[AIP-33] Premia Finance Alchemix Options
EDITED 1/16/2022 to have more accurate descriptions of the Premia platform
Background:
Premia Finance is a DeFi options market protocol, which currently offers ETH, BTC, and LINK options products, and opportunities to earn yield via underwriting options. The Premia team approached Alchemix to work with us to integrate ALCX and alETH options in their platform.
The ALCX options are paired with the DAI stablecoin, and allow people to trade risk in a secondary market. Theoretically, this risk market should help to limit the downside of the ALCX token because people could effectively short without the need to sell ALCX, while creating additional yield opportunities for ALCX. Availability of risk markets should also attract more token holders, since now downside hedges are available. The same can be true of the opposite side of the trade, with options potentially dampening upside, because others can take part in the upside with less exposure to ALCX. However, this is largely mitigated by the token-sink aspect of the ALCX call pool, since deposits and option purchases must occur in the ALCX token, removing those tokens from circulation. In addition to this, the financialization of assets is important in their maturity. More use cases for a token are always better than fewer, and such an integration will help mature the ALCX token and the market liquidity for it.
The alETH options are paired with alUSD, and will live alongside an ETH options market paired with DAI. Options platforms often use proprietary models to derive the strike prices for a given epoch, and naturally arbitrage exists between these various markets, leading to great opportunities for savvy traders. Because option traders on Premia can trade options with any strike or maturity, these arbitrage opportunities between platforms can be easily taken advantage of. The benefit of the alETH/alUSD options market is that there will be an options arbitrage available from within the Premia platform between the ETH and alETH markets. This will drive more volume to both the alETH options market, but also Premia in total because there won’t be a need for arbitrageurs to use other platforms. Furthermore the locked liquidity and yield opportunities for both alETH and alUSD in these markets will add more places to utilize these assets beyond the standard curve and saddle lp positions, which will alleviate pressure on the peg and help to increase trust and adoption.
In addition to adding these pools, Premia will offer incentives on top of the implicit APY for depositors.
Proposal:
Alchemix DAO to stake 3000 ALCX (roughly $1m depending on the day of the week) from the Alchemix DAO treasury (currently holding 320k ALCX) to provide liquidity for the ALCX/DAI options market.
Options markets need LPs in order to function and thrive. If we want these markets to gain any traction, first we need liquidity, and by providing an initial seed, we can do that while potentially earning more ALCX for the treasury. “Potentially” because the returns for LPs are highly dependent on the performance of the options traders. If they win vs the house, we would have negative returns on our deposit, but more likely than not, the traders lose vs the house, meaning that we’ll most likely earn from this deposit. If we end up with negative returns, it isn’t the end of the world anyway, because traders in our community did well at trading options, making them money.
While not part of this proposal, if the community wants to expand the size of these markets at a later date, we can consider offering ALCX incentives to LPs for our aleth and alcx markets, or LPing with alETH to help boost liquidity for the aleth options.
Risks:
Smart contract risk is always something to consider in DeFi. We are confident in the Premia team’s ability to make secure code and follow best practices. All administrative functions are controlled via multisig, so we think there is no risk of being rugged. Beyond operational and Smart Contract risk, there is just the risk inherent in being an options LP. If traders do exceedingly well, or if the options market model is not properly configured, then it is possible that our LP position could see negative returns. But, as explained above, if traders in our community make money from such a market, we are very happy for them. Options markets could also have an effect on price discovery, for better or worse.
Timeline:
Premia is looking to add these markets to their ETH mainnet deployment in the following week. Ideally, we can get this to a vote in the coming days in order to supply that initial liquidity to the ALCX/DAI market.
TLDR:
Alchemix DAO can earn from POL and bootstrap the ALCX/DAI options market on Premia Finance by staking with 3000 ALCX in their platform.
A vote for will authorize the DAO to stake 3000 ALCX into Premia
A vote against will not authorize this action