Partnered With:

Lyra: chain accurate pricing options | project is introduced

Read this article in 9 Minutes

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

Option, as the financial derivatives with the highest heat and the most violent development trend recently, has been favored by the majority of investors, especially professional institutional investors.

Defi's money Lego on the chain can't be without options. However, compared with on-chain spot trading, lending, and perpetuity contracts, options are much more difficult to implement on the chain.

Problems with on-chain options

In the on-chain option track, although there have been some preliminary projects such as HEGIC and OPYN to test the water, there are three problems in on-chain options: free loss of liquidity provider caused by inaccurate pricing, high risk caused by the lack of hedging means of liquidity provider, and high option pricing caused by excessive liquidity.

First, options themselves are a very difficult derivative to price, and their precise pricing depends on a lot of calculations. However, most of the existing option agreements are deployed on the Ethereum mainnet. Due to the lack of computing resources in the Ethereum mainnet, the protocol is forced to use static volatility and the pricing is extremely inaccurate, resulting in the free loss of liquidity providers.

Secondly, options are financial derivatives with high risks. Existing option products with competitive prices do not provide liquidity providers with original hedging means, resulting in liquidity providers having to bear extremely high risks (naked volatility).

Finally, because the above two points are extremely unfriendly to the provision of liquidity, this also leads to a liquidity shortage in the pool. Existing agreements, in order to avoid the complex issue of option pricing, would simply raise the price of options so high that trading volumes would decline.

An option platform built on the second layer

Freed from the constraints of the lack of computing resources on the first floor, everything required by the option agreement can be comprehensively optimized on the second floor. Lyra Finance, an options platform built on a two-tier network, uses high-frequency quantitative calculations to minimise risk for liquidity providers and optimise the trading experience.

Lyra maps the implied volatility surface with the market supply and demand relationship, and then feeds the surface data to the Black-Scholes pricing model for price calculation, so as to ensure the accurate pricing of options. Lyra's option AMM hedges the liquidity provider's Delta risk by merging on-chain spot trades, while Vega's volatility risk will be minimized through a rate mechanism.

Linkage Defi giant Synthetix

Due to the high dependence of the DEFI class on the composable type, the choice of the two layer network has become a problem for many project parties. Many head DeFi projects have chosen the Optimistic Rollup scheme which is highly Optimistic by V in the short term. Synthetix, the synthetic asset trading platform, is no exception, choosing Optimism.

In order to achieve access to the spot market, Lyra chose to interact with Synthetix to achieve exposure to the underlying assets of the liquidity provider to hedge the above Delta risk. Specifically, Lyra will automatically execute long and short positions of the liquidity provider's corresponding assets.

Linkage with Synthetix on the second floor ensures the best user experience and addresses some of the issues with existing on-chain options, which significantly increases the likelihood of on-chain options being accepted by the general public.

Lyra's token allocation

Image credit: Lyra Documentation

The largest 50% of the tokens will be handed over to the community to ensure that the protocol is decentralized. These tokens will be distributed to the community through open sales, liquid mining, and governance incentives. Twenty percent of the tokens will be allocated to Lyradao, which will fund the ongoing development of the protocol and the subsequent ecosystem. A further 20 per cent of the tokens will be reserved for the core development team and the remaining 10 per cent will be reserved for early investors in the agreement.

Lyra's present and future

Lyra V1 will offer European long and short options for cash delivery of ETH and BTC, and traders will be able to buy and sell options directly through the AMM provided by Lyra.

The overall Lyra mechanism was designed and completed in March of this year, the engineering was implemented in April and a third party audit was completed in May. The beta network will launch in June, while the main network is scheduled for Q3, followed by the V2 version expected in Q4.