Certik Hacken Solidity Finance
Certik Hacken Solidity Finance
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Last updated: Aug 16, 2023
Premia is an automated options trading protocol aiming to bring fully-featured peer-to-peer trading and capital efficiency to decentralized finance options. Through the platform, users can trade options, earn a market yield on DeFi assets, and be more or less protected thanks to the hedging of risks. One of the goals of the project is to offer open access to the top research and innovations in the DeFi field to its users.
Premia facilitates American-style options trading, which can be accessed through the app’s interface where users need to select the details of the option they have chosen such as the token pair, strike price, and maturity. After choosing, clients receive a quote denoted in terms of the underlying asset for call options, or the base asset for put options. Once the user agrees the transaction can be executed.
Options can be purchased with any asset as long as their DEX liquidity is available. This happens by swapping the payment token on the DEX with the best price automatically before purchasing the option and is done in a single transaction in order to ensure the best user experience.
The liquidity in the trading options pools is provided by other users of the protocol, so essentially once a trader purchases an option, an LP simultaneously underwrites the option to the buyer. Since all options are fully collateralized, the underwriters’ tokens are locked in the option from purchase until settlement, thus ensuring the full option value can always be paid out to the option holders.
If an option has not been exercised before its expiration, its value is locked to the option’s value at the time of expiration. When exercised, the reward is sent to the option holder and the remaining collateral is made available to be used again to underwrite future options at the LP’s free capital pool or be withdrawn by the depositor. Once an option is purchased, it is represented by an ERC-1155 token in the wallet of the purchaser and can be transferred or exercised partly or fully, at any future time before and after the option’s expiration.
Each asset pair on Premia has two pools – a Call Pool and a Put Pool. Due to this principle, both liquidity providers can decide which pool to underwrite and option buyers can select which direction they prefer to trade.
The put option can be considered “In the Money” if, at the time of exercise, the price of the underlying asset is lower than the breakeven price. In such cases, users are entitled to a payoff equal to the strike price of the underlying minus the spot price. The difference is settled in the base token to the option buyer automatically. The same goes for cases when the underlying asset’s price is higher, however, the difference is calculated in the underlying asset/quote token.
Since the price of crypto can not be estimated, because traditional option models do not support the crypto market microstructure, models without built-in market adjustment mechanics are doomed to consistently over- or under- price options. For this reason, Premia utilizes its model of taking into consideration the relative supply and demand of capital within each pool. The model implies higher pool capital utilization, and higher average returns to LPs without increased prices for buyers, and also includes in itself a continuous, on-chain reinforcement learning model.
By taking into account the relative supply and demand of capital within itself, each pool on the Premia app ensures optimal pool utilization at fair prices. According to the supply and demand in each pool, the company calculates the returns on liquidity, which means that the bigger the demand, the higher the option prices, which provides greater returns for LPs. Liquidity providers have control over which markets they underwrite instead of underwriting the entire volatility market and can implement different strategies to position their liquidity to pools and options of their desire. Due to the automated pool pricing mechanics at work, early participation in the launch of pools is incentivized, thus ensuring lower slippage by the time the first options are bought from the pool.
Liquidity providers and PREMIA stakers win PREMIA tokens through a Liquidity Mining program and xPREMIA system, with the rewards generated depending on the size of their position and the length of the deposit.
Premia doesn’t collect fees on deposit/withdrawal of liquidity from pools, but charges when the pools facilitate transactions between users. For an option purchase, there is a 3% fee for the option’s base price fee Premia charges the buyer, and for exercising options there is a 3% Premia fee of the option’s exercise value, before distributing the remaining exercise value to the option holder.
80% of all Premia fees are automatically collected and converted to PREMIA, which is then distributed to xPREMIA holders/stakers, and the remaining 20% go to the platform’s treasury.
Wallets Premia supports include MetaMask, Ledger, Trezor, and all wallets integrating the WalletConnect Protocol.
The distribution of the native platform token – PREMIA include: 30% - cross-chain liquidity mining fund, 20% - development fund, 10% - safety/insurance module, 10% - initial distribution, 10% founder allocation, 10% future incentives program, 5% marketing and education fund, and 5% ecosystem grants fund. The fixed supply of the token is 100M and its distribution happens through a Linear Bonding Curve, which means that when a new buyer acquires Premia tokens, each following buyer has to pay a slightly higher price for each token. Theoretically, this should ensure the token’s price will only go up as the circulating supply increases.
The role of the token is both for utility and governance. Users can choose to stake tokens and earn a share of the protocol’s fees – payable in PREMIA. Stakers can lock their staked tokens and earn reduced trading fees on the platform. Liquidity providers can earn the token as rewards, and token holders have voting power over proposals.
The company addresses its use of ERC-1155 tokens as a better fit for the needs of the platform, as it allows a single smart contract to mint a multitude of tokens with various levels of specifications. In the case of Premia, options are minted from the same smart contract, however, each contract can hold its own unique parameters, tailored to the distinct options contract.
The Premia team has chosen to keep its anonymity and wants to be referred to as “members of the Premia Republic”. The group also stands behind another project – Don’t Buy Rope, one of the first NFT yield farming experiments. Premia audits can be found in the protocol dashboard on this webpage.
The Premia marketplace is available on BNB Smart Chain and supports BEP20 assets, as announced by the platform in Q1 2021. Besides the deeper selection of assets, the team was attracted to the BNB Smart Chain’s low transaction fees compared to Ethereum’s gas prices which often outprice new users.
Premia integrated Chainlink Keepers and Chainlink Price Feeds and called it “the awakening of the Premia automated ecosystem”. The integration is intended to deliver high-quality price data for WBTC, ETH, LINK, and DAI in order to support real-time options pricing, as well as the ability to automatically exercise options and automate the distribution of protocol fees, while supporting the introduction of stop-loss and take-profit orders.
With the launch of the protocol V2 in November 2021, the company conducted a Shield Mining Campaign to bootstrap staking against the Premia protocol when it gets listed on Nexus Mutual. The Ethereum-based risk-sharing platform Nexus Mutual utilizes community governance by pooling members' funds and using them to offer protection products to its members.
Currently, the Premia team is working on finishing the development of Premia v3. Primarily work is being done on adding instant pro-rata exposure - the platform will be removing its liquidity queue so that any LP active in a poll will receive pro-rata exposure when an option is purchased. Concentrated liquidity exposure has been requested by the community and is also worked on, as well as buy, sell, or market-make specific options for LPs, passive and active liquidity management strategies, sell options on margin, boundless capital utilization for LPs, and finally Delta hedging and other meta-vaults.
The Premia app is expected to be deployed on Fandom and add new option markets, the project as well plans to have a UX navigation polish.
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