This page outlines the risks surrounding trading or providing liquidity to the Lyra Protocol.
Lyra is an experimental technology, and users must be aware of the risks that they incur when interacting with all touchpoints of the protocol. The key risks for each group of protocol users (traders/LPs/Security Module stakers) are listed below, but to some degree, all of these risks apply to all users.
The Lyra AMM collateralizes all trades with Synthetix synths. This means that users are buying options that are collateralized by the synthetic asset (i.e. sETH for the ETH market calls, or sUSD for puts across all markets).
In a scenario where there is a collateral shortfall backing Synthetix synths, the synth may not be redeemable for the full value of the asset it is tracking. This could lead to partial or total loss of the value of funds or positions held within Lyra. These risks also apply to sUSD - which is collateralized by wrapped assets and the SNX token (in varying percentages).
Smart Contract Risk
The Lyra Avalon smart contracts have completed multiple audits. The system is complex, however, and like any new software carries added risk of a smart contract vulnerability which may result in total loss of funds.
AMM Liquidity Provision Risk
AMM Mechanism Risks: Whilst the core team has worked hard to design and test a robust mechanism thoroughly, there is always a risk that the AMM will not perform as expected or result in significant losses through normal trading activity.
Unexpected losses due to technical errors: in the event that a protocol with which Lyra composes is dysfunctional (e.g. Chainlink, Optimism, Synthetix) it is possible that the AMM suffers losses due to bad pricing, missed liquidations, or incorrect settlements.
Unexpected losses due to failed liquidations: TheAvalon release introduces partially-collateralized option selling for traders. If liquidations fail to occur (because of a network outage, a bot network failure, or any other reason), it is possible that LPs will receive less money than they are owed for a long options position.
Lyra contracts cash-settle on expiry according to the following methodology:
A permissionless keeper bot can poke the contracts to fetch the most recent Chainlink price after expiry
The Chainlink reported price is then used to settle options
If the keeper bot fails to promptly call the Chainlink price after expiry, it is possible that options are settled to a delayed price. In the event of a major outage in the Optimism network, or Chainlink issues, it is possible that the settlement price may differ greatly from the price on the specific expiry.
Withdrawal Delay Risk
In periods of high pool utilization (e.g. 90%+), it is possible that liquidity providers will be unable to withdraw funds from the pool after the cooldown period. In theory, the longest wait time can be up to the length of the longest dated board.
For example, if there is $1,000,000 in the pool and one trader buys options that expire in 60 days and require $1,000,000 in collateral, then the LPs will need to wait for 60 days (or until the option is closed) in order to withdraw.
Guardians may bypass withdrawal delay periods in the case where funds are locked for unreasonably long periods of time.
Shortfall Event Risk
To come after Security Module LEAP is finalized by the Council.