How Premia is Simplifying Options On-Chain w/ DK and vxCozy - Flywheel #82

Dec 13, 2023

How Premia is Simplifying Options On-Chain w/ DK and vxCozy - Flywheel #82

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In this week's episode of Flywheel we have the Catboys of Premia on to share and detail their options platform. We're super excited about this interview as FRAX/FXS is a huge part of their offering and currently is yielding triple digits.

What is Premia

Premia is a peer-to-peer options exchange designed for the Ethereum Virtual Machine (EVM). It emphasizes security, self-custody, and automatic execution without requiring a trusted intermediary, while enabling permissionless use of financial primitives. The platform has evolved through three major versions:

Premia v1 (Early 2021 - Late 2021): An order-book-based options exchange, now deprecated.
Premia v2 (Late 2021 - Present): An Automated Market Maker (AMM)-based options exchange.
Premia v3 (Launched Q3 2023): Features a concentrated AMM-based options exchange with a peer-to-peer order network.

Premia Options:

Options in Premia are ERC-1155 tokens, granting the right (but not the obligation) to buy or sell a specified token at a predetermined date. Each option pool is defined by a token pair, option type (call or put), strike price, and maturity date. Premia v3 introduced European-style options, exercisable only at or after expiration, in contrast to the American-style options in Premia v2, which could be exercised at any time.

Liquidity providers (LPs) can create concentrated range orders. More liquidity in a price range requires more trades to traverse it, benefiting active traders while still rewarding passive traders through trading fees. The protocol enables diverse strategies without fragmenting liquidity. It supports a range of users including vaults, traders, and market-makers, all benefiting from unified liquidity space.

Premia v3 requires no maintenance, with governance of liquidity mining emissions being entirely on-chain through the vxPREMIA system. The protocol incentivizes liquidity provision through PREMIA mining rewards, encouraging higher trading volumes and fee returns. LPs and vxPREMIA stakers are motivated to direct rewards to the most productive vaults and pools.

Premia's Arbitrum Short Term Incentive Program Grant Details

Premia's Arbitrum STIP grant focuses on incentivizing options trading volume on the Premia Platform. The grant involves the distribution of ARB tokens and additional Premia tokens to various participants to achieve specific objectives. Here's a breakdown:

Allocation of ARB Tokens:

600,000 ARB Tokens for Vault Deposits: The majority of the grant, 600k ARB tokens, is allocated to incentivize vault deposits on the Premia Platform. This strategy aims to boost option writing by targeting 10 million in new liquidity into the vaults. Concurrently, Premia will match this with 550,000 Premia Tokens as part of their Option Liquidity Mining program. The expected yield is around 20% annually, plus premiums from trading.
200,000 ARB Tokens for Liquidity Providers: Another 200k ARB tokens are reserved for traders who provide liquidity through range orders on the AMM. The allocation is based on several factors like traded volume, tightness of spread, and the proportion of range order liquidity in the most traded pools. This method is similar to that used by Sushiswap and Angle Labs 3 for rewarding liquidity providers.
100,000 ARB Tokens for Matching Options Liquidity Mining: These tokens are designated for matching Options Liquidity Mining for other protocols launching incentive plans on Premia, as part of their Hydraulic Solutions Framework 4.
500,000 ARB Tokens from Premia Treasury: This amount will be deposited into the ARB CALL Short Volatility Vault, funded by the Premia Treasury, to enhance liquidity for ARB Call options. Yield or premiums from this deposit will be reinvested into the Premia Academy's Learn to Earn program, especially during Arbitrum Odyssey Week.

How to Earn 100% APR with FRAX/FXS on Premia

Currently there are two Frax vaults available to earn yield on Premia. These are:

FXS/FRAX Cash-Secured Put Vault - Deposit FRAX to sell cash-secured puts to earn premiums by shorting volatility
FXS/FRAX Covered Call Vault - Deposit FXS to sell covered calls to earn premiums by shorting volatility

The vaults boast a whooping 100% ARB rewards rate and have nearly $300k TVL as of writing.

In order to take advantage of these yields, you will first need to acquire FRAX or FXS on Arbitrum. If your assets are on Ethereum, you will need to use FraxFerry to bridge them over. This process takes at least 24 hours.