Premia Blue: Options Pricing

The Interstellar Trading Competition is well underway with 1K+ participants. Week 2/4 is a great time to go over another Premia Blue upgrade — options pricing!

Premia Blue introduces fully market-driven pricing for DeFi options. This is possible because we created a fully-fledged on-chain options exchange!

Let’s talk about how Premia Blue’s upgrades — including a quote system for Over-The-Counter (OTC) liquidity— converge to create the most efficient DeFi options exchange!

If you haven’t already, check out our latest article on Premia Blue’s concentrated liquidity & smart liquidity management!

Pricing in Premia v2 vs Premia Blue

Pricing has notoriously been one of the biggest hurdles for DeFi options to overcome.

Traditional options-pricing models rely on data that is not easily available for on-chain assets plus the market micro-structure is different, making pricing DeFi options correctly a challenging task. And we mean really challenging!

Premia v2 utilized an on-chain volatility oracle, while Premia Blue takes market-driven pricing and brings it a step further.

With the perfect combination of capital efficiency, novel systems, and clever architecture, Premia Blue acts as a fully-fledged on-chain options exchange, allowing premiums to converge to the “true market price”.

Together, the concentrated liquidity pools and OTC-network drive liquidity to maximum efficiency. LPs are incentivized to place their liquidity to the most efficient price to earn fees, all while minimizing liquidity fragmentation.

Let’s dive deeper into the solution — vaults, OTC liquidity, partial collateralization, and linear pricing!

Vaults & OTC Liquidity

In the world of options markets, liquidity fragmentation across strikes and maturities often poses significant challenges.

Premia Blue has risen to address these issues with a sophisticated Request-For-Quote (RFQ) network system, integrated directly into the base exchange layer.

The quote network allows for Over-The-Counter liquidity — direct trading between two parties — resulting in minimal fees and price impact for larger trades. It empowers any vault or market-maker to offer fillable option quotes to users, both on-chain and off-chain.

The result? Highly capital-efficient market-making for both passive and active users.

As a cool extra, the RFQ network lives on Arbitrum Nova, taking advantage of the fast transactions and low fees!

Vault creators aren't limited to just the OTC system. They can also utilize standard range orders to execute automated strategies on-chain.

Partial Collateralization & Linear Pricing

Partial collateralization opens the doors to greater liquidity in the market, leading to more efficiently priced assets.

This is where the magic of a lending market comes into play. The lending market steps in to fully collateralize option positions at the exchange layer, allowing sellers to provide only a portion of the collateral on margin.

Even under the most extreme market conditions, this robust system maintains the solvency of the exchange and effectively eliminates counterparty risk.

Taking a turn from the beaten path of non-linear pricing systems used by popular exchanges like Uniswap, Premia Blue embraces a linear pricing model. The exchange uses range orders that provide liquidity linearly within their range, satisfying the linear relationship between assets exchanged and price.

What you get is an exchange that behaves like a central-limit order book for options, while reaping the benefits of a sophisticated, concentrated automated market maker (AMM).