Premium&Market Price


The Premium Index is a metric used to measure the difference between the Market Price and the Index Price. The system adjusts the Premium and Market Price based on the net position direction of traders, aiming to maintain a balance between long and short positions as much as possible. Specifically, when traders' net positions are long, the Premium is positive, and the Market Price will be higher than the Index Price. In this scenario, the cost of going long increases, which suppresses the creation of new long positions in the market. Conversely, if one chooses to go short, reducing the net long positions, the opening price will be advantageous, thereby lowering the overall market premium.

The current Premium Index is determined by multiple segmented functions y=kx+by=kx+b, as outlined in the configuration table below.

Let's assume the ETH Price = 1000 USDC, and the LP Balance = 1,000,000 USDC, allowing for a Max Position of 1000 ETH provided by the LP Balance.

(Long-short)/Max Position  Premium Net Position Difference



1000*0.04 = 40ETH



1000*0.08 = 80ETH



1000*0.1 = 100ETH



1000*0.12 = 120ETH



1000*0.2 = 200ETH



1000 * 1 = 1000ETH

Given this setup, let's further explore how changes in traders' positions could affect the Premium Index, and consequently, the Market Price relative to the Index Price. Suppose we have a segmented function that defines different premium levels based on the proportion of net positions to LP Balance. For example:

  • If the net long positions constitute up to 10% of the LP Balance, the premium could be set at a certain percentage, leading to a slight increase in the Market Price over the Index Price.

  • As the proportion of net long positions increases beyond certain thresholds (e.g., 20%, 30% of LP Balance), the premium and, therefore, the Market Price would increase progressively to discourage further long positions and encourage shorts.

This mechanism ensures the market dynamically adjusts to maintain liquidity and balance, discouraging excessive speculation in one direction and promoting a healthier trading environment.

Market Price

When the net position of the user is long:

market price = index price * (1 + current premium)

When the net position of the user is short:

market price = index price * (1 - current premium)

Referencing Table 1, when the ratio of net positions is 0.04, the premium index is 0.0005; when the ratio reaches 0.08, the premium index increases to 0.001; and so on, until the ratio of net positions reaches 1, the premium index becomes 0.1. Such a configuration can intricately and professionally reflect the market impact of traders' holdings and accordingly calculate a reasonable premium level.

Assuming the current long positions exceed short positions by 40 ETH, according to the table above, the premium index reaches 0.0005, Market Price = 1000 * (1 + 0.0005) = 1000.5. If a user decides to go long 40 ETH at this time, the user's Entry Price will be 1000.5 * (1.0005 + 1.001) / 2 = 1001.250375. If the user goes short 40 ETH, the Entry Price will be 1000.5 * (1 + 1.0005) / 2 = 1000.750125.

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