Lyra: Pricing on-chain options with precision

Compared to on-chain spot trading, lending, and perpetual contracts, options are much more difficult to implement on-chain

Options, as the financial derivatives with the most recent heat and the strongest development trend, have gained the favor of investors, especially professional institutional investors.

On-chain DeFi’s money Lego is not likely to be missing the options piece. However, compared to on-chain spot trading, lending, and perpetual contracts, options are much more difficult to implement on-chain.

Problems with on-chain options
Although there have been pioneering projects like Hegic and Opyn in the on-chain options track, there are three major problems with on-chain options in general: no compensation loss for liquidity providers due to inability to price accurately, high risk due to no hedging means for liquidity providers, and high option pricing due to excessive liquidity.

First, options are inherently a very difficult financial derivative to price, and their accurate pricing relies on a large number of calculations. However, most of the existing option protocols are deployed on the Ethernet mainnet, and the lack of computing resources on the Ethernet mainnet has forced the protocols to use static volatility and imprecise pricing, resulting in uncompensated losses for liquidity providers.

Second, options are inherently risky financial derivatives, and none of the existing price-advantaged options products provide native hedges for liquidity providers, resulting in extremely high risk (naked short volatility) that liquidity providers must assume.

Finally, as both of the above are extremely unfriendly to liquidity provision this also leads to tight liquidity in the pool. Existing protocols choose to directly raise option prices to extremely high levels in order to avoid complex option pricing issues, which ultimately leads to a decline in trading volumes.

Options Platforms Built on Layer 2
Freed from the scarcity of computational resources at layer one, everything needed for an options protocol can be fully optimized at layer two. Lyra Finance, an options platform built on a Layer 2 network, minimizes the risk of liquidity providers and optimizes the trading experience through high-frequency quantitative calculations.

Lyra maps implied volatility surfaces with market supply and demand, and then feeds the surface data into a Black-Scholes pricing model for price calculation, ensuring accurate pricing of options. The Vega volatility risk is minimized through a rate mechanism.

Linking DeFi Giant Synthetix
Due to the high reliance on composability for DeFi-like applications, the choice of a Layer 2 network has become a challenge for many project owners. Many of the top DeFi projects chose the Optimistic Rollup solution, which was highly favored by V-God in the short term, and Synthetix, a synthetic asset trading platform, was no exception, choosing Optimism.

In order to connect to the spot market, Lyra chose to interact with Synthetix to achieve exposure to the liquidity provider’s underlying assets in order to hedge against the aforementioned delta risk. Specifically, Lyra will automatically execute long and short positions in the liquidity provider’s corresponding assets.

The linkage with Synthetix at the second level ensures the best user experience and solves the problems of existing on-chain options products, which greatly increases the likelihood that on-chain options products will be accepted by the public.

Lyra’s Token Allocation

Lyra: Pricing on-chain options with precision

Image credit: Lyra Documentation
The largest 50% of the tokens will be given to the community to ensure the decentralization of the protocol. This portion will be distributed to the community through public sales, liquidity mining, and governance rewards. 20% of the tokens will be allocated to LyraDAO, which will sustain the ongoing development of the protocol and the subsequent development of the ecosystem. A further 20% of the tokens will be reserved for the core development team and the remaining 10% will be reserved for the initial investors of the protocol.

Lyra’s present and future
In the V1 version of Lyra, European long and short options on ETH and BTC will be available for cash on expiry delivery, and traders will be able to buy and sell options directly through the AMM provided by Lyra.

The overall mechanism of Lyra was designed in March this year and the engineering was largely implemented in April and third party audits were completed in May. The test network will be launched in June, while the main network is scheduled to go live in the third quarter, followed by the V2 version expected to go live in the fourth quarter.

Posted by:CoinYuppie,Reprinted with attribution to:
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