Understanding Downside Protected Notes (D-Pros)
Fixed-maturity, on-chain instruments that combine token upside with a predefined downside floor. They give projects a way to offer holders defined outcomes—participate in the upside while limiting drawdowns—using fully collateralized, auditable mechanics.
D-Pros were first formalized in Exchequer research led by Jan Pevzner, adapting option-pricing techniques to the unique behavior of AMM liquidity. Under the hood, D-Pros are constructed from LP-derivative primitives (LP forwards, LP calls/puts) plus a zero-coupon component and a yield stream, packaged into a single, permissionless note.
Engineered Features
Built-In Downside Protection
Configure a floor on principal (e.g., a percentage of face value at maturity). Protection is achieved via embedded LP-option exposures inside the note's structure.
Token-Linked Upside
Participate in the token's upside beyond a defined level while retaining protection. Upside capture can include the economics of LP fees via the collateral structure.
Defined Term & Outcomes
Each note has a fixed maturity with transparent payoff logic and on-chain settlement.
On-Chain, Auditable Collateral
Collateral is held transparently on-chain; issuance and settlement are permissionless and programmatic.
Sustainable Yield Source
Yield is driven by efficiently structured, project-owned LP collateral—minimizing reliance on continuous token emissions.
How It Works
Issuance & Capital Formation
Projects issue D-Pros to raise working capital (e.g., USDC, ETH) from buyers who want upside with a floor.
Programmatic Collateralization (Project-Owned Liquidity)
A portion of proceeds is paired with treasury tokens to form an LP position that collateralizes the notes. This can expand protocol-owned liquidity relative to the treasury tokens committed—often approaching ~2× effective liquidity for the same token contribution, depending on structure and market conditions.
Maturity & Settlement
At maturity, noteholders receive the protected outcome defined in the terms (floor and upside schedule). Any residual project-owned LP collateral remains with the project—strengthening balance-sheet liquidity without ongoing emissions.
Why Projects Issue D-Pros
Lower Reliance on Rent-Seekers
Reduce dependence on centralized listings, opaque MM arrangements, and mercenary liquidity programs.
Non-Inflationary Liquidity Growth
Accrete Protocol-Owned Liquidity without blunt, dilutive incentives.
Align With Long-Term Holders
Offer a product that makes holding rational—defined risk, clear upside, real protection.
Efficient Treasury Utilization
Put treasury tokens to work as auditable, productive collateral backing the notes.
Why Capital Allocators Buy D-Pros
Exposure With Cushion
Get token-linked upside with a predefined floor on outcomes at maturity.
Quantified, Transparent Risk
Each note specifies its floor, upside profile, maturity, and collateral—no black boxes.
Research-Driven Construction
D-Pros are assembled from first-principles LP-derivative components, reflecting the empirics of AMM liquidity (including "square-root" option behavior) in a tractable, on-chain package.
Under the Hood
(for the technically curious)
D-Pros package LP forwards and LP options with a bond component and yield stream. The framework adapts classic derivative pricing to AMM LP tokens, establishing put-call parity for LP exposures and enabling closed-form reasoning about protection and upside. The result is a permissionless "structured note" primitive native to DeFi.
Ready to Explore Downside Protected Notes?
Learn more about the research behind D-Pros and how they can transform your liquidity strategy.