The Lyra Protocol is a new exciting project that aims to conquer the Defi markets. Its team developed a suite of smart contracts creating an automated market maker. The latter offers customers trading options on ERC-20 coins on the Optimistic Ethereum Blockchain.
There is also the Lyra Interface. Thanks to this web interface, users will enjoy easy interaction with the Lyra Protocol. However, the interface is only one of many ways to do that. The company will provide other opportunities, as well.
The team is determined to ensure that its protocol remains fully decentralized. To achieve that goal, it added Lyra Governance. The governance system for managing the Lyra Protocol is already ready for launch. The LYRA token is its key part, though. The company aims to start its ICO sale soon. This native utility ERC20 coin will give its owners the right to vote on the decisions and suggestions concerning the platform’s future development. The total supply of tokens is 1,000,000,000, but only some percentage will be available for purchase at the first stage.
As an options automated market maker (AMM) protocol, Lyra enables investors and traders to buy and sell options on cryptos against a pool of liquidity. It will have two key user groups, options traders and liquidity providers.
Investors and traders will be able to use this platform to trade options. They can either sell options to the MMV or buy options from it. Traders will also have to pay fees to Liquidity providers as compensation for their liquidity.
On the other hand, liquidity providers (aka LPs) will deposit their stablecoins (sUSD) into one of Lyra’s asset-specific Market Maker Vaults (MMVs). The company will use this liquidity to make two-sided options markets for the asset specified by the vault. LPs benefit by depositing liquidity to the vault as they will earn the fees paid when customers trade options.
Moreover, the team introduced Options TLDR, which gives its owner the right to buy or sell an asset at a specified price (aka the strike price) at a specific time. Options trading is very flexible, which is true in the Lyra platform case, as well. That’s why so many customers choose it. They profit handsomely in the process. However, no venture is without risks. So, investors need to decide carefully which investments are worth their while.
Lyra protocol enables its customers to hedge their risk, generate extra income on their assets, lock in a payoff, get leverage, and speculate on future price movements with precision.
The Lyra team noted that creating a good Options market comes down to finding a market value for implied volatility (aka IV). As a result, investors will know the expected volatility of the asset from the start of the session until its expiration. That’s important because when implied volatility hits high, the cost to buy an option increases, as well, and vice versa.
The company will use the core mechanic of the Lyra AMM to increase implied volatility when demand for options is high. It will also decrease implied volatility when supply is abundant. Thanks to this system, the AMM will be able to converge to a market-clearing value for implied volatility for each strike and expiry.
In addition, Lyra will offer the Black-Scholes model. The latter is the foundation of options pricing, and it has the following five inputs: Strike price, Asset price, Risk-free interest rate, Time to expiry, and Implied volatility.
Market participants already know about the four models. Many other companies use the asset’s current price, the risk-free rate, and the strike/expiry of the options contract to attract customers. However, implied volatility is the one input that makes Lyra stand out among these firms.
It works rather simply. When investors are trading options, they are really exchanging implied volatility. Thus, an options AMM should converge to a market-clearing value for the latter. Lyra decided to do just that.
Besides, the platform’s AMM will quote options over a range of strikes and expiries. In fact, Lyra plans to generate a market-driven value for IV. The latter will vary by expiry and strike. The team calls that process an option’s tradeVol. When users start trading, the platform will feed the relevant tradeVol into a Black-Scholes pricing equation to yield the option price.
The Black-Scholes model isn’t perfect. One of the incorrect assumptions it makes is that the IV is constant across all strikes within the same expiry period. However, in reality, different strikes usually have different implied volatilities. Varying supply/demand for options drives this difference on each strike. The market participants call such an occurrence the Volatility Smiles.
The Lyra team noted that its AMM managed to account for volatility smiles. The company included a strike-specific adjustment to its implied volatility parameter. It uses this skewRatio to price options.
Moreover, there is also the standardSize parameter. The latter refers to a number of contracts an investor would have to buy or sell for the AMM to increase or decrease the baseline implied volatility level for expiry by 1% point. The such mechanism enables the AMM to converge to a market-clearing level for the implied volatility.
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