Robust derivatives markets are essential to a healthy financial market as these instruments provide investors with an effective hedge against risk, asset exposure, leverage and serve as tools for price discovery. They also enable investors and companies to access foreign markets and currencies. The sheer size of the derivatives market, with a gross market value of approximately $12.4 trillion and total notional amounts outstanding nearing $600 trillion, demonstrates its importance.
Derivatives can be used to either mitigate or assume risk with the expectation of reward; they can easily move risk (and the accompanying rewards) from the risk-averse to the risk seekers. However, the traditional over-the-counter (OTC) market for derivatives, while the largest in traditional finance, suffers from a lack of transparency and a higher risk of counterparty default. It can be difficult for investors to properly assess the level of risk involved in these opaque financial products, and barriers to entry can make it challenging for investors to participate.
This is where DeFi comes in. By bringing derivatives markets on-chain, DeFi projects are working to increase transparency and accessibility in the financial system. By leveraging the power of blockchain technology, DeFi offers a more open and secure environment for investors to access and trade derivatives. It is a crucial step towards building a more equitable and resilient financial market for all.
Decentralized Derivatives
For such markets to exist on-chain the governing protocols will need to be efficient, secure, capital efficient, and have plans for progressive decentralization. This will give the users an unparalleled trading experience with all of the benefits that blockchain provides over traditional derivatives trading venues: full custody, permissionless access, and transparency.
One silver lining from the FTX implosion is that it’s likely to catalyze adoption of DeFi, as the industry has once again been reminded of the risks associated with transacting within unreliable custodial entities.
An area of DeFi that is well positioned to capture this newfound demand for non-custodial, transparent, and decentralized solutions are derivatives DEXs, particularly perpetual futures (perps). These products dominate the crypto derivatives market today and are offered by most
Perpetual Futures are crypto futures contracts developed by BitMEX in 2016 that do not have an expiration date, they continuously roll-over. To keep a position open and tether the price of the perp to the underlying asset, traders will make continuous interest payments. The rate of payment is determined by trader positioning and is known as the funding rate.
This design and the ease of managing these positions have led perps to explode in popularity and establish the sector as a core component of crypto market structure. Perps volumes exceed that of spot, as it's the primary way for traders to open leveraged long or short positions.
Centralized exchanges have been the go-to venues to trade perps. However, a cohort of steadily-growing DeFi protocols have emerged as viable alternatives poised to capture trading volume post-FTX.
Given that on-chain DEXs have a very small percentage share of futures open-interest, the near-term (let alone long-term) addressable market for these protocols is considerable. Furthermore, unlike CEXs, investors may have the opportunity to capture the upside of this trend, as the leading perps DEXs all have tokens, many of which have been outperforming the market recently.
Introducing ZKX
ZKX is set to redefine the DeFi experience. As the first perpetual futures exchange built on StarkNet, ZKX leverages account abstraction and low transaction costs to offer a new generation DEX that is non-custodial and as scalable as a CEX.
But what sets ZKX apart is its focus on the trader experience. Traders will have their own non-custodial account within the exchange and will be able to onboard through multiple EVM chains, rollups, or directly from Starknet. The exchange features improved token economics by ensuring the staked native token receives a share of the revenue, and anyone in the community can participate in the growth of ZKX. And with the ability to own a stake in the exchange through revenue sharing, ZKX truly puts the power in the hands of its traders.
ZKX is built on four essential properties that differentiate the protocol from others: -
1. Novel Architecture
ZKX has a novel order book architecture with a decentralized node network optimized for high-speed and high-throughput scalability. A dedicated consensus algorithm along the node client has been developed to provide the linear scaling capacity of the exchange. DEXs have low TPS compared to CEXs that leverage centralized cloud computing solutions; with a node network that verifies its computation through Starknet and settles on Ethereum, ZKX can scale and compete with a centralized orderbook while being decentralized.
2. Liquid Governance
An innovative liquid governance model which separates 'voting power' and 'token holding,' enabling fair participation and equal representation within the community. It rewards stakeholders with digital shares of ZKX that allow ownership of the open-source protocol to whoever is currently a stakeholder (trader, staker, node provider)
3. Financial Innovation
The team at ZKX will introduce fundamental concepts to redefine the current DeFi experience and detail multiple fronts with mathematical models that will go into the Cairo language.
4. Layer 2 scaling with Starkware (™)
StarkNet, StarkWare's ZK rollup, powers the trading interface. This enables low trading fees, instant settlements, and fast withdrawals on the platform.
These features combine to make ZKX a standout player in the decentralized exchange space. If you're a trader looking for an elevated trading experience, ZKX is worth a closer look.
Q&A with the ZKX team
What kinds of derivatives will the platform support? All exchange traded products? What about OTC products such as swaps or FRAs
Perpetual swaps have become a very popular instrument in the industry today. All the other exchanges offer these kinds of perpetual futures. We're also working on devising new instruments and new options for traders in the long term. Once developed, we're excited to bring it to our users in the future.
Can you describe how the governance model is unique
The liquid governance model is unique in separating "voting power" and "token holding." You can lock your token, represent yourself, vote, and participate in the DAO. This is a refreshing change from the traditional model, where the governance token tends to be concentrated toward whales and institutions and does not necessarily represent the actual users or value providers of these ecosystems and DAOs.
In this model, traders and liquidity providers can accumulate representation within a DAO as long as they continue using the protocol. Additionally, ZKX token holders can stake their tokens to gain access to digital shares of ZKX, which are linked to governance and protocol rewards. The more actions a trader performs on the platform, the more digital shares of ZKX he will accumulate. But the benefits of the liquid governance model don't stop there.
By rewarding stakeholders with digital shares of ZKX, our goal is to incentivize positive behaviors and facilitate long-term growth. And various benefits come with holding digital shares of ZKX, such as protocol fee revenue, discounted trading fees, and premium features. There is a clear incentive for stakeholders to get involved and actively participate in the governance process.
Can you describe the node network and what plans are in place for decentralization?
The Node Network is a solution that combines the best features of virtual AMMs and CLOB without their weaknesses. It is made up of a series of nodes that interact with each other using a consensus algorithm and can perform decentralized order matching. In the future, anyone will be able to install and run a node independently, providing services to the exchange and earning from liquidation and trading fees.
The Node Network has two fundamental parts: the Decentralized Limit Order Book (DLOB) and the Data Provider Service (DPS). The DPS provides flexibility in terms of the data that can be brought, the types of assets that can be supported, and the prices that can be offered, and it adds scalability to the system by making order book matches much faster than on-chain. The final check and single source of truth is always on-chain. The Node Network serves as an extension to the protocol, increasing flexibility, scalability, and execution speeds, while all fundamental checks are still within the L2 of StarkNet, providing security and privacy of transactions happening on-chain.
And to answer the latter part of your question, Nodes will receive a portion of the trading fees on the exchange and payments for services rendered to the smart contracts, like data provisioning for the markets listed on ZKX. Anyone will have the ability to run a node and thus benefit from the trading activity on ZKX. As trading volumes grow, more incentives will be provided to capture revenue for node operators. The plan for decentralization is a guarded secret for the time being, but it will involve the token economics of ZKX, staking, and a permissionless node client.
Why build on ZK Rollups ?
ZK rollups offer several advantages over Optimistic rollups for complex financial applications and transactions. First, ZK rollups provide stronger security guarantees using zero-knowledge proofs to ensure the validity of transactions. Transaction data is kept private and secure, and it is not possible for anyone to manipulate the data in a way that would be undetectable by the network. Second, ZK rollups are more capital efficient because they do not require the use of a verification game, as is the case with Optimistic rollups. This reduces the overhead associated with validating transactions, which leads to lower fees and faster transaction times. Finally, ZK rollups are more scalable because they can support a larger number of transactions per block. This is due to the use of zero-knowledge proofs, which allow for the aggregation of multiple transactions into a single proof that can be verified efficiently.
ZK rollups offer stronger security, greater efficiency, and higher scalability than Optimistic rollups, making them the compelling choice for a product such as this. The ZKX team has been working closely with StarkNet since the early stages of their development and are well integrated with the much anticipated Ethereum scaling solution.
Over the last 6 months myself and the Serafund team have had the pleasure to speak with the founders of ZKX and support their mission to build this essential component of a permissionless financial system. To read more about the ZKX protocol and team, check out their website.
Not only is the protocol innovative in terms of its trading features, but the team behind it is also pushing the boundaries when it comes to community engagement. They are launching their Community Incentives Program in late January 2023, which includes a gamified universe for ambassadors and contributors. This is a unique and engaging way for the community to get involved and earn rewards for their contributions. This program will be followed by an opportunity to experience their trading platform on Testnet in Q1 2023; sign up for their waitlist to get early access!