With the market for Layer 1 tokens such as AVAX red hot this month, it would be easy to overlook a development on the Layer 2 side of the DeFi universe. Yet three days ago Lyra, a cryptocurrency options platform, released a new offering that will let investors trade on Layer 2, a catch-all term for applications that improve the scale and speed of blockchains tied to Ethereum.
Launched on Optimism, a Layer 2 protocol, Lyra uses an automated market maker to help traders buy and sell calls and puts, which are bets that a token will rise or fall in value. Investors often use such instruments in both TradFi and DeFi to hedge the risk of their positions. Lyra’s move will test how well an AMM can handle pricing and liquidity when it comes to options in a Layer 2 environment.
It’s hard to hedge on Ethereum’s Layer 1 because pricing options often costs too much in gas. With action spiking across the cryptocurrency market on the back of a slew of regulatory news and innovations, investors’ appetite for a cost-effective way to protect their flanks may surge in the months to come.
“Determining risk is expensive because it requires iterating over all listings, which isn’t feasible on L1,” Lyra co-founder Michael Spain said. “Traders want the lowest possible price and liquidity providers want max risk-adjusted returns.”