DeFi + derivatives + DEX = ζ
Zeta (ζ) — the world’s first options and futures DEX.
DeFI = Decentralized Finance
DEX = Decentralized Exchange
Zeta (ζ) is under-collateralized DeFi derivatives platform, providing liquid derivatives (options and futures) trading to individuals and institutions alike, powered by Solana x Project Serum.
The idea
Crypto derivatives trading volume represented $2.9tn, or 52.7% market share of total crypto trading volumes, as of December 2021, down by 13.4% and 3.7% as of November respectively. As one can see derivatives are popular with traders. They allow manage risks easily, trade with lower barriers to entry from a capital perspective and do it more flexibility. But all those trades happens in CeFi “world” — Zeta’s goal is to bring CeFi derivatives trading capabilities to DeFi, in other words, to move derivatives trading on a DEX built on the Solana blockchain.
CeFi — Centralized Finances (like [centralized] stock exchanges)
Sounds easy, right? Has one done it already? Seems not. Currently, DEXes are focused mostly on spot trading or in another words — on trading underlying assets (in this case — cryptocurrencies). In contrast, Zeta Markets is focused on derivatives which are not cryptocurrencies or token themselves, but instead they are contracts that derive their price from an underlying asset (cryptocurrencies or token), and as such provide exposure to this underlying asset.
Let’s try to understand derivatives and how to use them at own benefit on live examples. First, we go to Zeta and connect your wallet (any from the mentioned below would fit; we need to have at least ~0.05 SOL in ones wallet to trade, because as we already know Zeta ζ is DEX based on Solana blockchain and when we need to perform an action — sent contract data to the network —we have to pay network fee in SOL to do so).
Derivatives 101
As mentioned before derivatives are contracts, but what those contracts can consist of? The simplest derivative allows to buy or sell an option on an underlying asset.
Let’s begin with default settings at zeta.markets: Options.
Options 101
An option ‘locks’ for purchase or sell a particular asset at a specified (strike) price at a certain moment in time.
As one can lock purchase or selling price for a certain asset, two kinds of options exist - calls and puts. Calls allow the holder to lock in a price at which to buy the stock. Puts allow the holder to lock in the selling price. You buy Calls when you think the stock will go up, and you buy Puts when you think it’ll go down. Options also have an expiration date on which you decide if you want to exercise your option or not.
Call Options
A call option gives the holder the right to buy an asset at a certain (strike) price by a certain (expiration) date. In our case underlying asset SOL (Solana token), strike price is $102, and expiration date is February 4th, 2022. Zeta (ζ) offers your also other underlying assets from crypto world, but let’s stick to the default settings. Same goes for expiration date — next day is the min. what one can pick as expiration date — and it is again one of the default settings to which we stick at this point (but you can pick from my other dates at your choice).
If one thinks that SOL price will go up next day (February 4th), one can buy now call option at the price of $1.40 (the premium of the contract; best price of the contract currently available).
Let’s assume we bought call option and its already next day. We can expect to see on of the 3 alternative scenarios:
A. The next day the price of SOL is above $102, one would be able to exercise the option by buying 1 SOL at $102 from the DEX and selling it immediately at the market price. Option will convert with a profit = market price-$102- -option premium-network fees. Option is profitable until profit> market price-$102-option premium-platform fees-network fees; otherwise it will be no-loss option described below in part C.
B. The next day the price of SOL is below $102, it would not be profitable for anybody to exercise such option to buy 1 SOL at $102. This option is called an out-of-the-money option (OTM; please, do not mix it with OTC = over-the-counter [exchange] which is DEX by the way). One would incur a loss = option premium+platform fees+network fees.
C. The next day the price of SOL is $102, same as a day before. That option is called an At-The-Money option (ATM). But even with the cost of $102 for 1 SOL, one will incur a loss if one would execute the option, since one already paid $1.40 in the premium and some tiny amount in network fees. Same goes until market price ≤ $102+$1.40(option premium)+platform fees+network fees. No need to execute the option.
Put Options
A put option is an opposite of a call option — it gives the holder the right to sell an asset at a certain (strike) price by a certain (expiration) date. In our case underlying asset + SOL, strike price is $102, and expiration date is February 4th, 2022.
So if one thinks that SOL price will go down next day (February 4th), one can buy put option at the price of $1.40 (the premium of the contract; best price of the contract currently available as in call option example). Let’s assume we bought put option, its already next day, now we can expect to see on of the 3 alternative scenarios:
A. The next day the price of SOL is below $102, one would be able to buy it immediately at the market price and exercise the option by selling 1 SOL at $102 on the DEX. Option will convert with a profit = $102-market price- -option premium-network fees. Option is profitable until profit> $102-market price-option premium-platform fees-network fees; otherwise it will be no-loss option described below in part C.
B. The next day the market price of SOL is above $102, it would not be profitable for anybody to exercise such option to sell 1 SOL at $102. This option is called an out-of-the-money option (OTM). One would incur a loss = option premium+platform fees+network fees.
C. The next day the price of SOL is $102, same as a day before. That option is called an At-The-Money option (ATM). But even with the cost of $102 for 1 SOL, one will incur a loss if one would execute the option, since one already paid $1.40 in the premium and some tiny amount in network fees. Same goes until market price ≤ $102+$1.40(option premium)+platform fees+network fees. No need to execute the option.
If one is already a more experienced trader or gained enough experience while traded option at zeta.markets — one can add additional layer of complexity — marginal trading. As options are less capital intensive one can us it at own will and risk. Please, keep in mind that Leverage trading is Risky.
Let’s take a look at the most important parts of the Call option trade one can initiate at zeta.markets.
Cause market is very volatile let’s buy quite unrealistic-to-end-in-profit Call_option: 1SOL for 122$ (current price is 105$) with expiration date tomorrow. Now we have open position which we can close = realize profit or loss by pressing “Close Position” button.
Remember, as you are using DEX, you should have some SOL available at your wallet to perform actions with your orders or positions because all your commands have to be sent to Solana blockchain to be executed.
Let’s duplicate some of the descriptions from the picture above to look at how they have changed after an order was executed and became a position.
Now time to dig dipper at zeta.markets and discuss Futures.
Futures 101
Futures are contracts to buy or sell a particular asset at a pre-set time in the future. In contrast to an option, futures ‘lock’ time of a purchase/sell of a particular asset (expiry date), not a price like options do. At the expiry date, futures will “settle” at the underlying spot price = longs (purchase of underlying asset) will sell, and shorts (sell of underlying asset)will buy at the settlement (~market) price. Futures are intended to closely track the movement of the spot price, as the settlement price for futures prices is intended to be the spot price on the expiry date.
Futures can either be asset settled (with transfer of the actual underlying asset) or cash settled( with transfer of asset’s associated cash position).
On expiry, asset settled futures actually exchange the underlying asset: for example, for a SOL future, 1 SOL (Solana token) to be sent from the seller of a contract to the buyer of a contract in exchange for the buyer exchanging their trade price. Sounds way too complex? Let’s show it on real example.
At zeta.markets we choose Futures at the left upper corner and as before leave all the settings for the [asset settled] futures by default (let’s again simplify the examples as much as one can). Pay attention to how the price axis just reverted.
Default setting gives us 1 SOL future at $111.4215 (lowest ask price) with the underlying price of SOL at $110.75 (best way to find future price at zeta.markets one can see it above the BUY/SELL switch with great UI color and icon design).
A. We buy 1 SOL future at $111.4215 (underlying price of SOL at $110.75) on February 4th.
On expiry, February 11th, the price of Solana has increased to $112.56, and the contract settles at the price of the underlying price, $112.56. It means that the buyer nets a profit of $112.56-$111.4215-$0.0276(platform fees at that moment)-0.027SOL(network fee at that moment) = $0.8409 (+0.75% on capital used for the trade).
B. We sell 1 SOL future at $111.4215 (underlying price of SOL at $110.75) on February 4th. Let’s also add closure of their position before the expiry date (by ones own will).
Before expiry, on February 7th, the price of Solana has dropped to $96.68, and we decide to close out of the position by buying the contract back on-market at $96.68. It means that as the buyer we net a profit of $111.4215- -$96.68-$0.0276(platform fees at that moment)-0.027SOL(network fee at that moment) = $14.1955 (+12.75% on capital used for the trade).
Classes Options 101 and Future 101 on example of Zeta ζ came to an end. Remember to use you money and time wisely
