The Edge Podcast - Will Zeta Markets Be Solana's First L2? - Revelo Intel

The Edge Podcast – Will Zeta Markets Be Solana’s First L2?

In this episode of The Edge Podcast which took place on May 24, 2024, DeFi Dad and Nomatic were joined by Tristan Frizza from Zeta Markets to discuss the evolving landscape of decentralized finance on Solana, advancements in crypto derivatives, integration of real-time risk management in trading platforms, and more! Read our notes below to learn more.


Zeta Markets: A Journey from Trading Bots to DeFi Protocols

  • Tristan says he got into crypto around seven years ago, in 2017, starting with personal trading and building Python trading bots on Binance and Bittrex. This experience stoked his curiosity in blockchain technology, leading him to study computer science with a focus on distributed systems. He mentions his involvement with a high-throughput blockchain for payments during his university courses.
  • Tristan explains his interest in consensus algorithms and how he built a Bitcoin clone in Java during his studies. He reflects on the market crash that made him take a break from crypto. Afterward, he worked in software engineering and machine learning, completing a thesis on generative AI and publishing his research in academia.
  • Tristan says he worked in Silicon Valley for two years, focusing on data science and personalization algorithms. During the COVID-19 pandemic, he felt burnt out and wanted to return to startup land. He was inspired by listening to podcasts about smart contracts and DeFi, leading him to dive back into the crypto space.
  • Tristan recounts learning Solidity over Christmas and deciding to build a derivatives protocol. He notes the high fees and slippage issues with early Ethereum protocols, prompting them to explore Solana. After a call with Anatoly from Solana, Tristan was convinced of the network’s potential and began learning Rust.
  • Tristan says he and his co-founder enrolled in a hackathon, quit his job and built an options proof of concept on Solana DevNet, which won the hackathon. This marked the beginning of Zeta Markets. He says that they started in early 2021, not three years ago as previously stated, and highlights their long journey from Solana’s early days to its current state.

Creating Scalable DeFi on Solana

  • DeFi Dad says that according to DeFiLlama, Zeta is doing about a $100m in daily trade volume. He says that Drift is at around $130m and Jupiter at around $400m, showing the competitiveness in the space. 
  • Tristan says that Zeta Markets is a decentralized perpetual exchange built on Solana. They aim to create scalable DeFi for real-world adoption, addressing issues with traditional DeFi applications such as high spreads, over-collateralization, and high gas fees. Zeta is designed to feel like a centralized exchange but operates entirely on a public blockchain, offering features like self-custody and transparency.
  • Tristan highlights Zeta’s unique fully on-chain central limit order book, inspired by Serum. He discusses the advantages of order books over AMMs, such as avoiding issues like slippage and impermanent loss. Zeta’s design leverages Solana’s high transaction throughput to provide a user experience comparable to Robinhood or Binance, with low fees and fast order placement.
  • Tristan says that AMMs focus on passive liquidity and often result in suboptimal pricing and losses for liquidity providers. Zeta, on the other hand, works with professional market makers to update quotes rapidly on-chain, offering better pricing and tighter spreads compared to AMMs. He highlights that their model provides a more efficient and competitive trading environment similar to centralized exchanges.

Solana’s Congestion Issues

  • Nomadic asks about Solana’s recent congestion issues and how they have impacted Zeta Markets and their users, as well as plans to address these problems.
  • Tristan acknowledges that Solana has faced growing pains, particularly affecting Zeta as an upstart exchange. He explains that Solana’s downtime, which occurred several times a year in the past, caused challenges, especially with managing open positions during those periods. 
  • He mentions that Solana received a lot of criticism and that it affected the network’s perception, but Solana has improved significantly with rigorous engineering efforts to enhance stability.
  • Tristan says recent issues stemmed from the networking stack and the implementation of Solana’s quick networking protocol, which aimed to prevent spam by filtering out spammy transactions. However, this led to unintended congestion as legitimate transactions got dropped. He describes how Solana introduced a stake-weighted quality of service to prioritize transactions from high-stake validators, which has already improved transaction reliability.
  • On Zeta’s side, Tristan says they optimized their smart contracts to reduce compute load, improving transaction inclusion rates. They also diversified their RPC providers and used Jito’s MEV network, which has been highly effective. Additionally, they focused on infrastructure redundancy to ensure their matching engine and critical backend processes remain operational.
  • Tristan mentions the upcoming Solana 1.18 upgrade, which aims to fix issues with the scheduler and fee markets. This upgrade should improve predictability for transaction inclusion based on fees, addressing the inconsistencies seen with the current parallel execution and scheduling system. This update is expected to be on the mainnet with a majority stake by the end of the month.

Zeta’s Experience with Solana’s Congestion Issues and Mitigation Strategies

  • Tristan says that Solana’s past congestion, such as during NFT mints or IDOs, caused significant user drop-offs due to downtime and network issues. He highlights improvements from Solana’s fee market, noting a recent successful NFT mint that had minimal impact on Zeta’s metrics, indicating better network isolation and handling.
  • Tristan acknowledges recent congestion issues caused by Solana’s networking stack and quick protocol, leading to dropped transactions and significant user drop-offs. He recalls a particularly bad week where user numbers halved, and transaction landing rates dropped to 10%, causing frustration among users and scrambling within Zeta to fix the issues. However, he notes that the situation has improved considerably since then.
  • DeFi Dad asks about Zeta’s plans to build an L2 for Solana. Tristan explains that while Solana’s monolithic chain works well for many use cases like spot trading, staking, and lending, derivatives trading with leverage requires faster reaction times and better risk management. Zeta aims to compete with centralized exchanges, necessitating performance improvements that an L2 can provide.
  • Tristan says that Zeta chose an L2 over a full app chain because they believe Solana will remain a hub for DeFi and liquidity. He expects Solana’s fast L1 will enable an extremely performant L2 with quick and cost-effective bridging. Zeta’s L2 will focus on institutional-grade trading, offering benefits like gasless quoting and more flexible margin engines, which are difficult to achieve within Solana’s current runtime constraints.
  • He highlights the importance of block space isolation to avoid downtime and congestion, ensuring reliable operations even during network slowdowns. Building an L2 gives Zeta more control over their platform’s design and resilience, reducing the risks associated with potential Solana downtime and providing better guarantees for their trading infrastructure.

Approach to Listing Assets on Zeta Markets

  • Tristan explains that one of the main costs for roll-ups is data availability, posting state data for verification. He mentions that Solana’s block space is relatively cheap, making it a viable option for data availability without breaking the bank. He also highlights the potential for improving UX by subsidizing gas costs and abstracting them away from users, similar to the gasless transactions approach seen with account abstraction on Ethereum.
  • Tristan notes the challenge of users needing to sign every transaction, which adds delays, especially when prices are moving quickly. He suggests session keys as a solution, which would streamline the process and make it feel more like a centralized exchange. This would allow users to place trades without the constant need for transaction approvals, improving the overall experience.
  • Tristan acknowledges the interest in trading meme coins but stresses the importance of risk management and security. He recalls incidents where other platforms faced significant issues due to poor risk management, such as margining in volatile tokens or listing highly volatile assets without sufficient liquidity. Zeta has taken a cautious approach, primarily listing assets with substantial liquidity and stable profiles to avoid spreading risk across the platform.
  • He mentions that while Zeta could theoretically list any meme coin with an appropriate oracle, they prefer to mitigate risk by focusing on assets within the top 100 on CoinGecko, offering lower leverage for more volatile assets. This approach helps prevent the platform from taking on bad debt and ensures the insurance fund remains intact, avoiding socialized losses.
  • Tristan says that while there is interest in trading meme coins, the inherent volatility and rapid price movements pose significant risks for DeFi protocols, particularly when leveraging these assets.

Navigating the Future of Decentralized Derivatives with Zeta Markets

  • Tristan says that $USDC is the currently accepted collateral, but they plan to support Solana, Jito, and other liquid staking derivatives soon. In the meantime, they have integrated Jupiter Swap to seamlessly convert $SOL into $USDC during the deposit process.
  • Tristan says they offer up to 20x leverage for major pairs and around 4x for more volatile meme coins to manage risk.
  • Tristan says that Zeta Markets supports take profit orders, stop losses, and other advanced order types such as immediate or cancel, fill or kill, and time-in-force orders for advanced traders.
  • Tristan explains that Zeta Markets currently operates with an order book where makers and takers place market or limit orders. He mentions plans to add vaults in the future for passive LP strategies, enabling users to run delta-neutral or hedge strategies. He notes that automated strategies could be stacked on top of the order book, with plans to implement this in Q3 or alongside their roll-ups.
  • Tristan explains that Z-score is a point system rewarding users based on trading volume and profitability. The upcoming token launch, expected this quarter, will use Z-score for distribution through an airdrop. The token will follow a vote-escrow model, incentivizing long-term staking and alignment with the protocol. He highlights rewarding active and engaged users with a significant portion of the token supply dedicated to trading rewards and staking incentives.
  • Tristan says that the planned roll-up is expected on Testnet by Q4, 2024. 

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Show Information

  • Medium: YouTube (Video)
  • Show: The Edge Podcast
  • Show Title: Will Zeta Markets Be Solana’s First L2?
  • Show Date: May 24, 2024