Introducing Lyra’s Security Module (SM). A well capitalized pool of liquidity that underwrites trading activities is a key piece of infrastructure for any DeFi (and CeFi) trading venue. This becomes especially important following the execution of future roadmap items such as partially-collateralized options trading. This blog post will examine:
- What is the Security Module?
- How to stake in Lyra’s SM during Ignition
- Exiting the SM
- The slashing conditions for the SM
- The vision for the SM in v2 and beyond
What is the Security Module?
The Security Module is a mechanism which secures the Lyra Protocol in a shortfall event. USDC holders are incentivized to lock tokens into a smart contract on Layer 1 Ethereum, which will be used as a mitigation tool in case of a shortfall event. The interpretation for the occurrence of a shortfall event is subject to a protocol governance vote. In return for performing the work of securing the protocol, stakers are compensated by earning LYRA token rewards. 5,000,000 LYRA (0.5% of supply) will be distributed to users staking in the SM over the Ignition period (November 2 00:00 UTC - January 7 00:00 UTC). Rewards will be continuously, and will be claimable at the token launch on December 14th. Initially, this will be the only yield that accrues to SM stakers. The contract address for the SM is 0x54D59c4596C7Ea66fD62188Ba1E16Db39E6F5472.
How to stake in the SM during Ignition
Unlike the core Lyra protocol itself (which lives on Optimism), the SM is located on layer 1 Ethereum. This is to ensure that the SM is secure in the event of an issue with Optimism itself. The SM currently only accepts USDC as collateral, and will likely also support LYRA staking following the token launch, subject to governance approval. Users can stake USDC at any time and start to earn rewards immediately. Users can stake in the earn tab in the Lyra dApp.
Exiting the SM
To withdraw from the SM, users can signal a withdrawal in the Lyra dApp which will begin a 10 day countdown. The 10 day cooldown period is to ensure that enough time is available to conduct an emergency governance procedure in the event of a shortfall. Your liquidity will continue to earn rewards during the cooldown period.
At the end of this countdown, you can withdraw as much of your liquidity as you want during the unstake window which lasts for 2 days (from the 10th-12th day after you have signalled withdrawal). If you do not withdraw during the unstake period, you will have to re-signal your exit from the SM, and wait another 10 days. The $LYRA rewards from staking in the SM will be claimable from the 14th of December, on the date of the token launch. After the 14th December, $LYRA rewards will be immediately available to claim once earned.
A user who provides liquidity to the SM earns $LYRA in return for insuring protocol risks. The interpretation for the occurrence of a shortfall event is subject to a protocol governance vote. Examples of shortfall events could include:
- Exchange solvency (v1 is fully collateralized so this is unlikely until v2)
- Smart contract attacks
- Issues with Optimistic Ethereum that result in a loss of funds
- Other events that Lyra governance deems to have resulted in a shortfall
Security Module Vision
If you’ve made it this far in the blog, then you deserve a (small) alpha leak.
In our community calls and Discord, we’ve made no secret that partial-collateralization is a big priority for Lyra. However, an increase in capital efficiency via the introduction of partial-collateralization necessarily results in some insolvency risk. This is a tradeoff that is frequently made in mature markets worldwide. In order to support trading volumes that reach billions of dollars, the SM needs to be sufficiently large to inspire confidence when trading. The Security Module could house a mix of collateral (stablecoins, ETH/BTC, LYRA), and derive returns from a few sources:
- A baseline yield from lending in governance deemed ‘safe’ yield generating returns (e.g. stablecoin lending for 4-5% yield).
- A percentage of fees generated by the Lyra protocol
- Lyra rewards which are boosted by staking LYRA in the module for longer periods of time
- Priority liquidations within a margining system
The focus will be turning the SM into the centre of gravity for the Lyra trading system, building a war chest of (eventually) DAO-controlled assets that can act as a guarantor for the system, driving higher volumes to the protocol and inspiring confidence from Lyra participants. There is another special role for the SM within the designed architecture that we can’t tease just yet, but will drive yet more volume to SM stakers.
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Lyra is a protocol for trading options 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.
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