[AIP-87] Launch Alchemix-Premia options pools

Proposal

This proposal seeks governance approval to collaborate with Premia Finance and launch a joint options pool product. It also proposes a treasury swap of $50k to take place between the two protocols.

Alchemix dev requirements

1. Launch custom Alchemists that can mint 100% LTV alAsset loans to a whitelisted contract.
2. Develop a UI. This is proposed to happen through a grant.

Context

When alAssets are taken out as loans, depositors usually swap these tokens to other assets, like DAI, USDC, ETH, etc., in order to realize the value of their loans. This happens through alAsset liquidity pools. Alchemix uses ALCX emissions and bribes to provide rewards to these LPs, so that people have incentives to become liquidity providers in these pools, which is a huge expense.

A long-term goal of the protocol is to find direct use-cases for alAssets, so that instead of entering the liquidity pools, they can more readily be deployed elsewhere. This makes it cheaper for the protocol to finance operations.

One such use-case is the alETH/alUSD options pool on Premia Finance (read more about Premia here: https://premia.finance), where users can provide liquidity to an alETH call pool or an alUSD put pool, and traders can buy options to go long or short on the performance of ETH.

There is a conundrum regarding alAssets: If someone has the option to earn x% of yield on ETH or on USDC, why would they choose alETH or alUSD to earn the same amount of yield on. So somehow, the yields need to be higher on alAssets for people to choose them, or need to have some added benefit.

This product aims to do just that through options pools. Users may wish to purchase alETH and alUSD options because the premiums are lower and alETH and alUSD option pool writers are willing to accept lower premiums because they are earning yield on their 100% LTV Alchemix loans.

The Alchemix-Premia Options Vault

The proposed way to incentivize depositors to enter an alAsset denominated options pool is to allow higher LTV alAsset loans to be minted with the restriction that the alAssets can only be deployed as liquidity in the corresponding options vault.

So, while a depositor could take a 50% alETH loan, swap it to ETH and deploy that in an ETH-denominated options vault, with this proposed options pool, a depositor could instead take a 100% alETH loan and deploy that in the alETH-denominated options pool.

Because the alAssets are never given to the depositors and instead are controlled by a smart contract, the alAssets are not sold and remain in the premia liquidity pools. This also means that the loan cannot be looped an infinite amount of times, like it would be possible with a "normal" loan. Additionally, it is extremely difficult to lose 100% of capital by writing options - thus, 100% LTV loans would not create a massive surplus in alAssets if the options pools did not go in the LP’s favor. The worst performance on Premia for any of their pools has been -17% since inception, as can be seen in this list under the "Inception APY" column. (To note, there are pools that have larger negative returns that do not show up in this list, but those are very small pools that are very underutilized, which can result in very large negative performances)

This actually supercharges returns for options liquidity providers, as they will earn yield from multiple sources:

1. Their base deposit is deployed in an Alchemix strategy (i.e. stETH or yvDai), which continues to self-repay the depositor’s loan.
2. The full capital is also deployed as alETH or alUSD in the options pool, collecting options premiums.
3. PREMIA emissions can also be sent to the pool that depositors can collect, more on this below.

As with options products, there is the possibility of the pools generating negative returns, if traders win. But generally, long term, the pools are expected to provide positive returns.

However, this joint product has a huge further upside for depositors: Even if in the theoretical scenario of the options pool losing a 100% of the capital, users will still have their full initial capital earning yield in the Alchemix strategy. So even with a net position of zero, they would be accruing yield, though, of course, they would not be able to remove their initial collateral until the loan is repaid.

Alchemix Premia position and PREMIA rewards

To supercharge depositor returns (and to compete with other Premia pools), PREMIA rewards should be directed to the alETH/alUSD pool. This can be done by vxPREMIA holders directing emissions there.

So the establishment of an Alchemix vxPREMIA (locked PREMIA) position is proposed. Alchemix currently holds $20k worth of PREMIA tokens and a treasury swap is proposed between the two protocols to the tune of $50k. Alchemix would lock their whole position and direct PREMIA rewards to our pool.

Further, a set percentage of the PREMIA rewards that are emitted to the users of this product would be collected and locked by Alchemix, increasing the voting power and thus the value of emissions to the alETH/alUSD pool.

Motivation

This product is beneficial for Alchemix because we:

1. Capture TVL without having to pay incentives for it, which makes these vaults net profitable.
2. Options traders purchase the alAssets from the market that they need to pay for their position, which generates buy pressure and also additional volume.
3. Alchemix can continuously accumulate a position in Premia.

To better illustrate the potential significance for Alchemix, if the vaults took off, take the following example: Current Premia reward yields to the most richly rewarded pools are 40%+ APR. If the alETH/alUSD pool stabilizes at just 10% and Alchemix claims and locks 20% of the rewards, that results in a 2% APR for the treasury on the deposit base. So comparing that with our basic Alchemix loans:

• Assuming a 5% yield on the deposits, Alchemix collects a 0.5% APR from the treasury cut.
• For this product, the same 0.5% APR is collected on the vaults, plus the 2% from Premia rewards, generating 5 times as much revenue on the same amount of deposits. On top of that, the minted alAssets do not need to be financed by Alchemix and if the vaults have a positive return, it actually removes additional alAssets from the market.

This product is beneficial for Premia for the following reasons:

1. The ability to offer liquidity providers the option to route their deposits through Alchemix and generate additional yield.
2. Capture additional TVL.
3. A large chunk of PREMIA emissions to the alETH/alUSD pool are essentially locked for good by Alchemix and not sold on the market

Premia would develop and deploy the smart contract that is able to deposit to the custom Alchemist, mint alAssets, deploy to the Premia pool, handle rewards and process withdrawals.

Alchemix would create a UI for the product that would be linked to from the main UI.

Deployment is currently targeted to take place on either the Arbitrum or Optimism networks utilizing Premia’s new V3 system.

Voting options

Voting is single-choice.

1. A vote of approval greenlights the deployment of the custom Alchemist and whitelisting of the smart contract, the grant for the development of the UI and the $50k treasury swap between Alchemix and Premia.
2. A vote of disapproval signals that this product should not be enabled by Alchemix.
3. Abstain

Appendix: Options protocol introduction

This intro to crypto options focuses on Premia largely due to their interest, past partnerships, liquidity incentives and the presence of an alUSD and alETH options market, but most other crypto options platforms work based on similar principle where variations of this product could be enabled if the product is successful.

There are two basic types of options:

1. PUT options: These give the holder the right (but not the obligation) to sell the asset (in this case alETH) for which the option was purchased at a price set at the time of purchase. Example: alETH price is $1300. Someone buys a PUT option (for a price, called the premium) with a strike price of $1200 and a set expiration date. Then if the price of alETH falls to $1000, the holder can exercise the option to realize the $200 difference, essentially buying alETH for $1000 and then selling it for $1200. In practice the system tracks the value of the option and automatically pays out the difference. If the price of alETH at the time of expiration is higher than $1200, the option expires worthless.
2. CALL options: These give the holder the right (but not the obligation) to buy the asset (in this case alETH) for which the option was purchased at a price set at the time of purchase. Example: alETH price is $1300. Someone buys a CALL option (for a price, called the premium) with a strike price of $1400 and a set expiration date. Then if the price of alETH rises to $1600, the holder can exercise the option to realize the $200 difference, essentially buying alETH for $1400 and then selling it for $1600. In practice the system tracks the value of the option and automatically pays out the difference. If the price of alETH at the time of expiration is lower than $1400, the option expires worthless.

On the other side of the trade are the option sellers, who (for a premium) take on the obligation to sell or buy the underlying asset at the strike price.

This happens using liquidity pools in crypto. Option sellers (also called the underwriters and liquidity providers here) deposit their funds into an options liquidity pool (in this case the alETH/alUSD pool) and traders can buy options from this liquidity pool. CALL options are denominated in the tracked asset (alETH), PUT options are denominated in USD (alUSD). So the sellers (liquidity providers) deposit either alETH or alUSD into the liquidity pool, depending on which option they want to underwrite. This is different from options in traditional finance as everything is denominated in USD (or fiat currencies). The reason for the difference here, is because this is how it can be ensured, that however the price of the tracked asset changes, there is always enough liquidity to pay out the options buyers. For PUT pools, the payout amount (the price difference between the strike price and the price of the asset), at a maximum is the strike price itself, as the price of an asset cannot drop below 0. For CALL pools, the payout amount (the price difference between the strike price and the price of the asset) can be infinite, as there is no cap for the price gain of the tracked asset. However, because the denomination is in the asset itself, wherever it rises to, the amount of available liquidity rises at the same pace, so the payout can always take place.

Generally, because the buyers pay a premium, the price of an asset needs to move at least as much as the premium they paid in a given direction for them to realize any profits, so long term, sellers (liquidity providers) expect the amount of premiums that they collect for underwriting to surpass the amount of money they have to pay when buyers “win”.

Buyers are generally either speculating on price movements and are getting access to leveraged returns without the downside, or are hedging their own portfolio against larger movements.

To learn more about options, Premia has 2 articles that provide more details: What are Options: Calls and Puts and DeFi Options 101