Zeta is a powerful under-collateralized derivatives platform that offers futures and options trading. Using Solana as a base layer and Serum for its underlying liquidity, Zeta looks to give traders the on-chain derivative trading experience they can expect from traditional centralized exchanges and enhance the product by minimizing barriers to entry.
In traditional finance, derivatives are the elephant in the room. Their trading volumes massively outweigh spot trading volumes, and their influence on everything from general market sentiment to the 1-minute price chart of an asset is undeniable. Some argue that spot volumes conform to derivative activity rather than the other way around. On the other hand, crypto derivatives are a grossly underrepresented fragment of decentralized finance. Only 1-2% of all crypto derivatives take place on-chain. Zeta hopes to change that.
This article will hone in on Zeta’s infrastructure, vision, and what makes them a contender in Solana’s supercharged DeFi ecosystem.
Hackathons breed some of the best DeFi development. Solrise and Zeta were ideated and implemented at Solana’s Feb 2021 hackathon, with Zeta taking first place. The Zeta team made it clear that they want to ship products quickly rather than remain in a ‘black box’ until a mainnet launch. With their initial release to only 50 users, Zeta has been iterating on their product since the start.
The pace picked up in December 2021 when they raised $8.5 million from reputable crypto VCs like Jump Capital, Sino Global Capital, and Alameda Research. Solana’s CEO, Anatoly Yakovenko, has stated that Zeta Markets are “pushing the limits of what’s possible on-chain.”
Zeta wants to usher in a new era of on-chain derivatives while maintaining a user-friendly interface that newcomers feel comfortable using.
There are 16 figures ($quadrillions) worth of derivatives trading in traditional finance and $trillions worth of crypto derivatives traded yearly. Almost all of this is centralized and guarded by a horde of industries within conventional finance. Due to the transparent nature, low fees, and lightning-fast transaction settlements on the Solana blockchain, there is no better place to implement a high-performing derivatives platform.
Derivatives are potent instruments and are generally not for the faint of heart. Their upside and downsides are substantial and considered a very efficient way to gain exposure to an asset.
As popular as derivatives are for being speculative instruments, this discounts their history. They have been around for hundreds of years in the agricultural world. If you are a wheat farmer worried about corn prices come harvest time, it would be in your best interest to short a corn futures contract while harvesting your corn simultaneously. If wheat prices go down, you make money on the short. If wheat prices go up, you make money on the harvest. There are, of course, other factors to consider, but this is the beauty of hedging your bets.
Issues With the Incumbents
If you decide to trade a futures contract, you may think you are just dealing with a single exchange, but you are dealing with several different entities, such as a custodian and a clearing house. This increases fees while decreasing transparency. Futures are also a product with no buyer for every seller; instead, there is a single buyer – the futures exchange. The futures exchange is the only counterparty you will deal with, which is about as centralized as it gets. This is especially true when you consider who CME and CBOE (the world’s biggest futures exchanges) compete against – virtually no one.
Options, on the other hand, are generally written by market makers. Each of these market makers has its own agenda and implements all sorts of shenanigans to take advantage of the retail crowd (non-whales). If you buy an option from a market maker, they are probably trading against you in some way because they are (often) mandated to maintain a delta-neutral position. This means they are ‘long’ as much as ‘short.’ If the market goes up, it doesn’t matter to them. It doesn’t matter to them if the market goes down, even if it matters to you.
Decentralized finance has been around for several years, and multiple derivative platforms have been implemented. Ethereum has been the bastion for most of this activity, and it currently needs to be more scalable. Gas fees and throughput (how many transactions per second the blockchain can settle) prevent high volumes of trading activity from occurring while pricing out the retail crowd.
Zeta offers traders both futures and options contracts, and they do so in an undercollateralized fashion. That means you can trade $100 without putting $100 at risk. In other words, you can use leverage and adjust it to where you feel comfortable. This contrasts with most DeFi, where you are required to over-collateralize your positions. While this may help prevent you from getting liquidated, it is not the most efficient use of your capital.
Zeta’s foundation is its margin system. This system consists of an internal pricing engine to calculate mark prices, a collateral framework to ensure position management, and a liquidation mechanism to safeguard the platform’s sustainability.
There are currently 46 markets available to Zeta traders, which will keep growing. Zeta utilizes the decentralized Pyth oracle (similar to Link) to provide asset price updates every 400 milliseconds (Solana’s block time). Oracles are the white knights in DeFi as they ensure that prices are accurate by accessing external data sets and bringing them on-chain.
Serum is the preeminent order book-based DEX. By serving as the underlying source of liquidity for the Zeta DEX, traders can be sure that their trades will be accurately and seamlessly processed on Serum’s tried and tested protocol. All trades are by default Good till Cancelled limit orders, although other order types will be implemented in the future.
Zeta’s Strategy Accounts enable traders to deploy collateral-efficient, risk-minimized trading strategies.
While Zeta’s current Margin Accounts require you to provide a margin on each contract in isolation, the Strategy Accounts calculate the maximum loss for a combination of options and only need this capital to be locked. Strategy accounts are fully collateralized Zeta accounts that can hold various positions except for naked short calls. Since they are fully collateralized, they cannot be liquidated.
Zeta Flex is a permissionless options creation and auction protocol. It enables traders to create tokenizable options with varying strikes, durations, exercise formats, and underlying assets. This customizability appeals to DeFi protocols that utilize vaults and DAOs that want to offset treasury asset risk.
Bulletproof is the word used in Zeta’s documentation that describes the vision of what they want their product to be. A bulletproof derivatives exchange is precisely what DeFi needs. Platform sustainability and emergency practices are clearly documented in Zeta’s Gitbook, and the team promptly accomplished everything on its roadmap. While there are other derivative platforms built on Solana, none are built with the product features that Zeta offers.
Many in crypto consider skeuomorphism to be an undesirable trait. Skeuomorphism refers to bringing traditional processes onto a modern framework, only for the conventional methods to remain the same. In other words, it is the utilization of obsolete technology. Zeta’s product innovations, Solana’s base layer, Pyth’s oracle, and Serum’s decentralized order book are all examples of how Zeta does not bring to market a skeuomorphic product.