used as price floors for rdpx.

Further, otm Atlantic rdpx puts are used within Dopex as currency, a substitute of usd, to bond DPXUSD. This standardises and popularises the use of Atlantics as currency.

So what’s the implication 4 protocols?
Protocols will 1. write puts on their own token to defend the price and add to their own treasury in case of price declines. Atlantics will cause this to be industry practice - protocols who don’t will be considered deficient.

2. In the meantime, the protocols earn premium on the put. 3. B/c the collateral can be released, it will be used to earn yield.

4. Atlantics cause significant reduction in liquidations systemically b/c collateral is moved to where it’s needed, either to support position or to earn yield, according to the market conditions and positions.

Effectively Atlantic Options become a tool to increase a protocol’s competitive position within Defi and outside of Defi.

B/c their capital is more efficient, and b/c they can defend their treasury in a predictable trust worthy way, they become more attractive and attract additional types of capital.

This improves the protocols fundumantals. And as its fundamentals improve, its token price increases. A higher token price attracts more capital and allows the protocol to do more things. Which improves the fundamentals more…which improves token price…a positive feedback loop.

Protocols would do anything to access this type of benefit. Especially when the benefit/cost ratio is so steep. Protocols have very little to lose and a sea of benefits to gain.

It would be irresponsible for protocol leadership NOT to utilise Atlantics. And the performance gap between those who do and those who don’t will become apparent rather quickly.

U starting to grasp the systemic importance? This is why Atlantic Options are a key innovation that’s a cornerstone for the entire Defi to build upon as its next phase of revolutionising finance, releasing it from its shackles and bringing it to the 21st century.

So now, lets consider the implications for Defi, tardfi, their relationship, and gripto’s ecosystem as a whole:

Atlantics will have systemic implications: effectively, they allow a sector wide organic price support by all liquid protocols: every liquid, supported protocol could defend the price of their tokens.

What does that do to Gripto? Adds robustness, reduces downside volatility, increases confidence for outsiders and opens up avenues for them to dip their toes in the space, at relative comfort knowing their capital is efficient and downside limited.

Example: In Tardfi, the most robust, sophisticated loans are offered to the best clients (think top PE funds). Those loans occasionally include a “first loss” clause.

Effectively the borrower, a highly reputable, liquid actor, promises to compensate the lender by way of incurring the initial loss if something goes wrong. A typical clause would include a 15-20% first loss guarantee from the borrower.

What this means in practice is the borrower will inject fresh capital to cover a decline of x% of value, so as long as the loss is <x%, the lender has lost nothing.

Atlantics open up the possibility for many protocols to organically, indirectly offer that to external counter parties, partners, investors by way of automatic pre calculated buy the dip that protects said counterparties from losses beyond x%, thus capping their risk.

Suddenly, the risk associated with Defi in the eyes of outsiders drops, which facilitates additional capital flow tardfi->Defi.

Secondly, consider all that capital which was sitting dormant as collateral doing nothing, and now is released to flow quickly and smoothly in defi and become efficiently productive.

Contrast that with Tardfi: the collateral is in many cases dormant, dead, non productive. And an attempt to do the Atlantics in tardfi would be slow, expensive, require 1000 intermediaries and parasitical “service provides”(lawyers, accountants, advisors), effectively impossible.

In @dopex_io and Defi this is all fast, automatic, cheap, simple and easy. Dopex removes obstacles from the capital’s way and allows it to realise its productivity potential.

Fast, automatic capital saves time. See above: time is money. Tardfi bros understand that.

So the second implication of Atlantics is: if the combination of Ethereum and Dopex automation is significant increase in capital efficiency, what will happen overtime to capital flow from tardfi to defi?!

That’s right - it will increase by orders of magnitude as capital flows to where it’s most productive.

Third, this means the forms by which capital flows into defi will evolve: from strictly speculative “equity” type flows, other pools of capital become relevant as the risk profile changes.

Okok Ieyasu, I’m a Dopex token(s) holder, great that it’s a great product, what does it mean for lil’ ol’ me? A few things:

What happens when capital efficiency increases? Capital productivity increases. More capital flows in. More capital in the system means more robust system. Increases robustness means more capital. Overtime capital flows from tardfi to defi, and all through the Dopex gates.

B/c Atlantics offer intense upgrades in capital efficiency to users compared with alternatives, they will garner premium pricing. This means Premiums would rise. Which means all writers would want to deposit for Atlantics on Dopex.

Capital always flows to the place where it’s used most efficiently. Since Dopex unlocked a path to channel capital and use it more efficiently, TVL of Dopex should explode as the market is educated on the usecases of Atlantics. That would translate to more revenues for Dopex.

It means Dopex will clip fees on all uses of Atlantic collateral, and as you’ve read above there will be plenty of such uses. This means veDPX holders will incure a waterfall, and rdpx treasury would increase.

Further: 2021 left many rich treasuries in gripto. DAOs raised hundreds of millions in $ + they are sitting on large treasuries of their own tokens. Those tokens now have value, as they are traded.

This is typically discussed in the context of dumping fears. Guess what: Atlantics are the solution. Smart teams will deploy their treasuries into Atlantics to create a price floor for their tokens AND also to earn yield on their dormant native tokens.

Those who won’t, will face pressure from their communities to do so.
Example: A DAO raised $100M in stables, and has a max supply of 1B native tokens. Post raise there are 100M tokens in circulation. 900M are reserved for R&D, development, marketing, etc.

But those 900M now have a quoted value. Say the token trades for $1. Why let $900M of value sit in the treasury idly, when some of it can be used to generate yields in a safe way via Atlantics? Every day that passes that those 900M aren’t deployed is a waste of capital and value.

What will protocols do? Designate some of that “market making” or “token protection” and Write Atlantic puts to turn their treasuries to productive assets, all through Dopex.

Atlantics provide a channel to temporarily turn these native tokens to stables, earn yield, and return to native token form.

There isn’t just one of those, there are many. What happens to Dopex’ TVL when 1,5,10, all of them use Atlantics?!

And it’s not fleeting TVL either. This type of TVL is of the recycable, here to stay nature.

Buying APs will become common practice. It will be an automatic function for treasury managers. With an Asymmetric value 2 cost ratio, it’s the rational choice.

It also means that communities integrating Atlantics within their perimeter would share the fees, and are thus further incentivised to vote to do so, b/c they will financially benefit and solidify their own income streams and treasuries via integrating Dopexs’ Atlantics.

Essentially, the automation, smart contracts metaphysics, and the brilliance of Dopex brain trust combined to offer a new financial primitive - this was not possible before Ethereum and Dopex.

But now it is: Orders of magnitude of capital efficiency via turning dormant, stale collateral into live, hot productive capital.

So take the above, and add leverage. If a simple, vanilla, 1 action capacity capital allows for x% of leverage added on top of it, how much leverage would a 4 action capital efficiency, automated, trustless, embedded in multiple corners of Defi & many protocols, capital garner?

4x the leverage? Perhaps more? Whatever answer the market will provide to this question, its in the order of trillions. Realistically considering Defi’s growth as an ecosystem in the next decade - many trillions.

What I’m saying is all those trillions would be funnelled through, and benefitting Dopex’s ecosystem.

Perhaps aware of Atlantics development as he was, that’s what Tetranode had in mind when he (repeatedly) referred to Dopex as his best R/r bet (high praise considering the quality of the other projects he’s involved with).

My educated guess is, that comment wasn’t made b/c how low the risk is, but rather how enormous the rewards are.

Gripto is full of hype and protocols that “marketing” is their main product. There are few that provide actual utility via their product suite. There is one that keeps innovating, revolutionising finance and transcending the gap between Defi, tardfi, LLCs and DAOs.

When the Defi hall of fame opens its gates one day, @tztokchad and the team will be in its first class for innovating and progressing global finance. I’ll deposit a lot in a SSOV that runs bets on the probability of this outcome.

Bonus: Identity Element is doing nice work in applying Atlantic use cases to specific protocols in defi. Check it out 4 further context and implications.

https://twitter.com/ElementIdentity/status/1487084060170145798