Authors: Mjs, Cody Adam, Sean Dawson
Simple Summary
Upgrade the utility and economics of LYRA to prepare for V2.
Abstract
We outline a proposal to upgrade the utility and economics of the LYRA token. This proposal has three goals:
- Decentralize governance and ownership of Lyra Chain and the v2 protocol
- Promote the adoption of the protocol by key stakeholders
- Provide a path to sustainability for the DAO
Motivation
The LYRA token was launched in late 2021 with a community-led distribution that decentralised ownership of the then-nascent project. In the two years since, the Lyra DAO has grown to include almost 10,000 token holders, who use the LYRA token to collectively govern the protocol and treasury.
We now approach the launch of Lyra V2, which will grow the onchain derivatives market 100x by building a new type of exchange. By redefining what’s possible onchain, Lyra V2 will become foundational infrastructure as DeFi scales to meet the demands of the broader financial system. To maximise the chance of success, we need to upgrade the economics and utility of the LYRA token to enable decentralisation and adoption of V2 and sustainability of the DAO.
Specification
Governance
Decentralised ownership and control of V2
LYRA remains first and foremost a governance token, allowing its holders to govern the DAO. With the launch of V2, LYRA will also facilitate governance of the Lyra Chain and the V2 protocol. Governance will occur via the fully autonomous on-chain system that was established in early 2023, enabling token holders to directly control all aspects of the DAO.
To enter the system, users need to stake their LYRA for stkLYRA, which grants them the right to propose and vote on proposals, as well as to delegate these rights. Holders of stkLYRA are responsible for governing protocol parameters and controlling the treasury by approving or rejecting all requests for funding. Proposals follow the LEAP process which is community-led and fully permissionless, culminating with an on-chain vote that is processed without reliance on any third parties.
Stakers receive a proportionate share of 10m LYRA per year. Unstaking carries a 14-day cooldown period.
Adoption
150,000,000 LYRA to bootstrap Lyra Chain and the V2 protocol.
Ecosystem incentives
The LYRA token is a powerful tool to incentivize the adoption of the protocol. Due to prudent spending, the DAO has retained around 35% of the LYRA supply. This proposal recommends distributing 15% (150,000,000) to takers based on the fees they pay while trading on the protocol. This distribution serves two main purposes:
- Governance alignment: To establish a strong connection between early adopters of Lyra v2 and the DAO, aligning incentives between key stakeholders by granting ownership and governance rights in the future of the protocol.
- User & liquidity acquisition: To attract new traders to Lyra v2 that will generate volume and fees for the protocol.
150,000,000 LYRA will be distributed over 96 epochs, with each epoch lasting 7 days.
Rewards Specification
Takers are allocated a pro-rata percentage of the rewards pool based on fees paid:
The rewards pool will consist of 150,000,000 LYRA distributed over 24 months
- Rewards are to be determined at the end of each 7 day epoch
- Rewards will be delivered in full as LYRA after the end of each epoch.
- In the special case of the “launch season”, all rewards will be delivered at the end of epoch 12.
Growth Experiments
Up to 15% of each epoch’s allocation of LYRA taker rewards can be diverted to bespoke incentive programs for traders. These programs can include but are not limited to trading competitions, referral programs and airdrops. The purpose of this allocation is to give the core contributors who focus on protocol growth and adoption the flexibility to run growth experiments outside the scope of the rigid epoch schedule and pro-rata fee rewards program.
At the end of each epoch the core contributors will publicly report:
- What experiments were run
- What experiments are underway
- How successful experiments were in acquiring traders and volume
- Reward distributions and addresses for the epoch
Learnings from these experiments will help the DAO determine the most effective way to evolve long-term public rewards programs to increase active traders and organic trading activity.
To preserve flexibility around timing and duration of experiments so that they can run across multiple epochs:
- LYRA allocations from the current epoch can be used in the next epoch provided the program started during the current epoch.
- LYRA allocations from up to the next 12 epochs can be earmarked for programs that need to run across multiple epochs.
- Any LYRA that is not allocated during an epoch is returned to the pro-rata fee rewards pool.
The community can vote to adjust or remove the growth experiments allocation for future epochs with a snapshot vote. However, allocations from ongoing experiments that have promised traders rewards for up to the next 12 epochs (for example, a 3 month trading competition) will be respected.
Sustainability
For governing the network, the DAO earns protocol and rollup fees
LYRA holders govern the Lyra Chain and the V2 protocol via the DAO. In order to create a sustainable ecosystem, the DAO earns fees from both the V2 protocol and Lyra Chain.
Protocol fees
As described in the V2 proposal, the protocol and the DAO-controlled security module architecture play a critical, risk-bearing role in the functioning of the network:
- Risk management: the risk managers determine their users’ margin requirements on-chain, thereby reducing counterparty risk.
- Liquidity backstop: The autonomous, DAO-governed security module is used to fund insolvencies and facilitates the process of socialized losses should this fail.
- Liquidations: the managers are responsible for liquidating accounts with insufficient margin, thereby reducing the risk of the system.
- Settlement: the protocol conducts the settlement of all trades on the platform.
Protocol fees are charged in accordance with extra risk generated by actors using the protocol, they are outlined below:
Exchange Fees: Trades on Lyra exchange incur a fee based on whether the trader is a maker or taker and the instrument they are trading. The initial fee schedule for Lyra Exchange is listed below:
| Instrument | Maker | Taker |
|---|---|---|
| Perp | 1bp | 6bp |
| Option | 3bp | 4bp |
Liquidation fees: Accounts that are flagged for liquidation are charged a progressive fee of up to 10% based on the mark-to-market value of the account in accordance with the increased risk backstopped by the security module.
Say Alice has a portfolio with a mark-to-market value of $100,000. When she is liquidated, she will be charged a liquidation fee, proportional to $10,000 (10% of $100,000). This fee scales with how far beneath her maintenance margin she is. I.e. if she is just beneath her maintenance margin, the fee will be, say, $50. If she is very far beneath her margin requirement (and near insolvency) then the fee will be $10000.
Spread on interest: In the protocol, there is a native lending market on balances of USDC. Users may enter into a negative cash (credit) balance by borrowing against long positions but in return pay interest to all accounts with a positive (debit) USDC balance. The protocol charges a 20% spread on this interest since borrowing and lending incur risks to the security module.
Say Alice and Bob have negative cash balances and over a 24-hour period they accrue $10,000 in interest. Charlie and David have positive cash balances and so they receive this interest. However, the security module first takes 20% of $10,000 and so $8,000 is split between Charlie, David and the Security Module (proportional to their cash balances).
Rollup fees
As with any rollup, Lyra Chain has an economic structure that fundamentally involves offering blockspace on Layer 2 (L2) and purchasing it on Layer 1 (L1). The structure is as follows:
- Users - send transactions on the L2 and pay fees to the rollup operator.
- Lyra Chain - batches transactions and submits them to L1.
- L1 - the underlying blockchain where transaction data is published.
On-chain gas flows:
- L1 Gas Cost = Gas spent posting the rollup data on L1.
- L2 Gas Received = Gas received by Lyra Chain from users on L2.
- Excess gas = L2 gas received - L1 gas cost
Sequencer profit split:
- 70% to the Lyra DAO (for governing the rollup)
- 15% to Conduit (for operating the off-chain infrastructure)
- 15% to Optimism Foundation (for designing and building the OP stack)
Risk Assessors & the Lyra Foundation
As defined in the V2 whitepaper, Risk Assessors (RAs) enable onchain portfolio margin without compromising the trustlessness of the protocol. At launch, the Lyra Exchange will be the initial Risk Assessor but this role can be performed by any entity who gains approval from the DAO.
In order to be approved, a RA must drive value to the protocol in proportion to their usage and the additional risks borne by the DAO. Risk assessors must also maintain and report a balance of stkLYRA. While a straight matching fee share would be ideal, this requirement is impossible to verify since an entity can charge fees off-chain. This necessitates a volume-based fee-share agreement.
We outline basic requirements and rights of a RA to inform future proposals:
RA Requirements
- Governance approval from the stkLYRA holders
- Report monthly volume settled to the Lyra protocol
- Report and adhere to LYRA Staking requirements
- Deliver volume-based fees to the Lyra security module in a timely manner
- Reserve VIP lowest fee tiers in any program for accounts holding stkLYRA
- Perform insolvency checks prior to submitting orders - this is verifiable if a matcher is sending numerous failed transactions to the protocol that do not pass the insolvency check
RA Rights
- Charge fees for matching, data, and exchange connectivity
- Implement their own proprietary APIs and order-matching algorithms
- Bypass the protocol OI fee
- Bypass non-essential risk checks except mark-to-market (insolvency)
- Require individual subaccounts to post stkLYRA to help meet exchange staking requirements
- Receive discounts on Lyra DAO fee shares in accordance with their VIP staking status and volume
Lyra DAO Rights
- Approve Risk Assessors via governance
- Revoke approval of a Risk Assessor via governance
- Require a Risk Assessor to hold and verify a stkLYRA balance that scales with volume in order to maintain their status
RA partnerships will be approved by the Lyra DAO and may be coordinated with the Foundation to negotiate more specific terms.
Rationale
Incentive Structure
The proposed incentives aim to attract new participants such as traders, liquidity providers, and integrators to the V2 protocol and chain. To motivate these stakeholders to take on new platform risk and technical integration costs, the incentives must be substantial and predictable over an extended period. The emission of 150,000,000 tokens over two years strikes a balance between preserving DAO tokens and offering a strong incentive for potential users to join the chain and protocol.
Moreover, productive users of the protocol, i.e., those who generate fees captured by the network via the insurance fund, receive incentives. These incentives are emitted as vested stkLYRA in proportion to protocol fees incurred, ensuring that protocol users are aligned with the Lyra DAO over the long term.
Security Module Funding
A well-funded insurance fund is crucial to a derivatives margin and settlement layer. This fund serves as the ultimate liquidator, assuming insolvent positions that could occur due to turbulent market conditions or periods of lower liquidity in the protocol. The assurance provided by a well-funded insurance fund creates a virtuous cycle. Higher confidence in the fund encourages greater trader and integrator confidence and volumes, which in turn further strengthens the insurance fund.
Within this framework, the role of LYRA holders is explicit: as the owners of the insurance fund and the protocol’s governors, they are motivated to establish responsible risk parameters. These parameters should balance protocol performance with sound risk management. Over time, this structure allows the LYRA token’s role to evolve into directing insurance fund (and eventually AMM) liquidity around the LYRA chain, supporting productive, risk-bearing modules in the protocol.
Distribution
The proposed incentive structure results in LYRA accumulation for the protocol’s power users. Over time, the token might be used to unlock the highest level of rewards and the lowest fee tiers on interfaces integrated with LYRA for stakers. By rewarding power users with tokens over a two-year period, we align their interests and ensure that they continue to significantly influence the protocol’s strategic direction in the long run.
Test Cases
N/A
Configurable Values
Emissions
- Lyra Staking Rate = 10,000,000 per year
- Lyra Incentives = 150,000,000 over 2 years
Protocol / Exchange Fees
- Perp Maker = 1bp
- Perp Taker = 6bp
- Option Maker = 3bp
- Option Taker = 4bp
- Liquidation Fee = 10%
- Interest SM Fee = 20%
Copyright Waiver
Copyright and related rights waived via CC0 .