Lyra is a protocol for trading options on Ethereum. Designed natively for the Ethereum Layer 2 scaling solution Optimism, Lyra is the first protocol to manage risk for liquidity providers (LPs), allowing it to offer the best on-chain pricing for traders.
From the outset, Lyra has focused on bringing accurate options pricing to DeFi. Long have traders been exposed to high fees on trades, as a temporary and counterproductive means to offset the risk of the LPs. This creates a fundamental tension between traders and LPs, as high options prices means less risk for LPs but significantly dampens volume because traders are disincentivized to participate. On the other hand, lowering fees without native risk hedging results in inadequate compensation for LPs and exposes the pool to unacceptable blowup risk.
A logical next step is to find a better way to measure and manage liquidity pool risk. However, high gas and slow transaction time prohibits the use of industry acceptable risk metrics like the ‘options greeks’ and the computationally intensive Black Scholes Pricing model. Enter Layer 2 Ethereum — we built Lyra natively for Optimism to satisfy the computational requirements needed to achieve far more robust risk management and, in-turn, better pricing.
If Lyra is aiming for best-in-class options pricing, then external price feed inputs are of the utmost importance to get right. After researching potential oracle solutions, it became clear that Chainlink is by far the most widely used, trusted, and robust source of price data. This is no coincidence given its market leading technology, security, and a proven track record of accurate pricing during periods of extreme market volatility and network congestion.
Lyra is starting out by integrating the BTC/USD and ETH/USD Chainlink Price Feeds on Optimism. The integration is also made possible via Synthetix, who provides a public Exchange Rates contract that connects directly with Chainlink aggregator contracts.
The spot price of the asset is one of five crucial inputs to the famous Black Scholes options pricing formula. Lyra’s market based, striked-adjusted pricing mechanism includes a fully on-chain implementation of Black Scholes. Whenever options are traded in Lyra, Chainlink Price Feeds are queried in real time to provide the most up to date spot price available on-chain. These prices are fed into the Black Scholes model, which outputs an accurate price for the option.
Lyra’s automated hedging mechanism also leverages Chainlink Price Feeds, calculating exactly how exposed LPs are to fluctuations in asset prices. This enables Lyra to trade in and out of the asset, otherwise known as “delta hedging”, reducing the exposure of LPs and allowing them to increase their risk adjusted returns over time.
Having successfully tried this approach on Optimism Kovan, Lyra was able to run a trading competition with over 3,500 traders making over 40,000 trades. The reliability of the pricing feeds was critical to ensure the success of the competition.
Not only does Chainlink provide high-quality data and time-tested infrastructure, but Chainlink is already functioning natively on Optimism. The speed at which Chainlink infrastructure runs on Optimism enables new projects like Lyra, which are native to Optimism, to benefit from deploying on a rollup, such as vastly increased transaction throughput and decreased latency.
Some of the other key benefits of the Chainlink Price Feeds include:
- High-Quality Data — data is sourced from numerous premium data aggregators, leading to volume-adjusted global market prices with robust market coverage and protections against flash crash outliers and data manipulation attacks.
- Reliable Nodes — price feeds are secured by a decentralized network of independent, security-reviewed, Sybil-resistant oracle nodes run by leading blockchain DevOps teams with a proven history of reliability during a variety of market conditions.
- Decentralized Infrastructure — both the data sourcing and on-chain transmission processes are decentralized, removing any central point of failure.
- Reputation — Chainlink provides a robust reputation framework and set of on-chain monitoring tools that allow users to independently verify the performance of node operators and oracle networks.
“In order to bring options to DeFi, we needed secure and reliable price feeds. Chainlink was quick to support Optimism layer 2, enabling us to develop quickly to meet market demand while still ensuring optimal oracle security for user funds. The Chainlink Labs team has helped ensure that deploying on Optimism was easy to transition from concept to implementation, empowering us to focus on delivering the best options trading experience.“ – Mike, Lyra Co-founder.
Lyra is a protocol for trading options on Ethereum. Designed natively for Optimism, Lyra is the first protocol to manage risk for liquidity providers, allowing it to offer the best on-chain pricing for traders. For important updates, key date announcements, and exciting opportunities, follow Lyra on Twitter. Join the Lyra community on Discord to get involved.
Chainlink is the industry standard oracle network for powering hybrid smart contracts. Chainlink Decentralized Oracle Networks provide developers with the largest collection of high-quality data sources and secure off-chain computations to expand the capabilities of smart contracts on any blockchain. Managed by a global, decentralized community, Chainlink currently secures billions of dollars in value for smart contracts across decentralized finance (DeFi), insurance, gaming, and other major industries.
To learn more about Chainlink, visit chain.link and subscribe to the Chainlink newsletter. To understand the full vision of the Chainlink Network, read the Chainlink 2.0 whitepaper. Want to discuss an integration? Talk to an expert.