Introduction to DSOs


The Basics

Dao Shares Options (DSO) are a form of Options Liquidity Mining (OLM) programs which enable Chi Protocol's smart contracts to mint ERC-721 call options (oTokens) as incentives for various use cases. It offers the protocol greater control over its native liquidity pools and provides flexibility through configurations such as quote asset, strike price, epoch length, and eligibility window.

Inner Workings of DSO

How is this different than bonding?

Bonding was first introduced with Olympus Pro as a means for protocols to obtain Protocol Owned Liquidity (POL) through incentivised mechanisms. It involves a continuous sale of governance tokens, offering a specific discount on these tokens. Individuals can obtain these bonds by exchanging them with an accepted asset, typically governance token LP tokens or stablecoins like USDC or DAI. As users race to acquire these governance tokens at a reduced price, the discount progressively diminishes until it reaches zero or possibly even becomes negative. The governance tokens are distributed over a predetermined vesting period, typically spanning around two weeks.

DSO employs call options, which come in two varieties: puts (the right to sell) and calls (the right to buy). The spot price represents the current token price at which it can be bought or sold at a specific location and time.

Call options provide the right, though not the obligation, to purchase the underlying asset at a predetermined price known as the strike price within a defined period, or until the option's expiration date.

oTokens shares represent in-the-money (ITM) call options that can be exchanged for an equivalent amount of governance tokens. Users can exercise their oTokens call options to acquire governance tokens at a price lower than the current market rate.

Recently, Tapioca DAO introduced oTAP as a reward program to encourage the locking of lending positions. oTAP is an American-style call option, meaning it can be exercised at any point before expiration. European and American style options are not tied to specific regions; instead, they describe two distinct types of options contracts. European Style Options can only be exercised upon expiration, whereas American Style Options can be exercised at any time before expiry.

Chi Protocol introduces oCHI as an incentive mechanism for building protocol-owned liquidity (POL) and enabling LPs to earn boosted trading fees on their positions. oCHI is a Bermudan-style call option, permitting exercise at any time following the lock-in period's expiration and before maturity.

Exercising Options

oCHI options can be exercised within the eligible time window before the expiry dates, at a flexible strike price determined at issuance. In this scenario, the issuer recoups the quote asset required for exercise, while the purchaser receives the upside payout (spot price-strike price) by converting oCHI into CHI at a 1:1 ratio.

POL Trading Fees

All POL trading fees are distributed to oCHI lockers to compensate the option's buyer for the risk of being OTM (Out of The Money) in the conversion period. This could also be interpreted as borrowing LP positions from the protocol with fixed maturity dates given by the unlock time and LP token (or tokens) value provided by the user representing the borrow cost.

Expired or Unexcercised Options

In the case of expired or unexercised options, the issuer cannot reclaim the payout collateral initially provided to mint the oTokens. This means the issuer does not have to pay out liquid incentive tokens.

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