ZacharyZachary
17 January 2022
Jan 2022
26 min

Zeta Spotlight

Zeta.Markets 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 not only give traders the on-chain derivative trading experience that they can expect from traditional centralized exchanges, but to 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. Crypto derivatives, on the other hand, 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. 

Background

Hackathons breed some of the best DeFi development. Solrise and Zeta both 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 ‘blackbox’ 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.”

Vision

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 every year. Almost all of this is centralized and guarded by a horde of industries within traditional finance. Due to the transparent nature, low fees, and lightning fast transaction settlements on the Solana blockchain, there is simply no better place to implement a high-performing derivatives platform.

Derivatives

Derivatives are powerful instruments and are generally not for the faint of heart. Their upside and downsides are substantial and they are 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 and you are worried about wheat prices come harvest time, it would be in your best interest to short a wheat futures contract while harvesting your wheat at the same time. 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 actually dealing with a number of different entities such as a custodian and a clearing house. This increases fees while decreasing transparency. Futures are also a product where there is not a buyer for every seller. The futures exchange is the only counter-party 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) are competing against – virtually no one.

Options, on the other hand, are generally written by market makers. These market makers have their own agenda and they implement 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 they are ‘short’. If the market goes up, it doesn’t matter to them. If the market goes down, it doesn’t matter to them, even if it matters to you.

Decentralized Finance has been around for a number of years now and there have been multiple derivative platforms implemented. Ethereum has been the bastion for most of this activity, and it’s currently not at all scalable. Gas fees and throughput (how many transactions per second the blockchain can settle) issues simply prevent high volumes of trading activity from occurring while pricing out the retail crowd. 

Features

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 is in contrast to the majority of DeFi where you are required to over-collateralize your positions. While this may help prevent you from getting liquidated, it is definitely 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 sustainability of the platform. 

Below is a comparison chart of the existing derivatives market and Zeta’s product innovations. 

There are currently 46 markets available to Zeta traders and that number 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. 

Orderbook

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. Currently, all trades are by default Good till Cancelled limit orders although other order types are going to be implemented in the future. 

Zeta Flex

Zeta Flex is a permissionless options creation and auction protocol. It enables traders to create tokenizable options with varying strikes, durations, exercise formats, and underlyings. This customizability is very appealing to DeFi protocols that utilize vaults and DAOs that want to offset treasury asset risk. 

Final Thoughts 

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 exactly what DeFi needs. Platform sustainability and emergency practices are clearly documented in Zeta’s Gitbook and the team has accomplished everything on its roadmap in a timely manner. While there are other derivative platforms built on Solana, none of them are built with the product features that Zeta has to offer.

Many in crypto consider skeuomorphism to be an undesirable trait. Skeuomorphism refers to bringing traditional processes onto a modern framework, only for the traditional processes 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 orderbook are all examples of how Zeta is not bringing to market a skeuomorphic product. 

Zeta’s mainnet goes live on January 17th and things may never be the same in Solana DeFi.

Next Steps

If you’ve made it this far, you’re probably interested in using Zeta’s platform. Well you’re in luck because it went live on Solana’s mainnet yesterday. Feel free to connect your Solflare wallet to Zeta’s platform and experience the lightning fast settlements and smooth execution of derivatives on Solana.

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