Remember the GME craze from 2020 during Covid? What about the swarm of options day traders that took over Robinhood? I remember stalking r/wallstreetbets daily and watching the insane gains everyone was posting from trading options. Those were some wild times.

The options craze hasn’t hit DeFi yet, but when it does, I expect it to be spectacular. But who will win the onchain options war? Let’s talk about Premia, a DeFi options protocol that is poisted to slowly but surely crush it in DeFi options.

In this article, we’ll dive into:

• What is Premia?

• The different layers (it’s crazy cool)

• PREMIA tokenomics

• And more!

It’s Options Without The Baggage

Premia is an onchain non-custodial options exchange. This means users:

• Don’t have to KYC

• Have full control of their funds

• Can trade onchain wherever they are

• Don’t have to worry about red tapes

So how does it work?

Let’s go back to the beginning when Premia first launched. Originally, it utilised a simple AMM design where the liquidity pool could only sell options. Liquidity providers could withdraw their funds after an initial 24 hour lock through a first in first out queue.

There was also a large unknown factor, known as implied volatility (IV), that goes into options pricing. Initially, Premia used the pool utilisation rate to underprice or overprice implied volatility.

Simply put, the protocol wasn’t that sophisticated. Liquidity providers weren’t getting the best returns. Some of them got hosed on options the AMM sold and options pricing were drastically off compared to the largest options exchange.

All of ☝️ is now old news. Today, Premia is an advanced protocol and has made huge strides in protocol design and the core exchange mechanism.

The Land Of Calls And Puts

The Premia Ecosystem consists of 3 layers:

1. Base Layer - Exchange

2. Depot Layer - Vaults

3. Messaging Layer - RFQ & Orderbooks

Let me break them down for you.

Base Layer (Exchange)

Now I am sure everyone reading has used Uniswap at one point in their onchain journey. Uniswap has come a long way, introducing:

• Uni V2 which only allowed you to provide liquidity across the entire price range of zero to infinity

• Uni V3 which gave us concentrated liquidity, allowing you to provide liquidity within specific price ranges

• Uni V4 which brought in the RFQ system called UniswapX (I’ll get to this later for Premia)

How does this relate to Premia? Well, Premia decided to give users a two-for-one deal and launch concentrated liquidity + RFQ functionality within Premia V3.

In Premia V3, liquidity providers/market makers can deposit liquidity within specific price ranges, essentially mimicking the concentrated liquidity functionality of a spot DEX. This allows for more expressivity of one’s liquidity, which means you can choose to:

• Only be buying options

• Only selling options

• Specify the price ranges at which you are willing to do so

This allows liquidity providers to maximise their fee collection and capital efficiency.

Want even more capital efficiency? That’s where partial collateralisation comes in. Using margin architecture, options with select payoffs such as spread strategies can be partially collateralised. This increases liquidity, and leads to better options pricing, with no counter-party risk. This is expected to go live in November.

You say “I am just a normie degen, this is too complicated!”. Fret not, that’s what vaults are for.

Depot Layer (Vaults)

Vaults allow retail users like me and you to just deposit an asset and then help market make for that option. For example, on Arbitrum, you can deposit WETH/USDC, ARB/USDC, and WBTC/USDC, exactly the same as you would if you were providing liquidity on a DEX.

You don’t even have to do anything else once you provide liquidity. The best part? You get to choose!

In addition to the yield-bearing strategies created by Premia contributors, you get options vaults created by third parties. This way, you may choose whichever vault suits your risk tolerance the most or whichever one is performing the best and allocate there!

Messaging Layer (RFQ & Orderbook)

RFQs are hot these days. They allow one to trade in size and bypass the protocol’s liquidity. Simultaneously, market makers who fill the RFQ may tap into offchain liquidity. However, RFQs in isolation are not the optimal solution, because if no market maker provides you with a good quote, that means you may never be able to execute your trade in a timely manner at a optimal price. That’s why RFQs are best combined with passive liquidity from an AMM, like Premia!

RFQs allow Premia to offer what is essentially "just in time liquidity, or liquidity for a specific trade. Vaults can tap into the OTC quote system too, to provide liquidity across the entire volatility surface.

The best part?

RFQ fillers can even tap into vault or existing range order liquidity. Look at how synergistic that is. It’s a virtuous cycle where traders can tap into various sources of liquidity while these sources of liquidity can tap into other sources of liquidity.

Premia tokenomics

New protocol, new tokenomics. Run it back turbo.

Out of the total supply of 100M, 35M $PREMIA is currently circulating, with this figure including any tokens locked as vxPREMIA.

So what’s new in Premia V3?

Let’s split this up into where Premia generates fees from, and then dive into how those fees are distributed.

Fees

• Base Layer: At the exchange layer, fees are either 3% of the premium or 0.3% of the notional value of the options, whichever is higher. Upon settlement, a further fee of 0.3% is collected (limited to 12.5% of the option’s value).

• Margin Layer: The prime rate - 0.4%, charged to whoever provides liquidity for margin lending. Dynamic liquidation fees are also added here.

• Vault Layer: 2% management fee + 20% performance fee, the hedge fund industry standard.

Distribution

• Staking users: 80% of base layer fees

• Premian Republic: 20% of base layer fees

• Insurance fund: 100% of vault and margin layer fees

Premia staking (vxPremia)

What’s in it for you if you stake your $PREMIA?

Woah boi, this list is long. You get:

1. Governance rights

2. Revenue share

3. Discounts on trading fees

4. Decide token incentives for gauges

TLDR: it’s a hefty amount of utility, you don’t just purely get governance rights which, as time has shown, isn’t the most valuable.

Options Liquidity Mining (OLM)

We’ve seen how giving out tokens as liquidity incentives hasn’t really worked in DeFi. Due to liquidity provider dynamics, people wanting to get paid (shocker), tokens with a high amount of emissions have usually been down only as LPs continue cashing out their rewards.

What is options liquidity mining?

Instead of straight up giving liquidity providers tokens, they instead receive a call option to purchase $PREMIA at a 45% discount.

There are a few benefits to this. First of all, there isn’t an incessant amount of sell pressure. Secondly, the protocol receives more revenue from users buying their tokens. It’s a win win situation really. Only individuals who want to align with the protocol will exercise the option and purchase PREMIA. In this case, 90% of the proceeds go to vxPREMIA holders. Think of it like buying vested tokens at a hefty discount.

Adoption Through Education

Options trading volume continue to outpace spot trading growth in the TradFi sector. There is a continued growing demand for this derivative in the retail market and any protocol that brings in options trading onchain should see significant windfall.

Premia also has options customisation where anyone can launch an options pool, the first orderbook and AMM hybrid exchange for options. Not to mention an advanced trading UI, european options that lower transaction costs and results in more accurate pricing,

Sure, the options sector currently has some large incumbents such as Aevo and the elephant in the room which is Deribit. But a crowded market means demand for options protocol such as Premia, that has selflessly devoted themselves to creating a protocol which caters to multiple groups of traders and liquidity providers.

The easiest way to win is when your users loving trading on your platform. But that can’t do that if they don’t know how it works.

Premia’s continued release of educational material for users plus innovation of its protocol UI/UX makes it a no brainer to trade on Premia.

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