An Intro to Premia

7 min readNov 23, 2022

Some of you might be familiar with Premia and how our tech works but if you’ve just discovered Premia for the first time then welcome — this article is for you.

What is Premia?

Premia is a decentralized options protocol built to benefit crypto option traders and liquidity providers alike. Premia utilizes a peer-to-pool system and a modified Black-Scholes algorithm for price discovery based on supply and demand. Check out this article if you’d like to learn more about how our pricing algorithm works.

Premia offers American-style options, but in a way that differs from traditional options exchanges working with an order book bid/ask system. Premia is the most flexible options platform for traders, as its peer-to-pool architecture allows options buyers to select custom strikes and expiration dates for their options, and settle their options any time up to expiration.

Premia offers a simple and seamless UI experience. Users can provide liquidity, trade options and even bridge and swap tokens at the best execution price available directly on the Premia DeFi app. So users who need to move things around for their positions can do it all on Premia without leaving the platform. This means users can purchase options with any asset (as long as DEX liquidity is available).

Premia currently supports Ethereum mainnet, Arbitrum, Optimism, and Fantom with plans to expand to other EVM-compatible networks as well as explore an omni-chain architecture.

Who is Premia for?

Premia is for anyone who wants to trade options permissionlessly using DeFi, and also for liquidity providers seeking yield. So whether you’re trying to hedge against a spot position or increase capital efficiency (leverage), Premia calls and puts on crypto assets are here for you.

If you’re unfamiliar with calls, puts, and options trading in general, we’ve got a great starter article here.

If you are not into trading options, that’s cool too. Premia offers LP opportunities, so users can deposit their assets in our Call and Put pools to earn yield.

Learn more about how the pools work and the associated risks here.

Why Premia?

While Premia isn’t the only decentralized options protocol, we think it’s the best (maybe we’re biased).

Here’s why:

Real-time market-driven option pricing

Premia option prices update in real-time with each option purchase or sale, liquidity deposit or withdrawal, hence, you get the most up-to-date and accurate pricing

Capital-efficient pool-to-peer architecture

Our unique system means liquidity providers can deposit their assets in the pool of their choice to underwrite options and earn yield efficiently, putting their capital to good use.

Optimal liquidity pool utilization

Premia pools aim to optimize the utilization of liquidity provider capital at the most efficient prices, improving LP returns.

Risk management and instant withdrawals for liquidity providers

Premia has no mandatory lock-up periods for LPs, if your capital is not being utilized to underwrite an option then you may withdraw it at any time. If your capital is being used to underwrite options then you may enter an exit queue and exit as soon as those options are exercised or expire, or purchase the options back to exit immediately.

All Premia options are fully collateralized and cash-settled

Fully collateralized options mean you don’t have to worry about not being able to cash out when your options expire in the money. Cash-settled means you don’t take a physical position but rather the difference in cash between your strike and the price at the time the option is exercised.

Premia tech features

Exercise options any time

No need to wait until your options expire, if you’re in the money then you can exercise and close your position.

Pooled liquidity

Rather than an order-book system with bids and asks, Premia provides deeper liquidity by utilizing liquidity pools — similar to Uniswap or other AMMs (automated market makers).

Liquidity sensitive pricing

If someone deposits more funds in the liquidity pool, this lowers the price for option buyers. If someone withdrawals funds from the liquidity pool, this raises the price for option buyers.

Continuous-time fair pool accounting

Accounting for pool liquidity and utilization of capital is all transparent and available in your account history tab so you know how your capital is being put to use and which options you’re underwriting.

Synthetic IVOL (implied volatility) surfaces

Similar to existing Price Feed oracles (such as those used by Premia pools), our Volatility Surface oracle allows any smart contract to query the data from on-chain, allowing external contracts to accurately price options or measure risk at a granular level using this volatility data.

Custom strike/maturity options

Premia allows option buyers to craft their own positions with custom strike prices and expiration dates, then our algorithm prices the options accordingly in real-time. This gives options traders ultimate flexibility when determining which options they want to buy.

No long-term capital lockups

Unlike some other protocols, Premia offers liquidity providers the option to remove their capital from our pools at any time, even when locked, through the re-assign feature.

Self-incentivizing pool liquidity

Liquidity providers earn yield through the premiums they collect from underwriting options.

Consistent liquidity mining rewards

In addition to yield from premiums, liquidity providers also earn liquidity mining rewards at a consistent rate so Premia makes yield more predictable regardless of changes in demand for options from their pool.

Sell back options to the pool

If there’s enough liquidity in the pool, you can sell your options back into the pool at any time even if they haven’t matured.

The Premia team puts a tremendous amount of work and research into building the best-in-class platform with synthetic IVOL surfaces and real time responsive pricing. You can read about our Volatility Surface Oracle here and you can read more about c-value which determines pricing here.

Tokenomics

Premia tokenomics has been carefully designed to align incentives between token holders and liquidity providers with a steady emission rate of 1.8% of the total supply annually (1.8M PREMIA tokens)

These emissions are used to provide LP incentives for Premia pools as follows:

Ethereum 20%
Arbitrum 45%
Fantom 20%
Optimism 15%

This was last updated by DAO vote when support for Optimism was added.

Besides emissions, Premia is implementing vote escrow (ve) tokenomics in the form of vePREMIA to incentivize long-term holders through a claim on protocol fees, discounted protocol fees when trading, and time-weighted voting in the DAO. You can read about the details of vePREMIA tokenomics here.

What’s next for Premia

The Premia team is always building and the highly anticipated Premia v3 release is currently in the pipeline. ****Premia v3 will bring some big new features to the platform, such as:

We plan to deploy a mechanism enabling all traders to market buy and sell options, at any time, subject to pooled liquidity.
We plan to enable LPs to deposit range orders (similar to fee-collecting limit orders) for the options which they would like to trade or market-make.
We plan to offer delta-hedged and similar meta-vaults to allow LPs to make deposits into simple, automated yield strategies that utilize the Premia protocol. This enables traders to take positions that don’t require active management, to potentially earn superior option-based returns on their capital.
We plan to roll out permissionless pool creation, so if you’ve got a favourite digital asset that you want to see on Premia, you’ll be able to create it in a few clicks (similar to permissionless pool creation on Uniswap).
We plan for Premia v3 to also feature a first-of-its-kind native margin system for decentralized options, enabling full capital efficiency and balanced trading requirements.

Have questions about Premia?

Those are the basics of Premia! We are excited to have you join us and we’re available in Discord to answer any questions you may have!