Testnet AMM Performance

The Lyra trading competition is officially in the books! We’re thrilled with the community participation and the feedback we got throughout. If you missed the first competition wrap-up, check it out here. This post will examine how the AMM performed during the trading competition.

Before we get into the hard numbers - it is worth stressing that the conditions in the competition were far from realistic. This means that you should not draw conclusions about the performance of the Lyra AMM on mainnet (which will operate in adverse, arbitrage-incentivized conditions) to the performance in the testnet competition. The purpose of this post is to give interested readers the results, please make sure to take them with a large grain of salt and within the proper context. Disclaimers aside, let’s get into the numbers!

The below table shows the total long options volume (dollars of premium paid by traders), short options volume (dollars of premium collected by traders), total volume and PNL of the AMM, with the return percentages calculated with respect to the volume traded.

Unsurprisingly, the ETH pool saw by far the most action in the competition. Market maker PNL tends to be highly correlated with trading volumes, so it’s no surprise that the ETH pool was the biggest money spinner for the AMM. A $55m return on $305m volume represents an 18% return for the month , or a whopping 629% APY on used capital. If you use the total pool liquidity ($1bn) as a reference point, that equates to a 90.1% APY.

These APY numbers are clearly unrealistic, and were driven by a number of traders buying and holding calls at IV levels that were around 10-15x realized volatility, with insufficient arbitrage incentives for sellers to bring volatility back in line (which would in turn inflict losses on the AMM).

Having said this, market making in options incurs much higher risks than market making in linear assets (à la Uniswap), so in a well-functioning system LPs should expect higher returns for their invested capital. We would expect returns from a hypothetically profitable options AMM to be capped at roughly 25% per year. This is an order of magnitude less than the above numbers, which is why we urge readers to all but disregard the competition numbers when thinking about AMM performance.

So what can we take from the competition results?

  1. The AMM thrives on high volumes. The more traders and trades, the more the AMM can collect spreads and fees, driving up revenue for LPs.
  2. The AMM's performance is ultimately dictated by realized volatility. If you had calculated the AMM PNL 3 days into the competition relative to the Lyra mark price, it would have looked ugly. This is because the AMM sold a decent chunk of options for 100-200% IV that shot up to the 1000-1200% range. However, since the underlying assets only realized 100-200% IV, the AMM ended making money as the options decayed to their intrinsic value. Had all of the traders who were long in the 1000-1200% range closed, the AMM would have remained profitable (thanks to its path independency), but the final PNL would have been markedly lower.
  3. The potential returns for a successful options AMM are high, due to the high risk that LP’s incur.

Thanks to everyone who took part in the competition! We hope you enjoyed it as much as we did.

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