Benefits of Strategy Vaults
With the launch of Knox Vaults, Premia has reached an important milestone.
We’ve already established a permissionless pool-to-peer options marketplace for liquidity providers to gain yield, and options traders to access instant liquidity. Our next step is launching strategy vaults.
Vaults are a great alternative to liquidity pools for market makers and users who want to put their crypto assets to work.
Additionally, strategy vaults unlock composability and collaboration possibilities across the DeFi ecosystem, as you might have noticed with all the GLP-based protocols floating around in the latter half of 2022.
Let’s delve a bit deeper — here’s why strategy vaults are the natural next step for Premia’s progress as one of the leading DeFi options protocols.
Advantages of Strategy Vaults
DeFi strategy vaults are structured products — automated strategies utilizing one or more financial derivatives to achieve the intended result, whether it be leverage, risk-minimized yield, or something else.
At its core, DeFi offers financial instruments and services for anyone, anywhere. Structured products take it a step further by providing users with industrial-grade financial strategies.
For example, Knox Vaults are structured products that:
- Automate the process of underwriting covered calls and covered puts.
- Reduce the opportunity risk of writing covered calls.
With strategy vaults, depositors don’t have to worry about continuously reallocating their capital across DeFi. Users can simply deposit assets and earn yield.
As with Premia’s options trading, anyone is able to access strategy vaults anytime, anywhere.
Improving Covered Calls With Knox Vaults
Knox Vaults automate and improve the process of underwriting covered calls to earn yield.
As opposed to normal (or naked) call options which don’t require collateral to be posted in order to be sold, covered calls require the underwriter to hold the appropriate amount of the underlying asset.
Thus, covered calls come with a degree of opportunity risk — the possibility of missing out on appreciation above the strike price of the underlying asset.
Normally, users have to do everything manually: reallocate capital, manage risk, hold a spot position, and hedge their position. Knox Vaults are designed to minimize these drawbacks, providing users with a straight-forward, risk-minimized experience.
Knox Vaults underwrite options that are far out of the money. This means that the options sold by the covered call vault are generally unlikelier to expire in the money and result in a net loss for a given epoch.
Additionally, instant withdrawal allows active users to manage the risks involved even further.
Using Strategy Vaults vs Providing Liquidity
Strategy vaults serve as an amazing alternative to providing liquidity directly to the pools.
Providing liquidity comes with a bunch of drawbacks. There is a certain amount of risk across different spot prices with the threat of impermanent loss (IL).
Impermanent loss happens when a token’s price change causes the user’s share of a given liquidity pool to be worth less than the present value of the user’s deposit. If the token pair returns to the initial exchange rate, users can recover the loss.
There are additional issues that may arise in the case of DeFi options markets. Liquidity providers have to assume exposure across a range of strike prices and expiries, which comes with an unattractive amount of risk.
These problems can sometimes cause LPs to end up at a loss, as opposed to earning yield. In contrast, strategy vaults eliminate the risk of IL while providing a more predictable risk profile.
The extra benefit of built-in risk tooling with Knox Vaults makes them an even more attractive option for depositors.
What Vaults Unlock For Premia
Strategy vaults provide another faucet of liquidity, while assisting in onboarding the next wave of users to Premia.
The predictability and automation of the Knox Vaults on Premia make them a great choice not only for retail users, but also for other protocols, institutions, and DAOs to earn yield across different risk profiles.
Composability across protocols in DeFi is another innovative avenue to venture into with strategy vaults. As a small hint, Knox Vaults are precisely built with that in mind, so wen integrations?
