Why we invested in Zeta Markets

Introduction

  • Options and Futures activity in traditional financial markets
  • Options and Future activity on crypto centralized exchanges
  • Options activity on DeFi platforms

TradFi markets: Options and Futures activity

World Federation of Exchanges — 2020 Market Highlights (https://www.world-exchanges.org/storage/app/media/FH.FY%202020%20Market%20Highlights%20v9.pdf)

Cryptocurrency CEXs: Options and Futures activity

(Accessed through: https://www.theblockcrypto.com/data/crypto-markets/options)
(Accessed through: https://www.theblockcrypto.com/data/crypto-markets/options)

Options activity on DeFi

1. Order book for origination and exchanging

  • PsyOptions v1 on Solana, with fully-collateralized, asset settled, American options. Future updates to PsyOptions will include under-collateralized, cash-settled, European options.
  • Opyn v2 on Ethereum using 0x Exchange order books, featuring partially-collateralized, cash-settled, European options

2. Pooled Liquidity or Automated Market Maker model

  • Hegic v8888 on Ethereum L1, custom pricing model, IV either set manually or via oracles, but altered to cheapen buying options vs CEXes, positions tokenized as tradeable ERC721s, liquidity pools hedged for zero-loss.
  • Siren v2 on Polygon, custom AMM pricing via BS approximation and bonding curve to set slippage, IV set manually, collateral split in bToken for buyers and wToken are pooled in the AMM for LPs.
  • Lyra on Optimism, pricing via BS and a dynamic fee based on pool’s vega, baseline IV adjusted by a strike volatility ratio, hedges LPs delta via Synthetix.
  • Premia v2 on Arbitrum, pricing via BS with a liquidity adjustment called C-level, volatility surface generated via CEX and Premia option data, tokenized positions as tradeable ERC721s.

Summary: Issues for widespread DeFi options adoption

  • High cost of options
  • Low capital efficiency (fully-collateralized vs. undercollateralized)
  • Imperfect pricing
  • Lack of complex margining
  • Lack of liquidation mechanism due to limitations of platform

How Zeta addresses the limitations of current DeFi Options Platforms

Advantages — Solana/ Serum

  • Reduce the cost of taking an options position to a manageable amount.
    - On Ethereum, to mint and trade a position it could be $100s of dollars in gas.
  • Provide undercollateralized options with greater capital efficiency
    - Undercollateralization requires a margin system and an efficient margin system requires efficient pricing & liquidation.
  • Update pricing every 400ms
    - Zeta is able to “mark-to-market” positions at frequent intervals. When the platform knows the “fair price” of a position there are numerous benefits including orderly/partial liquidation when positions go underwater.
  • Access to Pyth’s Oracle
    - Pyth’s data streams with confidence intervals are key to both orderly liquidations and the margin system.
  • Access to Serum’s fully on-chain order book
    - This reduces the need for passive AMM style liquidity, which can provide near infinite liquidity, but is a price laggard as the AMM must always take the price of the buyer. This means that well-informed market participants can choose to trade against the AMM only when they have an advantage.
  • Active order management
    - Without this more active approach to order management (and also given the limited ability to update pricing, for example, Hegic inputs Implied Volatility manually) LPs using Hegic, or other AMM-style options protocols, can face losses.
Dune Analytics Hegic Dashboard (https://dune.xyz/slash125/hegic-v2)

Advantages — Zeta FuZe & Composability

Advantages — UI/UX & Mobile-first approach

Advantages — Options Market Maker

  • At initial launch, Zeta is focused on a pure undercollateralized order book approach that relies mainly on sourcing liquidity from market makers, of which there are two day 0 liquidity providers — LedgerPrime and Pattern.
  • Because of the standardization of the Serum order book, firms that have composed/traded with Serum or any forks can easily port to Zeta.
  • In the future, Zeta plans to add an Options Market Maker that would price and trade any requests so there would be liquid markets even in strikes or tenors that are not popularly traded.

Roadmap

  • Currently there are 40+ markets on Zeta (call/puts/futures at different tenors).
  • Post launch, Zeta will focus on adding new markets and different types of options.
  • BTC/ETH options are high on the list as well as Luna/AVAX.
  • As the market matures and there is demand for monthly and quarterly expiries, those will be added as well.
  • Beyond that, working on everlasting options could be a potential project 👀

Governance

Conclusion

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A team of former consulting, Wall Street, private equity, government, and corporate veterans accelerating the blockchain revolution

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