Lyra Finance uses Chainlink Price Feeds for price data

Chainlink announced last Wednesday, September 1, through its Twitter account, that with the launch of the platform on Optimism mainnet, Lyra Finance is using Chainlink Price Feeds for premium price data with high-frequency updates, which serve as inputs for Black Scholes-based option pricing and help protect data against volatility.

Image on Chainlink’s Twitter post

“After successful beta testing and commercial competition, we are pleased to announce that Lyra has successfully integrated Chainlink Price Feeds, the industry-leading decentralized price oracle solution. Chain-driven decentralized oracles provide high-quality price data with high availability, tamper resistance and transparency, a key entry into Lyra’s novel options risk management and pricing mechanism”, he said via a published article in his web page.

Understanding Lyra

The company explained that Lyra is a protocol for trading options on Ethereum. Natively designed for the Ethereum Layer 2 Optimism scaling solution, Lyra is the first protocol to manage liquidity provider (LP) risk, allowing it to offer the best on-chain prices for traders.

In his view, from the beginning, Lyra has focused on offering accurate option pricing to DeFi. Traders have long been exposed to high trading fees as a temporary and counterproductive means of offsetting the risk of LPs.

“This creates a fundamental tension between traders and LPs, as high option prices mean less risk for LPs but significantly reduce volume because traders are not incentivized to participate. On the other hand, reducing rates without native risk coverage results in inadequate compensation for LPs and exposes the group to an unacceptable explosion risk”, he added.

According to the company, if Lyra is targeting best-in-class option prices, then external pricing inputs are of the utmost importance to getting it right. After researching possible solutions from Oracle, the company assured that Chainlink is by far the most widely used, reliable and robust source of pricing data. This is not a coincidence given its market leading technology, security, and a proven track record of accurate pricing during periods of extreme market volatility and network congestion.

Technical integration

Lyra indicated that it is integrating BTC / USD and ETH / USD Chainlink Price Feeds into Optimism. Integration is also possible through Synthetix, which provides a public exchange rate contract that connects directly to the Chainlink aggregator contracts.

In his view, the cash price of the asset is one of the five crucial inputs to the famous Black Scholes option pricing formula. Lyra’s market-based striked-adjusted pricing mechanism includes a fully on-chain implementation of Black Scholes. Whenever options are traded on Lyra, Chainlink’s price sources are queried in real time to provide the most up-to-date spot price available on the chain. These prices are incorporated into the Black Scholes model, which generates an exact price for the option.

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Additionally, he noted that Lyra’s automated hedging mechanism also leverages Chainlink’s pricing sources, calculating exactly how exposed LPs are to fluctuations in asset prices. This allows Lyra to trade on and off the asset, also known as “delta hedging”, reducing LP exposure and allowing them to increase their risk-adjusted returns over time.

Not only does Chainlink provide high-quality data and time-tested infrastructure, the company said, Chainlink already works natively on Optimism. The speed at which the Chainlink infrastructure runs on Optimism allows new projects like Lyra, which are native to Optimism, to benefit from rollout, such as greatly increased transaction throughput and decreased latency.

Some of the other key benefits of Chainlink Price Feeds include:

High-quality data: Data comes from numerous premium data aggregators, leading to volume-adjusted global market prices with strong market coverage and outlier protections from sudden failures and data manipulation attacks.

Trusted Nodes: Pricing sources are secured by a decentralized network of independent, security-reviewed, and Sybil-resilient Oracle nodes, managed by leading blockchain DevOps teams with a proven track record of reliability during a variety of market conditions.

Decentralized Infrastructure: Both the data source and the on-chain processes are decentralized, eliminating any central point of failure.

Reputation: Chainlink provides a robust reputation framework and a suite of on-chain monitoring tools that allow users to independently verify the performance of Oracle networks and node operators.

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