Futures on Tezos: a Test of Zenith, a Derivatives Platform

Futures on Tezos: a Test of Zenith, a Derivatives Platform

Many DEXs and swap applications exist on Tezos: QuipuSwap, SpicySwap, Vortex, SiriusDEX, Plenty DeFi, and Vortex. But what is yet to come to Tezos is actual derivatives to go short on a whole stash of money and then tremble in fear at the very thought of liquidation.

Thankfully, they are coming since the decentralized platform for perpetual futures, Zenith, is already running a public test on Ghostnet. So, keep reading to learn what it’s like to trade with leverage on a blockchain.

How Zenith Works

Zenith’s interface resembles a regular centralized exchange: a chart with different timeframes, buttons for Long and Short, leverage, a non-realized PnL for open positions, financing rates, etc.

There are no limit orders on Zenith, though. At a CEX, their purpose is to provide liquidity but on Zenith, this is the task of the virtual market maker (VMM or VAMM).

The VMM works like a regular automatic market maker but “in its head.” When opening a deal, traders deposit liquidity to back their position. The VMM records the price and the volume of the trade in the contract’s storage and changes the exchange rate in the pool as K = X × Y as if traders bought and sold tokens.

Check out Zenith’s documents to learn more about calculating prices in the virtual pool.

When traders close trades, they profit from the funds that other users have deposited. Like centralized exchanges, Zenith liquidates leveraged positions if the price of the asset changes and there may not be enough collateral to cover the obligations of the trade.

The test version of Zenith on Ghostnet supports the trading of tez price futures. Thanks to the VMM, the platform can support other futures, such as Bitcoin, gold, or Apple shares.

The maximum leverage in the test version is 3x, but the documentation suggests 10x.

Using Zenith: a Firsthand Experience

We opened and closed several positions, waited once for liquidation to see how it worked and were satisfied. We also compared prices: the quotes on Zenith were different from those on centralized exchanges.

The experience of trading on Zenith is both better and worse than trading on centralized exchanges. A significant advantage is the ease of entry and lack of KYC. The user connects a wallet and does not suffer from captchas, session closures for security reasons, and promotional offers of the site. A slight disadvantage is that each trade is executed on-chain with a few seconds delay.

Conclusion

Zenith could be the platform where people use Tezos daily and even switch to it from centralized sites. See for yourself:

  • Complete control of funds. The user does not need to make a deposit and trust all their money to a third party but only risks a position;
  • Anonymity. You do not have to go through KYC or even give your email address;
  • No regulation. Users can access any trading tools, and there is no censorship;
  • The community can build on top of the platform. For example, add copy trading or trading bots with customizable strategies.

All in all, we are waiting for Zenith to launch on the mainnet. Hopefully, it will attract liquidity and users both to itself and Tezos in general.

Bonus: How Futures Work

Futures contracts allow you to make money on the price of an asset moving in either direction. The buyer and seller agree to exchange money for the asset and then, at the option of the asset holder, exchange it back at the market price.

Earnings from buying futures (longs) look like this:

  1. Alice buys futures on tez at $1.5.
  2. The tez price rises to $3.
  3. Alice closes the trade, sells the futures to Bob, and earns $1.5 from each tez.

Short selling (shorting) works in a little more complex way:

  1. Bob sells tez futures for $1.5. Under the bonnet of the exchange, he makes a deal with Eve: he borrows tez from her, sells them immediately, and agrees to pay them back later.
  2. The price of the tez drops to $1.
  3. Bob buys the respective amount of tez at $1 on the market and returns them to Eva. He earns $0.5 from each tez.

On centralized exchanges, transactions are concluded by the trading core. The counterparties in the transactions are traders who place limiting orders to buy or sell futures.

Because traders are required to close trades, exchanges allow them to trade with leverage, i.e., to open positions with a volume bigger than the amount on the trader’s deposit. For example, with 5x leverage and $1000 on the deposit, a trader can buy or sell $5000 worth of contracts.

Exchanges use liquidation so that the trader would fulfill his obligations to the counterparties in the case of a leveraged trading loss. They forcibly close the position when the amount of loss approaches the amount of collateral for the position. If a trader buys tez at $1.5 with 10x leverage, the exchange will close his position when the price of tez drops by 10%.

Futures is a market in its own right, and a difference from the price of the same asset on a spot market is not something rare. To incentivize the futures rate to return to the spot, exchanges use a financing rate. If the futures price is higher than the spot, holders of long positions regularly pay the rate to holders of short positions. As a result, some traders close their positions, and those out of the market open short, lowering the rate. The same happens when the price is undervalued: the short holders pay the long holders, some close sales, and some buy and push the price up.

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