Observing AWS Lambda functions with OpenTelemetry and Grafana Cloud can be efficiently managed using the opentelemetry-lambda extension layer, which addresses the unique challenges of function-as-a-service (FaaS) environments. This extension allows telemetry data collection without modifying the function's code, utilizing a local endpoint for data transmission. It operates by starting an OpenTelemetry Collector instance, which interacts with the Lambda lifecycle to manage data collection and transmission efficiently, thereby reducing billed time. Configuration can be managed through embedded files or external repositories, offering flexibility but requiring consideration of trade-offs like cold start duration. Integration with Grafana Cloud allows for easy monitoring of Lambda functions, providing a streamlined setup through environment variables and AWS Secrets Manager, and transmitting logs to Grafana without code changes. This approach facilitates efficient telemetry data collection and offers a scalable solution for monitoring AWS Lambda functions in real-time.