Market Maker Vaults
This page explains how Lyra's liquidity pools, which are referred to as market maker vaults or MMVs, operate.
Liquidity providers can deposit sUSD to a Lyra market maker vault (MMV) in order to collect trading fees from users of the protocol. In doing so, they take on a few risks:
- 1.Options market making risk: LP capital will appreciate or depreciate depending on the performance of the AMM's options position (which is inverse to that of the traders).
Users can deposit or withdraw their funds into the AMM at any point in time, subject to a short delay. The steps by which this occurs are:
- 1.The user signals their intention to deposit/withdraw funds. A user cannot rescind their decision to deposit after signaling.
- 2.A cooldown timer of 3 days begins.
- 3.After the cooldown timer elapses and pending the circuit breakers (see below), the net asset value (NAV) of the pool (the sum of free liquidity, the delta hedging position, and the pool's option exposure) is calculated using a geometric time-weighted average value (GWAV). The value of each LP token is calculated by dividing the NAV by the number of LP tokens in circulation. The user then has LP tokens minted/burned, the number of which is given by the value of deposited/withdrawn capital divided by the value of a single LP token.
To further protect existing LPs from potential attacks, two circuit breakers have been implemented. These are:
- 1.The liquidity circuit breaker: this ensures that a minimum percent of the pool's NAV (currently 5%) is available as liquid USD (sUSD/USDC, etc) to trade options.
- 2.The volatility circuit breaker: this ensures that the GWAVs of baseline/skew/trading volatilities are reasonably close to their market values.
When either a) the pool runs too low on liquidity or b) has diverging spot and GWAV volatilities, the appropriate circuit breaker fires, and all deposits (and withdrawals) will be blocked. The circuit breaker(s) continue to fire until these conditions are rectified. A cooldown timer then begins, during which deposits (and withdrawals) are still blocked.
- For the liquidity circuit breaker, the cooldown timer is 3 days
- For the volatility circuit breaker, the cooldown timer is 1.5 days.
After this cooldown timer has elapsed, deposits/withdrawals can recommence. Any deposits/withdrawals meant to occur during the firing/cooldown time can be immediately processed.
To ensure that prolonged firing of the circuit breaker doesn't prohibit funds from entering the pool, Guardians (a multisig of two core contributors and the five members of the council) can manually approve deposits that have been signalled for a sufficient period of time. For more detail, see the section on Guardians.
On August 1 2022, Alice signals to deposit $100,000 sUSD. After 3 days, on August 4, the net asset value of the pool is computed to be $30,000,000 and 29,000,000 LP tokens are in circulation. The value of 1 LP token is 30,000,000/29,000,000 = $1.03. Alice receives $100,000/1.03 = 96666.7 LP tokens.
If the liquidity circuit breaker fires on August 3 and stops firing on August 5, then her deposit will be processed on August 8 (after the 3-day cooldown has elapsed).
The protocol aims for the AMM to be close to delta-neutral, reducing PNL fluctuations for LPs and aiming to ensure that returns are driven by implied volatility market making.
For a delta hedge to be performed:
- The time threshold since the last delta hedge must have elapsed (this is a parameter, e.g. every 12 hours)
- A keeper bot must call the permissionless DeltaHedge function
The core team will be running keeper bots, however this role is permissionless and can be performed by any actor.
If a delta-hedge is performed, the AMM will either:
- Purchase the underlying synthetic asset (e.g. sETH for ETH options)
- Short sell the underlying synthetic asset
Using the Synthetix Protocol.