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  • [AIP-33] Premia Finance Alchemix Options

[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

    Hi, love this proposal. I'd like to add a point in favor.

    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.

    If this ends up happening, by selling calls on 1% of the dao, I would expect that there was significant upside on the remaining 99% of the treasury. I don't know about you all, but that sounds fantastic to me if alcx does well : ). Until then, seems like a great way to hedge a crabbing or bear market by earning yield (and thus funding the treasury), as well as the points listed above.

    For those curious, the incentive here is that people will buy calls when they're bullish on the asset, typically if they're swing trading into something else. By having alcx tokens in the call pool for people to buy calls on, the dao is incentivized to have productive, "bullish" behavior for people to want to buy calls on. The more bullish, the more volume, and more yield (premia) on the call sales. And if alcx is "too bullish" and those calls become profitable, my previous point i think stands and we all won a great success.

    Really glad to see alcx is onboarding to premia, and I really look forward to the success of both platforms. Thanks for the writeup, scoopy

    I think this is a great idea!

    Only one question - why not write covered calls for Premia rather than stake ALCX? That way, Alchemix DAO would both get to add some PREMIA to the treasury (aligning success of both projects) and receive some income from writing said calls.

    Maybe the above is too complex for reasons I don't understand, and if that's the case I think supplying liquidity to ALCX/DAI is a great idea.

      jm_

      Only one question - why not write covered calls for Premia rather than stake ALCX?

      The "staking of covered calls" means the DAO will deposit alcx into the Premia Call pools, and thus the protocol will be selling covered calls, and earning yield. There can't be a market on Premia without an initial supply of alcx and alETH to be bought from. So the ALCX DAO is proposing here to bootstrap the liquidity by depositing into those pools and thus sell call options on ALCX to those who want them.

      If it goes really well, there is an open-air thought that those pools could also be incentivized further with alcx emissions to encourage further liquidity deposits from the community as well, or if the pool is in incredibly high demand, the alcx DAO could deposit further alcx tokens to earn further yield.

      If I misunderstood your questions, I apologize in advance but may ask you clarify your post. Seemed to me there was confusion on what it meant to be staking/depositing alcx on premia.

      scoopy

      Premia is voting on a Proposal to add Liquidity Incentive Emissions to the ALCX pools. Assuming that goes through (I can't imagine otherwise), and if this proposal succeeds, the ALCX DAO will be receiving a good amount of those emissions (at least, to start). What are your thoughts, and is there any consideration by the larger DAO, on what to do with the earned Premia tokens?

      If no thoughts or plans have been made, I would like to suggest that the ALCX DAO stakes the Premia to earn yield for the DAO's treasury. This will add a nice, third(!!) source of yield/revenue to the DAO's treasury (selling the calls - i.e. earning premia -, earning Premia token emissions, and then earning income from the entire platform as well).

      When vePremia is launched, we can allocate those rewarded emissions to the ALCX pools for a feedback loop that increases the income and yield on the ALCX deposits. Hopefully most here are familiar with the Curve mechanisms, I can clarify if not. Furthermore, if we decide to also provide bootstrap liquidity for alETH, then we can choose to split in some fashion the weightings/gauge votes to both pools.

          Are there any historical analogs in Premia from which we could draw comparisons and see what kind of effect it has and what kinds of market cycles are introduced?

            IMIMIM I don't have any research on hand, but it would work the same as options do in most markets. Typically, they are supposed to dampen volatility as you can long and short without actual market operations (buying and selling). This means less parabola, but also reduces cascading liquidation scenarios (in theory).

            There are a few little ways the options market affects tradfi, usually around expiration dates, however with American-style options they can be exercised whenever, and so I think that's less pronounced. Nothing that doesn't already happen with BTC and eth, regardless, as they have institutional-size options available on a few different centralized platforms (Derebit, FTX, etc.) What comes to mind here is, I believe, "Gamma" squeezes where options sellers "hedge" whatever is happening in options.

            For example, if there are a ton of call options on alcx that are suddenly getting very profitable, the sellers would then want to rush and buy as much alcx as makes sense so that their options positions are "covered". That would be a pretty heavy, sudden upward movement around a largely-used expiration date in European-style options that exercise & expire ONLY on specific dates. Pretty rare, and not as pronounced as actual leveraged buying that we typically see in crypto, but maybe there's something else too that I'm not thinking of right now if anybody else has research or examples for IMIMIM.

              I think having options backed by alUSD and alETH is a really important step forward. In support

              a month later

              I really like the idea! And I agree with the guys below. Thanks for sharing. And it would be cool to watch your progress.

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