The New Lyra - An Avalon Upgrade Primer

The New Lyra - An Avalon Upgrade Primer

Given the amount of exciting things that have been happening with Lyra over the last couple of months, a blog update is long overdue! This post will focus on the Avalon Upgrade, what it means for the protocol, and some goals for the next few months.

In just under 6 months, Lyra v1 has racked up some impressive accomplishments, including:

  • $450m notional volume
  • 8000+ traders with a 70% retention rate (on relatively low incentives)
  • An AMM that (delta-hedged) has been profitable for LPs (more information to come on this shortly)
  • 2 protocol integrations (with more in the pipeline)

These are fantastic numbers for a v1, but we’ve only scratched the surface of what’s possible with an on-chain, programmable, liquid volatility engine.

The New Lyra

Avalon will offer the best options trading experience DeFi has ever seen. Predictable, programmable, deep options liquidity that is available 24/7. Traders will now have access to:

  • 100 strike/expiry combinations
  • Partially collateralized options selling (3-4x improvements in yield)

Liquidity providers will:

  • Be able to enter/exit the market maker vaults at any time
  • Generate more fees thanks to partial collateralization
  • Collect the lion’s share of liquidation fees generated on the protocol

In a virtuous cycle, this revamped experience will lead to more fees for LPs, driving even more AMM liquidity which in turn generates an even better venue for traders. How is this all achieved? The new release centers around three big breakthroughs in the protocol, we’ll dive into each of them next:

  1. Anytime market-maker vault entry/exit
  2. Rolling expiries out to 3 months
  3. Partial collateralization for options selling

Anytime Entry/Exit

LPs will now be able to deposit and withdraw funds from the market maker vault at any time (subject to a cooldown period initially set to 7 days). This:

  • Widens the potential LP userbase, as they need only lock funds for the duration of the cooldown period
  • Allow LP rewards to be tailored in real-time to the demand for different options markets Gone are the days where a 30-day lockup was the only way to access the market-maker vaults. That threshold is now a 7-day withdrawal period (and possibly smaller over time). This should reduce the cost of capital for the protocol and result in better liquidity for traders. You can check out the full anytime entry/exit specification here.

Rolling Expiries

Avalon will support options trading out to 3 months of expiries with new listings constantly being added. Think something like 1, 2, 3, 4, 6, 8 and 12 week expiries on ETH that replenish every couple of weeks or so.

To date, DeFi users have only had access to a limited selection of liquid options are only tradeable in a rigid way (most protocols still don’t support users selling options!). Now, traders and protocols will always have access to two-sided options liquidity spanning 100 strike/expiry combinations out to 3 months. The importance of market reliability and predictability cannot be overstated, it’s the only way a product can retain users (both traders and protocols).  

On top of the great experience for traders, the expanded markets will represent a rich playground for integrators. The creative possibilities explode with the flexibility of options available, and we’ll no doubt see more protocols take advantage of the liquidity and DevX on offer in the near future.

Partial Collateralization

The Avalon Upgrade will also see the advent of partially collateralized options selling, meaning that traders can now sell 4-5x as many options with a given amount of capital than they were able to with v1.

The ability to efficiently sell options is critical to the functioning of Lyra’s AMM, as it makes it easier for traders to arbitrage the volatility surface back into a market-clearing configuration. The more efficient it is for option sellers, the better prices on offer for buyers. On top of this, the AMM’s liquidity is backstopping the partially-collateralized trades, which means that LPs can capture the bulk of liquidation fees that are charged.

Putting it all together

Lots of commentary has (fairly) begrudged DeFi options for having low liquidity, poor pricing and limited markets, leading some to speculate that DeFi users just don’t care for options. However, it’s clear that DeFi users (protocols and traders alike) have never experienced the full potential of programmable options.

The Avalon Upgrade will transform Lyra from a novel protocol to a fully fledged options powerhouse. A state-of-the-art trading experience will combine with increasing integrations to generate uncorrelated stablecoin fees to LPs, whilst powering risk transfers across the L2 DeFi ecosystem. The Avalon release will allow Lyra to redefine the DeFi options narrative with a market-leading trader/LP experience, it’s time to pick up the pace.

About Lyra

Lyra is an open protocol for trading options built on Ethereum. Lyra allows traders to buy and sell options that are accurately priced with the first market-based, skew adjusted pricing model. Lyra also quantifies the risks incurred by liquidity providers and actively hedges them, encouraging more liquidity to enter the protocol.

Stay tuned for more important updates, key date announcements, and exciting opportunities by following us on Twitter.

Join the Lyra community on Discord to get involved; be the first to learn about new opportunities with Lyra and be a part of building the future of DeFi.