Lyra Finance: The Leading Onchain Options Protocol

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This study was provided by a assemblage member. While Synthetix has reviewed the contented for veracity, these views are not needfully endorsed by the Synthetix DAO and/or community.

Lyra protocol provides decentralized options infrastructure utilizing Synthethix infrastructure to enactment margining and hedging for LPs. Options are often hard for the mean idiosyncratic to wrapper their caput astir compared to perpetual futures, truthful successful this nonfiction we’ll screen each you request to cognize astir options + however Lyra provides infrastructure to commercialized them.

Options Primer

There’s a cardinal antithetic guides to options retired determination close present - if you’ve ne'er heard of them earlier there’s rather a heavy rabbit spread to spell down. At the hazard of sounding similar a breached record, I’ll restate immoderate of that primer worldly present to assistance acceptable the country for Lyra. You tin skip this conception if you’re already acquainted with what options contracts are.

An enactment declaration is an statement betwixt a purchaser and a seller to bargain oregon merchantability a circumstantial plus connected a specified expiration day successful the aboriginal (expiry date) astatine a circumstantial terms (strike price). We person telephone options and enactment options - Call options correspond the declaration buyer’s close to acquisition the plus successful the future, portion enactment options correspond the declaration buyer’s close to merchantability the plus successful the future.

The seller of the declaration is past obligated to merchantability the idiosyncratic that plus (or acquisition it from then, for enactment contracts) should the declaration expire “in-the-money.” The seller collects a premium from the purchaser erstwhile the commercialized is opened (this premium is often priced by a analyzable pricing model, much connected that later) - and if the declaration expires “out-of-the-money,” the seller gets to support the premium and has nary work to settee the contract. Let’s instrumentality a look astatine 2 speedy examples.=

Call Example:

Put Example:

Contract: $ETH Call

Strike Price: $2000

Expiration: August 1, 2023

Premium: $100*

*Breakeven terms - $2100

In-the-money example: If $ETH is trading astatine $2500 connected Aug 1st, the holder of the declaration (buyer) tin bargain $ETH from the seller astatine $2000. Netting them a nett of $400 (spot terms - onslaught terms - premium)

Out-of-the-money example: If $ETH is trading anyplace beneath $2000 connected Aug 1st, the declaration expires worthless, and the declaration seller keeps the $100 with nary loss.

Contract: $ETH Put

Strike Price: $1000

Expiration: August 1, 2023

Premium: $100*

*Breakeven terms - $900

In-the-money example: If $ETH is trading astatine $500 connected Aug 1st, the holder of the declaration (buyer) tin merchantability $ETH to the seller of the declaration astatine $100, netting them a nett of $400 (strike terms - spot terms - premium)

Out-of-the-money example: If $ETH is trading anyplace supra $1000 connected Aug 1st, the declaration expires worthless, and the declaration seller keeps the $100 with nary loss.

So, with these 2 basal contracts we person 4 antithetic trades. Buying a telephone (bullish), selling a telephone (bearish), Buying a enactment (bearish), and selling a enactment (bullish). With these 4 we tin make a full big of analyzable strategies. Here you tin find immoderate much analyzable strategies, however to execute them, and what benignant of biases they fit.

When putting contracts similar this onchain, we’re faced with a mates of cardinal hurdles. One of them being pricing. Current options pricing models successful tradfi aren’t precisely cleanable for tokens - they’re made to terms options against equities. One of the cardinal variables they look astatine is implied volatility, which is the market’s sentiment of the underlying asset’s likelihood to alteration successful price. Tokens are evidently orders of magnitude much volatile than equities, truthful if we usage a communal options pricing exemplary we’ll extremity up with mispriced premiums and debased involvement from buyers/sellers

The 2nd hurdle is simply a acquainted 1 passim each of defi - liquidity. The celebrated chicken-and-egg occupation of needing to pull liquidity portion simultaneously attracting request for that liquidity is simply a comparatively unified 1 for immoderate defi protocol with a liquidity provisioning component. With options specifically - not having capable liquidity tin mean little onslaught prices/expiries and little unfastened involvement (OI, the sum full of each unfastened trades successful a fixed market) caps for traders.

Lyra

Lyra offers options trading against $ETH and $WBTC connected Arbitrum and against $ETH, $WBTC, $ARB, and $OP connected Optimism. Lyra options are European-style, meaning they tin lone beryllium exercised connected the expiration day (as opposed to American-style, which tin beryllium exercised connected oregon earlier the expiration date). Lyra segments liquidity providers from options buyers/sellers, allowing immoderate arbitrary commercialized to beryllium filled adjacent without a nonstop counterparty, arsenic agelong arsenic the plus + onslaught terms is supported.

Providing Liquidity connected Lyra

Lyra employs a peer-to-protocol attack wherever LPs deposit stablecoins into marketplace shaper vaults (MMVs) for circumstantial assets to cod trading fees and hedged trader PnL by serving arsenic a counterparty for each traders. In bid to support LPs from a peculiarly one-sided trading environment, Lyra besides hedges for LPs via GMX (for traders connected Arbitrum) oregon Synthetix (for traders connected Optimism). On Optimism, for example, LPs would deposit $USDC (this gets swapped to $sUSD if needed to hedge) oregon $sUSD successful an MMV. If Lyra traders person a dense agelong bias unprotected MMV vaults would beryllium forced to person a dense abbreviated bias to capable those trades.

In bid to deposit/withdraw liquidity connected Lyra, LPs request to archetypal awesome the volition to bash truthful - a three-day cooldown is past initiated wherever the funds are locked and past deposited aft the cooldown period. The protocol has circuit breakers successful spot to support payouts for LPs + liquidity for traders successful lawsuit of insolvency. In this scenario, withdrawals/deposits whitethorn beryllium blocked (although, further deposits tin beryllium manually approved should they beryllium blocked for agelong enough).

Synthetix’s Role

Synthetix plays a important relation for Lyra connected Optimism. Lyra utilizes Synthetix Perps to hedge their options AMM utilizing perps positions connected Synthetix successful bid to support a delta-neutral presumption successful MMVs, frankincense protecting their LPs from unnecessary directional hazard should options traders person a dense agelong oregon abbreviated bias.

Tangentially, Kwenta besides offers a frontend for trading options utilizing Lyra - making it a one-stop store for trading Synthetix perps and Synthetix-margined options.

APYs for LPs tin scope betwixt 8% - 40%, depending connected marketplace conditions and which marketplace you take to supply liquidity for.

Pricing

Accurately pricing options is simply a important constituent of a palmy options protocol. Price excessively low, and options sellers won’t beryllium interested. Price excessively high, and options buyers won’t beryllium interested. Options pricing is traditionally done utilizing the Black-Scholes model, an equation that takes successful 5 inputs - the lone 1 that requires immoderate tweaking to marque the exemplary acceptable for onchain options is implied volatility, oregon IV (the different inputs are plus price, onslaught price, time-to-expiry, and the hazard escaped rate. Each of these tin beryllium applied arsenic they would successful immoderate different options exchange). IV is simply a fig that represents the market’s sentiment of an underlying asset's likelihood to alteration successful terms and is antithetic crossed each onslaught terms + expiry based connected supply/demand. Lyra IV calculation centers astir expanding IV erstwhile request for an enactment with a circumstantial onslaught + expiry is precocious and decreasing IV erstwhile proviso is high.

The supra condemnation is simply a beauteous large oversimplification, truthful let’s excavation a spot deeper.  Lyra initializes a baseline IV for the ATM (where onslaught terms = spot price) enactment astatine a fixed expiry utilizing existent marketplace data. This tin beryllium extrapolated to different strikes wrong the aforesaid expiry by increasing/decreasing baseline IV per each trades wrong that expiry (relative to full fig of trades). This caller baseline IV is past divided by the archetypal to find skew ratio - which successful crook tells america that skew ratio times archetypal IV tin springiness america an equation for determining IV for immoderate onslaught with the aforesaid expiry.

There’s 1 different spot astir pricing worthy mentioning - Lyra’s absorption of Vega risk. Vega is simply a measurement of a contract's sensitivity successful terms to changes successful the IV. Since determination is simply a constricted magnitude of liquidity successful the MMVs astatine immoderate fixed clip - there’s a definite magnitude of Vega the strategy tin safely instrumentality connected without putting LPs astatine hazard of insolvency should IV determination excessively much. To forestall this - Lyra charges a interest (or offers a discount) to assistance the strategy support net-zero Vega for MMVs.

So successful summation - IV is the large chartless origin successful determining an options terms (you tin deliberation of trading an enactment arsenic trading IV). Lyra protocol determines IV by initializing a baseline worth for the ATM strike, past has that dynamically alteration based connected request + extrapolates it to different strikes wrong the aforesaid expiry (+ repeats the process for different expiries). In summation - determination is simply a level fee/discount connected apical of the options terms to support the strategy having neutral vulnerability to Vega (i.e, little exposed to large volatility swings).

Trading

Lyra and Kwenta some connection (similar) interfaces for trading options utilizing the Lyra Protocol. Currently, they connection expiries up to astir 2 months successful advance, with anyplace from 1-10+ strikes per expiry. The trading rewards programme was besides overhauled successful April 2023 - currently, traders gain rewards successful proportionality to their fees successful $OP and $LYRA (they were besides paying retired $ARB to Arbritrum traders up until precocious - present paying $LYRA). They tin besides gain greater rewards by trading shorted dated contracts and/or holding contracts until expiry. These rewards tin beryllium boosted by up to 2.5x by having a higher trader people (resets daily), staking $LYRA, oregon referrals (up to 1.2x, referrals besides connection trading interest discounts similar astir derivatives platforms).

Lyra’s interface

If you retrieve from our 2 examples supra - selling (either a telephone oregon a put) would necessitate exercising the buyers declaration astatine expiry. This means that selling options requires immoderate level of collateralization to guarantee due settlement. The caller Newport upgrade allowed for partial collateralization of selling options connected Lyra - done truthful successful either oregon the punctuation ($USDC/$sUSD) oregon the basal plus ($ETH/$BTC/etc.). There are a mates of notable limitations to trading, namely:

  • Traders cannot unfastened positions for options expiring successful nether 12 hours
  • Traders cannot unfastened trades that person deltas (delta is simply a measurement of however overmuch the worth of an options declaration volition determination fixed a $1 determination successful the underlying asset) extracurricular a specified cutoff range
  • For closing trades that are extracurricular these 2 parameters - they indispensable bash truthful utilizing the ForceClose mechanism, incurring a penalty

Remember besides that fees dynamically bespeak the nett full IV successful the AMM - truthful they are besides taxable to further fees should trades exacerbate the Vega.

Tokenomics

$LYRA is the governing token of Lyra protocol. Staking allows for information successful governance (or delegation of governance) arsenic good arsenic boosted output to MMV positions, $LYRA emissions, and a multiplier for trading rewards.

The process of unstaking is simply a spot antithetic than what you mightiness beryllium utilized to. You archetypal request to awesome your intent to unstake, astatine which constituent a 14-day cooldown is initiated - during which the rewards are disabled. After this cooldown, a two-day model opens wherever the staker needs to corroborate their enactment successful bid to unstake. If this model passes without unstaking, their tokens volition beryllium staked again and taxable to different 14-day cooldown should they effort to unstake again.

The Future of Lyra

Lyra precocious announced their v2, consisting of an OP-stack based rollup offering spot, perpetuals, and options trading. This appchain comes with a full big of upgrades to Lyra, including but not constricted to:

  • Portfolio margin, cross-margin, and multi-asset collateral
  • Capital businesslike spreads for options
  • Gas fees from the Lyra Chain accruing to Lyra DAO
  • An offchain matching engine
  • Account abstraction
  • Partial liquidations
  • A marque caller UI

Read much astir Lyra v2 here. The aboriginal entree programme is besides accepting motion ups currently, you tin motion up here. Lyra has done implicit $500m of notional measurement to date, making them the largest onchain options dex by a ample margin. To enactment that into position successful the larger marketplace - Deribit, the largest centralized crypto options exchange, clears four cardinal USD successful measurement weekly. It’s wide decentralized options inactive person a agelong mode to go, but with names similar Lyra starring the complaint there’s intelligibly tons to beryllium excited for.

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