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This report was offered by a neighborhood member. Whereas Synthetix has reviewed the content material for veracity, these views aren’t essentially endorsed by the Synthetix DAO and/or neighborhood.
Lyra protocol supplies decentralized choices infrastructure using Synthethix infrastructure to help margining and hedging for LPs. Choices are sometimes troublesome for the typical consumer to wrap their head round in comparison with perpetual futures, so on this article we’ll cowl all it’s worthwhile to find out about choices + how Lyra supplies infrastructure to commerce them.
Choices Primer
There’s 1,000,000 totally different guides to choices on the market proper now – in the event you’ve by no means heard of them earlier than there’s fairly a deep rabbit gap to go down. On the danger of sounding like a damaged document, I’ll restate a few of that primer materials right here to assist set the scene for Lyra. You’ll be able to skip this part in the event you’re already accustomed to what choices contracts are.
An possibility contract is an settlement between a purchaser and a vendor to purchase or promote a particular asset on a specified expiration date sooner or later (expiry date) at a particular value (strike value). Now we have name choices and put choices – Name choices characterize the contract purchaser’s proper to buy the asset sooner or later, whereas put choices characterize the contract purchaser’s proper to promote the asset sooner or later.
The vendor of the contract is then obligated to promote the consumer that asset (or buy it from then, for put contracts) ought to the contract expire “in-the-money.” The vendor collects a premium from the customer when the commerce is opened (this premium is commonly priced by a sophisticated pricing mannequin, extra on that later) – and if the contract expires “out-of-the-money,” the vendor will get to maintain the premium and has no obligation to settle the contract. Let’s check out two fast examples.=
Name Instance:
Put Instance:
Contract: $ETH Name
Strike Worth: $2000
Expiration: August 1, 2023
Premium: $100*
*Breakeven value – $2100
In-the-money instance: If $ETH is buying and selling at $2500 on Aug 1st, the holder of the contract (purchaser) can purchase $ETH from the vendor at $2000. Netting them a revenue of $400 (spot value – strike value – premium)
Out-of-the-money instance: If $ETH is buying and selling wherever under $2000 on Aug 1st, the contract expires nugatory, and the contract vendor retains the $100 with no loss.
Contract: $ETH Put
Strike Worth: $1000
Expiration: August 1, 2023
Premium: $100*
*Breakeven value – $900
In-the-money instance: If $ETH is buying and selling at $500 on Aug 1st, the holder of the contract (purchaser) can promote $ETH to the vendor of the contract at $100, netting them a revenue of $400 (strike value – spot value – premium)
Out-of-the-money instance: If $ETH is buying and selling wherever above $1000 on Aug 1st, the contract expires nugatory, and the contract vendor retains the $100 with no loss.
So, with these two fundamental contracts we’ve got 4 totally different trades. Shopping for a name (bullish), promoting a name (bearish), Shopping for a put (bearish), and promoting a put (bullish). With these 4 we will create a complete host of difficult methods. Right here you could find some extra complicated methods, find out how to execute them, and how much biases they match.
When placing contracts like this onchain, we’re confronted with a few key hurdles. Considered one of them being pricing. Present choices pricing fashions in tradfi aren’t precisely excellent for tokens – they’re made to cost choices in opposition to equities. One of many key variables they have a look at is implied volatility, which is the market’s opinion of the underlying asset’s probability to vary in value. Tokens are clearly orders of magnitude extra risky than equities, so if we use a typical choices pricing mannequin we’ll find yourself with mispriced premiums and low curiosity from consumers/sellers
The second hurdle is a well-recognized one all through all of defi – liquidity. The well-known chicken-and-egg downside of needing to draw liquidity whereas concurrently attracting demand for that liquidity is a comparatively unified one for any defi protocol with a liquidity provisioning element. With choices particularly – not having sufficient liquidity can imply much less strike costs/expiries and decrease open curiosity (OI, the sum complete of all open trades in a given market) caps for merchants.
Lyra
Lyra provides choices buying and selling in opposition to $ETH and $WBTC on Arbitrum and in opposition to $ETH, $WBTC, $ARB, and $OP on Optimism. Lyra choices are European-style, which means they will solely be exercised on the expiration date (versus American-style, which may be exercised on or earlier than the expiration date). Lyra segments liquidity suppliers from choices consumers/sellers, permitting any arbitrary commerce to be stuffed even with out a direct counterparty, so long as the asset + strike value is supported.
Offering Liquidity on Lyra
Lyra employs a peer-to-protocol strategy the place LPs deposit stablecoins into market maker vaults (MMVs) for particular property to gather buying and selling charges and hedged dealer PnL by serving as a counterparty for all merchants. With the intention to defend LPs from a very one-sided buying and selling setting, Lyra additionally hedges for LPs by way of GMX (for merchants on Arbitrum) or Synthetix (for merchants on Optimism). On Optimism, for instance, LPs would deposit $USDC (this will get swapped to $sUSD if wanted to hedge) or $sUSD in an MMV. If Lyra merchants have a heavy lengthy bias unprotected MMV vaults can be compelled to have a heavy quick bias to fill these trades.
With the intention to deposit/withdraw liquidity on Lyra, LPs have to first sign the intention to take action – a three-day cooldown is then initiated the place the funds are locked after which deposited after the cooldown interval. The protocol has circuit breakers in place to keep up payouts for LPs + liquidity for merchants in case of insolvency. On this state of affairs, withdrawals/deposits could also be blocked (though, further deposits may be manually authorized ought to they be blocked for lengthy sufficient).
Synthetix’s Function
Synthetix performs a vital position for Lyra on Optimism. Lyra makes use of Synthetix Perps to hedge their choices AMM utilizing perps positions on Synthetix as a way to preserve a delta-neutral place in MMVs, thus defending their LPs from pointless directional danger ought to choices merchants have a heavy lengthy or quick bias.
Tangentially, Kwenta additionally provides a frontend for buying and selling choices utilizing Lyra – making it a one-stop store for buying and selling Synthetix perps and Synthetix-margined choices.
APYs for LPs can vary between 8% – 40%, relying on market situations and which market you select to supply liquidity for.
Pricing
Precisely pricing choices is a vital element of a profitable choices protocol. Worth too low, and choices sellers received’t have an interest. Worth too excessive, and choices consumers received’t have an interest. Choices pricing is historically completed utilizing the Black-Scholes mannequin, an equation that takes in 5 inputs – the one one which requires any tweaking to make the mannequin match for onchain choices is implied volatility, or IV (the opposite inputs are asset value, strike value, time-to-expiry, and the chance free price. Every of those may be utilized as they might in another choices change). IV is a quantity that represents the market’s opinion of an underlying asset’s probability to vary in value and is totally different throughout every strike value + expiry primarily based on provide/demand. Lyra IV calculation facilities round rising IV when demand for an possibility with a particular strike + expiry is excessive and lowering IV when provide is excessive.
The above sentence is a fairly large oversimplification, so let’s dig a bit deeper. Lyra initializes a baseline IV for the ATM (the place strike value = spot value) possibility at a given expiry utilizing present market knowledge. This may be extrapolated to different strikes throughout the similar expiry by rising/lowering baseline IV per every trades inside that expiry (relative to complete variety of trades). This new baseline IV is then divided by the unique to find out skew ratio – which in flip tells us that skew ratio instances authentic IV can provide us an equation for figuring out IV for any strike with the identical expiry.
There’s one different bit about pricing price mentioning – Lyra’s administration of Vega danger. Vega is a measure of a contract’s sensitivity in value to modifications within the IV. Since there’s a restricted quantity of liquidity within the MMVs at any given time – there’s a specific amount of Vega the system can safely tackle with out placing LPs liable to insolvency ought to IV transfer an excessive amount of. To stop this – Lyra expenses a charge (or provides a reduction) to assist the system preserve net-zero Vega for MMVs.
So in summation – IV is the most important unknown think about figuring out an choices value (you’ll be able to consider buying and selling an possibility as buying and selling IV). Lyra protocol determines IV by initializing a baseline worth for the ATM strike, then has that dynamically change primarily based on demand + extrapolates it to different strikes throughout the similar expiry (+ repeats the method for different expiries). As well as – there’s a flat charge/low cost on prime of the choices value to keep up the system having impartial publicity to Vega (i.e, much less uncovered to large volatility swings).
Buying and selling
Lyra and Kwenta each supply (comparable) interfaces for buying and selling choices utilizing the Lyra Protocol. At present, they provide expiries as much as about 2 months upfront, with wherever from 1-10+ strikes per expiry. The buying and selling rewards program was additionally overhauled in April 2023 – presently, merchants earn rewards in proportion to their charges in $OP and $LYRA (they had been additionally paying out $ARB to Arbritrum merchants up till not too long ago – now paying $LYRA). They’ll additionally earn higher rewards by buying and selling shorted dated contracts and/or holding contracts till expiry. These rewards may be boosted by as much as 2.5x by having a better dealer rating (resets every day), staking $LYRA, or referrals (as much as 1.2x, referrals additionally supply buying and selling charge reductions like most derivatives platforms).
Lyra’s interface
When you keep in mind from our two examples above – promoting (both a name or a put) would require exercising the consumers contract at expiry. Which means promoting choices requires some degree of collateralization to make sure correct settlement. The latest Newport improve allowed for partial collateralization of promoting choices on Lyra – completed so in both or the quote ($USDC/$sUSD) or the bottom asset ($ETH/$BTC/and so on.). There are a few notable limitations to buying and selling, specifically:
Merchants can’t open positions for choices expiring in underneath 12 hoursTraders can’t open trades which have deltas (delta is a measure of how a lot the worth of an choices contract will transfer given a $1 transfer within the underlying asset) outdoors a specified cutoff rangeFor closing trades which can be outdoors these two parameters – they have to achieve this utilizing the ForceClose mechanism, incurring a penalty
Bear in mind additionally that charges dynamically mirror the web complete IV within the AMM – so they’re additionally topic to further charges ought to trades exacerbate the Vega.
Tokenomics
$LYRA is the governing token of Lyra protocol. Staking permits for participation in governance (or delegation of governance) in addition to boosted yield to MMV positions, $LYRA emissions, and a multiplier for buying and selling rewards.
The method of unstaking is a bit totally different than what you may be used to. You first have to sign your intent to unstake, at which level a 14-day cooldown is initiated – throughout which the rewards are disabled. After this cooldown, a two-day window opens the place the staker wants to verify their motion as a way to unstake. If this window passes with out unstaking, their tokens will likely be staked once more and topic to a different 14-day cooldown ought to they attempt to unstake once more.
The Way forward for Lyra
Lyra not too long ago introduced their v2, consisting of an OP-stack primarily based rollup providing spot, perpetuals, and choices buying and selling. This appchain comes with a complete host of upgrades to Lyra, together with however not restricted to:
Portfolio margin, cross-margin, and multi-asset collateralCapital environment friendly spreads for optionsGas charges from the Lyra Chain accruing to Lyra DAOAn offchain matching engineAccount abstractionPartial liquidationsA model new UI
Learn extra about Lyra v2 right here. The early entry program can also be accepting signal ups presently, you’ll be able to join right here. Lyra has completed over $500m of notional quantity up to now, making them the biggest onchain choices dex by a big margin. To place that into perspective within the bigger market – Deribit, the biggest centralized crypto choices change, clears 4 billion USD in quantity weekly. It’s clear decentralized choices nonetheless have an extended approach to go, however with names like Lyra main the cost there’s clearly heaps to be excited for.
