Lyra Finance V2: App-Chain Case Study

Layer Labs
June 14, 2024

What is Lyra Finance?

Lyra Protocol is a self-custodial and high performance crypto trading platform built specifically for trading of options, perpetuals, and spot. There are 3 distinct components that make up Lyra Finance.

1. Lyra Chain: A rollup built using the Optimism stack that scales Ethereum by offloading computation and transactions away from L1 Ethereum while inheriting its security.

2. Lyra Protocol: A protocol that enables the margining and settlement of perpetuals, options, and spot trading. The protocol is compromised of the main components of accounts that users house their assets, risk managers that govern the margin requirements and liquidate accounts, and assets which are stored in smart contracts that specify the properties of the assets and derivatives.

3. Lyra Exchange: A self-custodial services that performs zero cost and low latency matching of orders.

All of these components are governed by the Lyra DAO via a on-chain system to make any changes to Lyra’s infrastructure and design.

Lyra V2

Lyra V2 is the final form of the volatility engine, which combines the best of on-chain trading with a CEX-like experience to deliver a product to push forward the next wave of volatility and derivatives trading.

This new version of Lyra is designed to:

  1. Support trustless and innovative margining capabilities (Portfolio Margin, Cross-Margin, Multi-asset collateral)
  2. Facilitate institutional trade order matching (Redesigning AMMs to power the backbone of Lyra Chain)
  3. Re-introduce options to the crypto market (Customized, seamless, intuitive user experience and new advanced strategies/products)

V2 was designed to be a modular permissionless bedrock for Defi derivatives. All of the critical components for trustlessness and composability reside on-chain from initial margin requirements to liquidations.

Lyra Chain

The App-Chain narrative is emerging stronger with DYDX, Base, and many more launching Layer 2 rollups and App-Chains that can support a customized user experience, high performance, low cost financial products while retaining composability, self-custody, and decentralization. Lyra Chain’s narrative is the clear need for a credibly neutral global settlement layer for derivatives.

I spoke to the Co-founder of Lyra Finance, Nick Forster to ask him about the reasoning behind building an App-Chain.

We take decentralization seriously with the goal to have all financial options on-chain to build the perfect derivative, abstract complexity, and allow users to choose the risk/reward strategy they want to use to earn yield. Users can earn yield from cash then buy BTC when it dips below 30k and sell puts against it. There is infinite payoffs with options. We wanted to build a full stack on-chain for risk engine, margin, liquidations, etc. By building an app-chain we didn’t have to compete for blockspace and we could build a ecosystem around Lyra and still maintain the benefits of the Optimism Superchain. There is also lot of control over the rollup environment which is why we chose Optimism.

By building an App-Chain on top of Optimism, Lyra Chain provides

  1. High throughput, low latency, and low cost execution environment
  2. Seamless bridging to and from Ethereum Mainnet and other L2s
  3. Inherited security of Ethereum with a escape hatch in case of sequencer downtime
  4. Improved user experience with smart contract wallets, gasless transactions, and more
  5. An EVM environment to build and deploy smart contracts

Leveraging Celestia’s Data Availability Stack

The cost of DA is larger than the sequencer fees that are needed to process transactions for app-chains and rollups. The adoption of fully on-chain options remained bottlenecked by the cost of call data and data throughput on Ethereum. Without a Modular DA layer, Lyra can’t deliver on the throughput and transactions costs needed to compete with centralized infrastructure.

In December 2023, before utilizing Celestia’a DA stack the cost for DA costed 42 ETH, after upgrading Lyra Chain to utilize Celestia’s DA stack in January the expected DA cost will be less than 0.5 ETH, over a 100x in savings. — 0xmjs

By integrating Celestia, this enables the protocol to pass these cost savings to users of the platform enabling Lyra to compete with the custodial and opaque centralized exchanges. Celestia also enables Lyra to significantly improve sequencer profitability for the community with more ETH going to the Lyra DAO without increasing transactions fees for users.

Lyra Chain Stats

Since launching on Optimism on December 15th, 2023, Lyra Chain has recorded:

  • 33.76m total notion volume
  • 43.01m all time total volume

Conclusion

Lyra Finance and its choice to build an App-Chain to build the settlement layer for all derivatives is a great case study for the future of Rollups, App-Chains, and Modularity. We’ve barely scratched the surface of what is possible with the on-chain option market currently trading around 10$m+ in notional volume per day. This is only around 1% of the total options volume in crypto with Centralized exchanges facilitating 99% of the volume. Lyra Finance is poised to capture a large market share from Centralized exchanges with their unique V2 model.

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