Project Insight: Zeta Markets – Under Collateralized Derivatives on Solana

By Abhinav TewariExplainer

Zeta markets’ derivatives-based offering is designed to cater to both retail investors and institutional clients alike.

Introducing Zeta Markets

Zeta Markets is a sophisticated under-collateralized derivatives platform on the Solana network. It provides liquid derivatives trading for individuals and institutions. It is a revolutionary platform that allows all interested parties to hedge risk against crypto market movements and events.

Zeta Markets aims to democratize trading by providing all of the DeFi community a platform to hedge, speculate, and trade options on a variety of market movements by creating user experiences and products which simplify derivatives trading and by introducing CeFi capabilities into the DeFi ecosystem.

Issues Identified in the Current Derivatives Market

DeFi has provided a massive space for digital asset investors to safely trade, store and earn on their digital assets without the intervention of centralized third parties. With the advent of Automated Market Maker (AMM) pools, lending platforms, and asset staking, investors are vigorously seeking effective methods for hedging their risk. Financial derivatives (futures and options) provide this opportunity as they are a tried and tested mechanism to safeguard assets and enhance returns. However, there are is significant scope for improvement required for improving the under-utilization of options on DeFi because of issues such as: 

High costs: Existing on-chain protocols are limited because of high transaction costs, which are passed on to investors as fees that create barriers to entry. 

Poor AMM profitability: Although AMMs are able to provide spot liquidity, financial derivatives are more complex to price and trade, which hinders many pools from attracting significant TVL and profitability.  

High collateral obligations: Most current DeFi platforms have not been able to address the fact that options have unbounded payoffs without requiring users to be fully collateralized. This affects the investor’s capital efficiency, thereby increasing the implicit costs of trading options. 

Weak liquidity: The combined effect of the aforementioned factors results in overall inadequate liquidity for investors and market makers because trade is expensive (costs and fees) and liquidity is risky (collateralization).

Value Proposition

Zeta attempts to address gaps in the existing decentralized derivatives market by building a sub-second seed protocol on the Solana network with an AMM designed to provide long-term yields to investors and liquidity to traders. Its unique value proposition is as follows:

Speed and Efficiency: As the protocol is built on Solana, it enables users to execute lightning-fast trades on the Serum orderbook at zero cost. 

Liquid Markets: Zeta’s dynamic AMM offers superior yields to LPs whilst encouraging greater liquidity by making markets on each product listed. 

Under-collateralization: Zeta requires significantly lesser collateral as options in conjunction are a lot less risky compared to when used standalone. 

Novel Derivatives: Zeta intends to offer products that appeal to and are designed specifically for crypto natives, such as derivatives on spot prices, blockchain information, gas fees, funding rates, etc.  

Advantage over existing market

Zeta Markets is innovating the DeFi ecosystem through the following advantages it offers over existing players:

Top-level liquidity provider (LP) and trader experience with uniswap-like scalability.

Undercollateralized options with adjusted leverage.

Dynamic volatility surface and Black-Scholes pricing with automated risk management.

Two-sided trading options with support for other underlying (such as Uniswap).

Orderbook and Cross-strike OMM liquidity.

Almost zero trading fees and sub-second response times. 

Margins System

The margin framework enables users to apply leverage effectively and use capital efficiently. Generally, there is a trend of over-collateralization witnessed in the DeFi ecosystem. As blockchains are typically slow, it can take a while to determine the underlying asset price. Especially for crypto assets which are largely volatile, this time lost is critical, which has made it substantially challenging to create a margin system. Zeta addresses this issue by leveraging Solana’s 400ms block time. This allows the protocol to monitor and update prices multiple times a second, enabling the implementation of an effective margins system that facilitates under-collateralized trading that can be at par with centralized exchanges.

Zeta’s Margins System comprises the following factors: 

Mark Pricing: Critical for determining the value of the participant’s position in order to determine PnL and risk. Zeta has an internal pricing engine to determine the Mark Price of all tradable assets.

Collateral Framework: This framework is key to managing capital in the system in order to ensure efficient use and risk mitigation.

Liquidation Mechanism: This mechanism is utilized to prevent the platform from losing money. It allows liquidators to intervene when a user’s account is too risky to continue trading. In such a case, the user’s account is liquidated to ensure losses do not extend to the entire protocol. 

Use of Derivatives in Zeta Markets

A derivative is a contract or product whose value is derived from the price of an underlying asset. The buyer and seller of such contracts have directly opposed predictions for the future trading price. In order to earn a profit, both parties wager on the underlying assets’ value in the future. 

At present, Zeta Markets offers two types of derivatives:

Options – European Cash Settled Options

Futures – Dated Futures

What are Options?

They are derivatives contracts that enable buyers to either buy or sell a fixed amount of an underlying asset at a fixed price on or before the contract expires. This implies that options allow market participants to speculate on the future price of assets without significant underlying risk. 

The Zeta program automatically generates a new option to list as the previous contract nears expiry. This protocol leverages the oracle feed to fetch the underlying price, which is used to generate relevant strikes for trading. 

Advantages of options trading: 

Can increase cost-efficiency.

Less risky compared to other equities.

Potentially can deliver higher percentage returns.

Offer a number of strategic alternatives for an investment portfolio.

Disadvantages of options:

Options could expose sellers to unlimited/amplified losses.

The investment thesis is often limited to a certain time frame. 

Since options are complex products, they often require the investor to have in-depth knowledge in order to make a steady profit.

Guide to trade Options on Zeta:

Step 1: Go to Zeta Market’s trading terminal.

Step 2: Click on “Select Wallet” at the top right, as shown below.

Source: Zeta Mainnet

Step 3: The installed wallet (only SPL-enabled wallets can be used) is automatically detected. If the user has more SPL-enabled wallets linked to the browser, they will get an option to choose which one they want to link to the mainnet.

Step 4: Select “Options” from the pop-up menu.

Source: Zeta Mainnet

Step 5: Assuming that the user believes the price of SOL will increase before the 8th. Select “call” and set the expiry date to the 8th. 

Source: Zeta Mainnet

The strike price can be set by clicking on any of the given choices. In this case, $130 is selected, which means you are betting on the price of SOL reaching $130 before the 8th.

Source: Zeta Mainnet

Step 6: The trade details need to filled in; this includes the price of buying the option and the number of contracts.

Source: Zeta Mainnet

Step 7: Use the leverage slider to adjust the risk parameter, as shown in the image above.

Next, click on “buy.” Simple as that!

What are Futures?

A futures contract is a legal agreement to buy or sell a particular asset at a predetermined price at a specified time in the future. The buyer of a futures contract is taking on the obligation to buy and receive the underlying asset when the futures contract expires. The seller of the futures contract is taking on the obligation to provide and deliver the underlying asset at the expiration date.  

Advantages of futures in traditional finance:

Cost-efficient: A futures contract does not require advance payment. 

Resistant to time: Time does not have a negative impact as the trade will be executed at the predetermined date.

Size: Futures tend to hold more quantity of an underlying asset. 

Guide to trade Futures on Zeta

The first three steps are similar to the aforementioned method of trading Options. Therefore, we can proceed with the remaining steps:

Step 4: Click on Futures in the toggle below the graph and select contract choice. 

Source: Zeta Mainnet

Step 5: After selecting the desired contract based on the expiration date, the next step is either to buy or sell the future, i.e., go long or short, and select the price and quantity. 

Source: Zeta Mainnet

Step 6: Under the leverage slider, the amount of equity to risk can be selected

Source: Zeta Mainnet

Step 7: Enter the trade, and the position can be executed


Zeta Flex is a permissionless options creation and auction protocol that allows users to create an unlimited variety of tokenizable options with flexible strikes, durations, exercise formats, and underlying. Flex intends to standardize and facilitate the matching process between option sellers and market makers, providing a simplified interface and auction process for verifying, bidding on, and trading DeFi options. 

It is targeted toward option vaults and DAOs who intend to monetize risk on their assets; it will also add support for American-style options, blind bids, dutch auctions, and more.

Background & Funding

Zeta is revolutionizing options trading on DeFi, enabling anyone to effectively hedge risk against crypto market movement and events. Zeta recently partnered with Ribbon to introduce structure products in the Solana ecosystem. 

In December 2021, Zeta completed its first funding round, which raised $8.5 million led by Jump Capital. Other significant crypto venture capital firms like Race Capital, Electric Capital, DACM, Airtree Ventures, Amber Group, Wintermute, Sino Global Capital, Genesis Block Ventures, QCP Capital, Alameda Research, Solana Capital, MGNR, 3kVC, Orthogonal Trading, LedgerPrime, and SkyVision Capital also participated in this round.

Source: Zeta Markets Website

In the near future, Zeta Markets plans to integrate Zeta with other protocols in the Solana ecosystem, launch more underlying assets to trade, and release incentive schemes to boost trading. The team also plans to introduce multi-collateral margining and release perpetual futures by Q2 of this year. 

Source: Zeta Markets Gitbook

Since the protocol’s funding event in December last year, Zeta has partnered with various other protocols as listed below:

Katana – Yield bearing options protocols on Solana.

LedgerPrime – A quantitative and systematic digital asset investment firm.

Pattern Research – A technology-driven trading firm that serves as a leading market maker in DeFi.

Exotic Markets – Wealth management and structured products protocol on Solana.

Concluding Thoughts

Zeta Markets is on a mission to democratize the crypto derivatives market in the Solana ecosystem. With a focus on providing the ecosystem with a secure derivatives platform, the protocol aims to create user experiences and products that will simplify the complex experience of trading derivatives for retail and institutional investors alike. Users can hedge, speculate, and take opinions on all market price movements.

Find more about Zeta Markets here: 

Website | Twitter | Medium | Documentation | Discord | Instagram


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