# Protocol Basics

In a European [digital options](https://docs.divergence-protocol.com/overview/digital-options#what-are-digital-options) transaction, the buyer pays a premium and obtains the **right** to receive a fixed $1 payout. This right is tokenized and exercisable at options' maturity. The seller receives the premium and assumes the **obligation** to pay $1. 

In a Divergence v1 pool, one pays premiums to market buy options. Before a swap, there must be liquidity for a price range. The liquidity providers (LPs) are passive sellers of options. The liquidity they provide ensures that options can be paid off upon settlement. LPs collect fees for transactions within their liquidity range. The premiums they receive are kept in the pool and reserved for settlement. 

Before options expire, one can also provide previously purchased calls or puts as liquidity to close long exposures, or buy puts or calls to hedge and offset long exposures.

At settlement, anyone can call the smart contracts to retrieve a settlement price from [Pyth](https://docs.pyth.network/price-feeds/use-real-time-data). If the underlying price is above or equal to the strike price, the call options are in-the-money. Call token holders can exercise their rights to receive one collateral per option.  LPs have the seller obligation to pay for their open shorts in calls. Otherwise, the put options are in-the-money, and put holders can claim one collateral per option.  LPs have the seller obligation to pay for their open shorts in puts.

For broader discussions about digital options as a financial derivative, and the core swap and liquidity functionalities of Divergence v1, visit the following pages:

<table data-view="cards"><thead><tr><th align="center"></th><th data-hidden></th><th data-hidden></th><th data-hidden data-card-target data-type="content-ref"></th><th data-hidden data-card-cover data-type="files"></th></tr></thead><tbody><tr><td align="center"><strong>Digital Options</strong></td><td></td><td></td><td><a href="protocol-basics/digital-options">digital-options</a></td><td><a href="https://205922869-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F-MXDQ_f-eqqSVmsimay0%2Fuploads%2F8nEf5FjxqIT6KTJxTpBB%2Fswap1.png?alt=media&#x26;token=fa536ddd-0b69-4e7b-b4be-3157c4e75f82">swap1.png</a></td></tr><tr><td align="center"><strong>Triangular Swaps</strong></td><td></td><td></td><td><a href="protocol-basics/triangular-swaps">triangular-swaps</a></td><td><a href="https://205922869-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F-MXDQ_f-eqqSVmsimay0%2Fuploads%2FoJVXfYHUyEM06l89KYup%2Fswap1.png?alt=media&#x26;token=6d9b0f0f-2580-4e31-8d4d-cd42a8d5bad6">swap1.png</a></td></tr><tr><td align="center"><strong>Convertible Liquidity</strong></td><td></td><td></td><td><a href="protocol-basics/convertible-liquidity">convertible-liquidity</a></td><td><a href="https://205922869-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F-MXDQ_f-eqqSVmsimay0%2Fuploads%2FKllbVmRVaJaJdMzKJA3C%2Flp1.png?alt=media&#x26;token=a7ee5b19-4383-4af5-a26d-d8760a84bd2a">lp1.png</a></td></tr></tbody></table>

For those who are looking for a quick reference on options trading, view the one-page summary of [options specs](https://docs.divergence-protocol.com/overview/protocol-basics/options-specs) and the curated playlists in our [youtube channel](https://www.youtube.com/@DivergenceProtocol). To dive deeper, please refer to the [whitepaper](https://www.divergence-protocol.com/diver_v1AMM_paper.pdf) and the [technical documentation of Divergence v1 smart contracts](https://docs.divergence-protocol.com/technical-reference/smart-contract-architecture). For some of the fundamental math concepts of the protocol, check out this [Uniswap v3 primer](https://blog.uniswap.org/uniswap-v3-math-primer).&#x20;