An overview of Zeta Protocol and the key components that will make derivatives trading on DeFi bulletproof. The following is a summary of how margin is calculated and treated by Zeta protocol.
A margin framework unlocks the world of under-collateralized trading - this is super desirable in the trading world as it allows for users to effectively apply leverage and use their capital in much more efficient way. In DeFi we have typically seen over-collateralization. This has emerged out of necessity; blockchains have typically been slow, often it takes minutes for a protocol to know the real state of the underlying asset price and take the actions required to keep the protocol safe and sufficiently collateralized. For an asset class as volatile as crypto, we know that these minutes can be precious. This has made it impossible to create an effective margin system. Until now.
Zeta solves these problems by leveraging Solana's 400ms block time. This allows us to update prices and monitor positions multiple times per second, enabling the implementation of a margining system which allows for an under-collateralized trading experience that rivals centralized exchanges.
The key elements that factor into our margin system are:
- Mark Pricing: In a world of under-collateralized trading one of the most important inputs is knowing how much a user's positions are worth. Without this knowledge it's impossible to determine their PnL and their risk. Zeta has its own internal pricing engine which calculates the Mark Price of all tradable assets and uses this to inform its margin and collateralisation system.
- Collateral Framework: This is essential for managing the capital in the system. Under-collateralized trading is all about using capital efficiently. However, as always when trading more than you have there are more risks. The collateral framework is what ensures that this balance is maintained so that the exchange at large can continue functioning.
- Liquidation Mechanism: The last piece of the puzzle is a liquidation mechanism which is utilized to keep the platform from losing money. This liquidation mechanism allows liquidators to step in when a user's trading account is too risky to continue trading. When this occurs the user is liquidated to ensure that the losses do not extend beyond isolated users.