We’re excited to introduce Lyra, DeFi's first complete options AMM. Options are an integral part of the financial system, allowing traders to manage risk, obtain leverage, and construct any payoff structure. However, despite the recent growth of DeFi, they have yet to find any real traction on-chain. This is for a few reasons:
- Impermanent Loss
Options are difficult to price, especially with the constraints of L1. Because of this, many existing protocols use static volatilities and imprecise pricing, leading to consistent losses for LPs.
- Extreme Risk
It’s no secret that options are some of the riskiest financial instruments out there. As a result, any competitively priced options protocol without native hedging runs a high risk of LPs losing all of their money over time. Existing options AMMs often aren’t able to purchase options (meaning that LPs are simply naked short volatility), let alone hedge risk.
- Low Liquidity
This combination of IL and high risk is unattractive for LPs, so liquidity has remained low. Existing protocols which have some liquidity offer sky high prices as a way of sidestepping the complexity of the options pricing problem. These uncompetitive prices naturally lead to little trading volume.
Is it even possible to solve these problems on-chain? Well, it all begins with a deep understanding of options to price and manage risk. Applying this knowledge is computationally intensive, so it requires a scalable compute layer. Finally, you need a place to actually hedge risk for your LPs.
With the advent of L2 and liquid spot markets, it's become possible to build a complete options protocol. Lyra combines the best of traditional options market making (tried and tested pricing and risk management) with crypto’s two biggest strengths right now, scalability and composability. Here’s how we get it done:
Designed for L2
DeFi users will be all too familiar with the benefits of L2; instant transactions and low fees. However, L2 isn't just about being faster and cheaper. Designing a protocol for L2 means redefining the scope of what's possible on-chain.
In Lyra's case, this means automatically managing risk for LPs. The quantification and hedging of risk undertaken by Lyra is achieved by frequently running computationally intensive algorithms. This process would be too expensive to operate within an L1 environment due to gas costs. L2 has enabled Lyra to bring sophisticated hedging techniques on-chain to the benefit of both traders and LPs.
Proven Pricing and Risk Management
Lyra uses market demand and supply to map the implied volatility surface per expiry. This surface is then fed into the Black Scholes pricing model to determine prices for all listed options, yielding performant pricing for traders and steady returns for LPs.
Lyra’s AMM actively hedges the delta risk incurred by LPs by composing with DeFi spot markets to trade in and out of the underlying asset. Vega (volatility) risk is quantified and is at the heart of its fee structure, allowing it to incentivize risk-reducing trades. These innovations increase the alpha and improve the Sharpe ratio of the AMM. See our whitepaper for more details. In a virtuous cycle, increased alpha leads to more liquidity, driving more volume and yielding more fees for the protocol.
Lyra uses Synthetix to hedge the delta risk of its LPs. As trades occur on Lyra, LPs take on exposure to the underlying asset. To protect our LPs, Lyra automatically trades long/short on the underlying asset via Synthetix.
By building on the shoulders of leading protocols in DeFi, we believe we will offer our users an authentic trading experience that leapfrogs the challenges of competitors, positioning us as the new leaders in the ecosystem.
V1 of Lyra will support European calls and puts on ETH and BTC, with automatic cash settlement on expiry. Traders can both buy options from, and sell options to, the AMM. In the future Lyra will support more sophisticated positions, combining both spot and options trading, as well as spreads, straddles, strangles, and much more.
Join the Community
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; provide early feedback, be the first to learn about new opportunities with Lyra, and be a part of building a new DeFi community.