Premia's automated options market enables best-in-class pricing based on realtime supply and demand, bringing fully-featured peer-to-pool trading and capital efficiency to DeFi options.
Key Premia innovations:
Market driven options pricing
- Each pool on Premia takes into account the relative supply and demand of capital within that pool to ensure a market-clearing options price is reached. This ensures optimal pool utilization at fair prices.
Liquidity sensitive returns to LPs
- Returns on liquidity (options premiums) are priced according to the supply/demand of capital in each pool. Larger demand means higher option prices, which translates to greater returns for LPs.
Granular liquidity provision
- LPs have control over which markets they underwrite, as opposed to underwriting the entire volatility market. LPs can implement customized strategies to granularly provision their liquidity only to the pools (and options) they desire.
Self-incentivizing initial liquidity
- The automated pool pricing mechanism incentivizes liquidity providers to enter a pool from the time it's launched, to get the highest returns. This ensures lower slippage by the time the first options are bought from the pool.
Dynamic Premia token rewards
- Liquidity providers and PREMIA stakers accrue PREMIA tokens over time through our Liquidity Mining program and xPREMIA system, respectively. The amount rewarded depends on the size of their position and the length of the deposit (additionally, the amount of protocol fees generated determines the total size of rewards for PREMIA stakers).
How Premia Works
- Users can purchase American-style options on Premia’s best-in-class AMM by first selecting the details of the option they'd like to trade, like the token pair, strike price, and maturity. Once the details have been entered, the user will receive a quote denoted in terms of the underlying asset for call options or the base asset for put options. If the user agrees with the price, they can execute the transaction to facilitate the trade and purchase the option for the quoted price.
- Users can purchase options with any asset (so long as their is DEX liquidity available). If users purchase an option with an asset other than the default payment token, the user's asset will be swapped to the payment token on the DEX with the best price before purchasing the option. This is done in a single transaction to ensure the best user experience.
- All of the liquidity (capital) in the pools for trading options is provided by other users of the protocol called Liquidity Providers (LPs). When a trader purchases an option, another user, who has previously provided capital to the pool (an LP), simultaneously underwrites the option to the buyer. All options on Premia are fully collateralized, meaning the underwriters' tokens are locked in the option from purchase until settlement, to ensure the full exercise value of an option can always be paid out to option holders.
- There are 2 pools for each asset pair on Premia: a Call pool and a Put pool. This allows both liquidity providers to granularly decide which pool they'd like to underwrite and option buyers to select which direction they'd like to trade. A win, win.
- When a user wants to purchase an option from the pool, they can simply send the details of the option they'd like to purchase to the pool, and the pool will return a quoted price for the user's selected size, strike price, and maturity date. If the user agrees with the price, they can execute the trade with an on-chain transaction.
- The option is then owned by the purchaser and represented as an ERC-1155 token in their wallet, allowing the user to transfer the option or exercise it at a future time.
Option Purchase: On option purchase, a protocol fee of 3% of the option's base price is charged to the buyer, included in the price quoted by the pool.
Option Settlement: On exercise, a protocol fee of 2.5% annual interest on the option's collateral value is collected from the pool for facilitating the utilization of capital.
- As per community vote, 80% of all protocol fees are automatically collected and converted to PREMIA, which is then automatically distributed to xPREMIA holders (xPREMIA holders are PREMIA stakers). The remaining 20% of protocol fees are distributed to the PREMIA treasury, to be used for the further growth and development of the Premia ecosystem.