AlphaDex v2.0 Preview (2): From Vault Shares to Synthesized Leveraged Tokens

When you deposit ETH into AlphaDex v2.0 vaults, you will receive vault shares, which are tradable ERC20 tokens.

In this way, BULL and BEAR vault shares become synthesized leveraged BULL and BEAR tokens for the underlying market, and using AlphaDex can be as simple as buying and selling such tokens on UniSwap.

AlphaDex v2.0 testnet version is at https://www.alphadex.org/v20 .

There are now three ways to use AlphaDex:

  1. Manually add BULL or BEAR stakes for a round when you see a trading opportunity.
  2. Deposit ETH to BULL or BEAR vaults. Let vaults auto-stake and auto-payoff for you every round.
  3. Directly buying and selling BULL and BEAR vault shares on Uniswap.

Moreover:

  1. If share prices become overvalued, traders are incentivized to mint vault shares by depositing ETH to vaults.
  2. If share prices become undervalued, traders are incentivized to purchase vault shares and hold them.
  3. Vault share prices will reflect the expected payoff of vault stakes, and move continuously along with the underlying market.

It is worth illustrating the auto-staking process in detail using an example. Assume the auto-staking rate is 10% per round.

  1. In [Round 0], 10 ETH are deposited into BULL vault, and 10 BULL shares are minted.
  2. In [Round 1], 1 ETH is auto-staked. Now 10 BULL = 9 ETH + 1 [Bull stake @ round 1].
  3. In [Round 2], 0.9 ETH is auto-staked. Now 10 BULL = 8.1 ETH + 0.9 [Bull stake @ round 2] + 1 [Bull stake @ round 1].
  4. In [Round 3], 0.81 ETH is auto-staked. Now 10 BULL = 7.29 ETH + 0.81 [Bull stake @ round 3] + 0.9 [Bull stake @ round 2] + 1 [Bull stake @ round 1].
  5. In [Round 4], round 1 stakes are auto-settled. Assume 1 [Bull stake @ round 1] becomes 2 ETH. Then 10 BULL = 9.29 ETH + 0.81 [Bull stake @ round 3] + 0.9 [Bull stake @ round 2]. And after auto-staking we have 10 BULL = 8.361 ETH + 0.929 [Bull Stake @ round 4] + 0.81 [Bull Stake @ round 3] + 0.9 [Bull Stake @ round 2].

Question: If we sell 1 BULL back to the vault, how much shall we receive?

The answer is 1 BULL = 0.8361 ETH + 0.0929 [Bull Stake @ round 4] + 0.081 [Bull Stake @ round 3] + 0.09 [Bull Stake @ round 2].

The vault can decompose and transfer unsettled stakes to you. And remember you can always directly sell vault shares on Uniswap and immediately receive pure ETH.

Question: If we pay 1 ETH to buy vault shares, how much shall we receive?

This is an interesting question, because it depends on the valuation of stakes.

Firstly, you can always buy on Uniswap, which will provide a fair valuation.

Secondly, if you buy from the vault, then the vault must take an optimistic valuation, in order to prevent arbitrage. In that case:

0.929 [Bull Stake @ round 4] = 0.929 ETH because we are in round 4 and we can always stake;

0.81 [Bull Stake @ round 3] = ~1.62 ETH because we assume it will win;

Similarly, 0.9 [Bull Stake @ round 2] = ~1.8 ETH because we assume it will win.

Hence 10 BULL = 8.361 ETH + 0.929 ETH + ~1.62 ETH + ~1.8 ETH = ~12.71 ETH.

And 1 ETH will get you 0.7868 BULL share. So it’s better to directly buy vault shares when all its stakes are winning.

In this sense, the vault provides an upper limit for share prices. If share prices become overvalued on Uniswap, traders are incentivized to mint vault shares by depositing ETH to vaults.

AlphaDex v2.0 testnet version is at https://www.alphadex.org/v20 .

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