Derivatives landscape on Solana in 2024
Derivatives (assets whose value is derived from value of another asset) in any ecosystem consist of the following: expiring futures markets, perp markets, expiring option markets, structured products, and exotics. Exotics in the crypto definition would be different from the TradFi perspective and include a vast range of protocols such as various swap contracts, perpetual options, or volatility indices. Solana is no exception.
The landscape can not only be broken down by the type of asset traded but also by the type of exchange which offers these assets. The most simplistic distinction would be: AMM-type exchanges, CLOB-type exchanges, and aggregators.
Perp DEXs
By far the largest derivative market is perpetual futures. DEX-based perpetual futures achieved over $166 billion in volume during February 2024, 1.7x more than the spot market over the same period. In addition, the perp market is consistently on the rise, growing 248% year-over-year from $47.9 billion in February 2023.
Solana-based perp market is significantly smaller, currently processing around $400 million/day or approximately $12 billion/month in volume, making up around 7% of the total perpetual market. Nonetheless, the daily volume is up around 10x since January 2024 and around 100x since October 2023 showing considerable strengthening.
Solana is currently serviced by Jupiter, Drift, Zeta, Mango, Flash Trade, GooseFX, and HXRO. Parcl is also a perp DEX with non-standard underlying assets being real estate markets.
Jupiter
Jupiter, better known as Solana’s largest DEX aggregator, launched its perp dex platform in October 2023 and currently runs its exchange in public beta. The exchange is based on an AMM design, similar to Arbitrum’s GMX perp exchange. Under this design, liquidity providers deposit approved assets to a single multi-asset liquidity pool and the traders trade against this pool. Any trader profits come at the loss of the LPs and vice-versa. Jupiter’s multi-asset pool currently consists of wBTC, ETH, SOL, USDC, and USDT.
Benefits of this design are zero slippage or price impact and deep liquidity. It also allows liquidity providers to act as market makers without the risk of impermanent loss. The design comes at the cost of a limited trading asset set whereby traders can only trade the assets that are included in the liquidity pool and the size of the pools. Traders can only utilize the assets for leverage up to their size in the pool — non-stable tokens for long positions and stablecoin assets for the short positions. Nonetheless, the model builds on a model proven by GMX as a viable perp trading platform.
Important to note is that even though there is no impermanent loss, the pool depositors are subject to two negative externalities. First, depositors always take the opposing side of the trade and it is possible for the traders to drain the pool if they become too profitable. Secondly, even though traders may deposit a single asset into the pool, the pool composition effectively dilutes the price of the LP token (JLP) by the presence of the stable assets in the pool and the depositor experiences lower value appreciation (in case of rising prices) on their non-stable token deposit than they would, if they never deposited the token. The benefit is obviously slower value depreciation in case of falling prices.
Jupiter perp DEX allows up to 100x leverage at the moment. The exchange charges 0.1% trading fee + borrowing rate on leverage, which is an alternative to a funding rate typically charged by perp DEXs to keep the perp price close to the spot price. Jupiter charges the borrowing rate hourly. Jupiter currently shares 70% of the trading fees with the pool depositors.
Building GMX-style perp DEX on Solana has a one major advantage — UX. Seamless trade processing and fast execution is unparallel and any trader using Jupiter is unlikely going to go back to GMX on Arbitrum.
Jupiter currently covers around 50% of the daily volume ($200 million). Since its launch, Jupiter did over $13.7 billion in perp volume (as of mid-February 2024).
Flash Trade
Similar to Jupiter, Flash.Trade exchange uses multi-asset single pool to peer trading model with up to 100x leverage. The pool currently consists of wBTC, ETH, SOL, and USDC (remember that Jupiter’s pool allows USDC and USDT deposits).
Design-wise similar to Jupiter, Flash.Trade differentiates through a gamified approach to trading via a collection of NFTs that represent accounts of the original supporters, which seeded the initial liquidity of the multi-asset pool from purchasing the NFTs. The holders of these NFTs receive 100% fee share on this initial liquidity into perpetuity while also receiving trading fee discounts and other benefits based on their activity.
The ideal composition of tokens in the pool is 20% BTC, 10% ETH, and 25% SOL with the remainder covered by stablecoins (USDC). Note that in Jupiter’s design, the ideal composition is 40% SOL, 9% ETH and 7% BTC (remainder USDC and USDT). The different target weight compositions force the respective LP tokens to behave differently. BTC and ETH as blue-chip assets generally trade with lower volatility — 30-day BTC volatility over the last year ranged between 4% and 18%, ETH between 4% and 20%, while SOL between 10% and 40% as reported by PortfoliosLab (https://portfolioslab.com) — which, given the composition, would imply Flash.Trades LP token is expected to be more stable than Jupiter’s.
Flash.Trade uses its add/remove liquidity fee to incentivize deposits of assets whose weights are below the target and vice versa. Withdrawal requests are further disincentivized by charging a penalty fee of 5bps in case of frequent withdrawals. In order for depositors to participate in revenue sharing mechanism, they further need to stake their LP tokens, which increases depositor risk in case the staking pool is hacked. 70% of fees generated by the protocol (after subtracting the fees generated by the initial liquidity owned by the NFT holders) goes to depositors.
In addition, Flash.Trade also allows leveraged trading of synthetic assets — major Forex currencies and a limited set of commodities.
Unlike Jupiter, Flash.Trade uses a dynamic fee system composed of open/close position fees, borrow fees, add/remove liquidity fees, and swap fees. Traditionally, open/close position fees for crypto assets are set at 0.1% (2bps for Forex and 10bps for metals). Borrow fee (in this design effectively a funding rate) is charged on the leverage used and ranges based on the utilization of the borrowed asset. Swap fee is then charged in case of collateral deposits for a trade that differ from the position asset.
Drift
Drift is probably the best known perp DEX on Solana. The exchange uses a hybrid approach to its matching and execution mechanism of just in time liquidity, where taker orders are first placed into a 5 second dutch auction, then matched against resting limit orders in the order book and lastly DAMM to be filled. Best execution is a priority and therefore the AMM and resting limit orders can fill orders as well during the initial phase.
As a primarily central limit order book design, Drift utilizes funding rate payments to periodically reset the perp price to the spot price. The calculation is quite interesting as (unlike other formulas used by Solana exchanges) Drift uses the difference between market TWAP and oracle TWAP prices (with 1 hour duration) to calculate the funding rate. Using TWAP reduces noise and can especially be helpful in case of less liquid markets. Funding rates are updated hourly.
Fee structure charged by Drift is relatively simple, -0.05% for market makers and a decreasing fee ranging from 0.075% to 0.025% based on 30-day volume tiers for market takers for blue-chips (BTC and ETH) and -0.02% fee for market makers and 0.03%-0.1% for market takers for any other assets. This is below the market average. Trading fees generated are currently placed into reserve pools to backstop any potential protocol losses.
PnL setup is quite important to discuss in Drift’s design. Given its on-chain structure, traders must settle and claim PnL to be able to withdraw it, realizing PnL is not enough. Additionally, all PnL (both profits and losses) are pooled in P&L pool. Traders can only realize profits up to the settled funds available in the pool. As such, if a trader realized a significant profit from a long trade but short traders did not realize and settled losses yet, the trader may not be able to withdraw their profits immediately. This ensures solvency of the protocol but introduces additional risk to traders.
In addition to perp markets, the platform offers spot trading and lending markets, where the deposits are used as a yield-earning collateral.
Drift currently covers around $100 to $200 million per day in volume. Cumulatively, the platform processed over $10 billion in volume.
Zeta
Zeta markets is a long-standing perp DEX on Solana. The exchange launched in 2021 as an AMM-based exchange but switched to fully on-chain central limit order book with their v2. Under the order-book model, Zeta depends on market makers to post orders (effectively placing limit orders at various levels and sizes into both sides of the order book).
Order books are a proven TradFi model and with enough depth, they can provide unparalleled trading experience with extremely low slippage. In addition, order books provide transparency about a given market, the depth and structure, which can help traders make informed decisions. With Solana’s performance and speed of 400ms, fully on-chain order books such as Zeta are becoming a possibility. The cost of using order books as a design is that the exchange requires market makers and enough liquidity depth to operate efficiently (reason why in crypto’s early days, AMM design with x*y=k curve that can operate on limited liquidity was so popular). Given the cost, Zeta’s fee structure incentivizes market makers by providing lower fees in the range of 0.006% to 0.02% (based on volume tiers) and market maker rebates, incentivizing market makers with yield in form of their announced native token.
Market takers on the other hand pay fees in the range of 0.03% to 0.1% (based on volume tiers with lowest fees hitting at $50 million in account’s 30-day volume).
Given the perpetual nature of perps and a standard structure of Zeta, funding rates play an important role in any longer-term trading strategy. Zeta charges funding rate to accounts with open positions hourly but updates the effective funding rate every 10 seconds. The rate is calculated as an impact midpoint price relative to oracle price. The impact midpoint price is calculated as the midpoint of the orderbook given $1,000 worth of quotes on both the bid and ask side. Funding rate is automatically settled from the account’s deposited collateral and as such, changes the liquidation price over time.
In terms of leverage, the exchange allows initial leverage up to 10x for blue-chip assets, 8x for middle-tier and 5x for volatile assets. Maintenance leverage (leverage before liquidation) can reach 33x for blue-chips, 12x for middle-tier, and 10x for volatile assets. All trades are cross-collateralized and Zeta doesn’t offer isolated leverage.
In terms of size, Zeta processes around $15 million a day in volume.
GooseFX
GooseFX is another case of fully on-chain order book exchange. The exchange currently supports only SOLUSDC perp with up to 10x leverage (and maintenance leverage of up to 20x). One of its key advantages is the exchange’s insurance pool backstopping any potential losses.
Funding rates are charged hourly and calculated simply as the difference between oracle and orderbook price where the orderbook price is the average of bid and ask prices.
GooseFX charges 0.04% taker and 0% maker fee. In addition, it provides market maker incentives to populate its order book.
Mango Markets
Similar to Zeta and GooseFX, Mango Markets uses fully on-chain central limit order book as its exchange mechanism. The exchange allows 5x maximum initial leverage and up to 10x maintenance leverage.
One key difference between Mango and the other order books mentioned here is its settlement engine. Similar to Drift, settlement is permissionless and not done automatically by the protocol. As such, if a trader closes their position, the realized PnL moves into an unsettled PnL account until someone (or the trader) settles the accounts and matches traders with opposite unsettled PnLs. Settling PnL improves the account’s health balance.
In addition, Mango’s margin system is quite interesting and relative to other perp exchanges on Solana and resembles lending market protocols. Available margin is calculated based on accounts health. The health is reflected by the value of deposited assets (collateral) relative to the leverage used. The important distinction comes from value weights assigned to assets. For example, USDC has a weight of 1 and its collateral is worth 1:1 to the amount deposited. SOL on the other hand has a weight of 0.9, meaning that for each $1 worth of SOL deposited, the collateral increases by $0.9. This mechanism is used to reflect volatility of the collateral assets and helps protect the protocol from bad debt during periods of high stress in the market.
Mango’s UI also offers advanced trading features, not just TP/SL but also Time in Force orders or oracle peg orders.
Mango’s funding rate is paid continuously. Funding from a funding rate is continuously added to unsettled PnL accounts.
Mango’s fees are generally below the market standard with taker fees 0.06% for all assets except BTC, which has a 0.01% taker fee. Maker fees are ranging from -0.03% to 0%.
Mango Markets processes around $500 thousand a day in volume.
HXRO
HXRO is a unified liquidity layer for derivatives on Solana. Similar to what Serum did for spot (and later Openbook does for spot), is what HXRO does for derivatives. HXRO allows any number of front-ends and derivative trading dapps to tap into and share liquidity among each other. The unified liquidity layer inside a general-purpose blockchain is another testament of Solana’s performance. Most unified liquidity layers operate as separate chains and overlays to optimize for the trading environment but on Solana, HXRO can live natively on top of the core layer and still perform without hick ups.
HXRO is effectively a 2-layered system of smart contracts — one layer consisting of order books for each of the dapps and a second layer for their risk margin system.
The layer charges 0% fees for market makers and 0.05% for takers. This is not inclusive of fees charged by the front ends.
Parcl
Parcl is a perp exchange specializing on real estate synthetic assets.It operates using AMM mechanism where LPs deposit assets into a pool to act as the counterparty to traders. The pool is underwritten with a single collateral asset — USDC.
The AMM model automatically implements rebalancing to delta neutral trading state by incentivizing traders actions to balance out the pools.
As any perpetual exchange, the platform charges funding rate payments. Parcl uses fairly sophisticated velocity model that depends on the disbalance of the pool and the pool’s maximum funding velocity, which helps balance out the pools.
Options
In terms of options, there is a fairly limited set of protocols building this derivative. Those are PsyFi, SDX, and DeVol.
PsyFi and SDX
PsyFi and SDX are products of the same team and as such, we should discuss them together. PsyFi is an infrastructure DAO/layer, which builds various derivative financial primitives including options and structured product vaults. They provide an AMM-style options exchange under the SDX brand and a structured vaults product under their PsyFi brand.
SDX offers a fully-collateralized, USDC-settled European-type options (options exercisable only at expiration) using AMM-design. Use of AMM design allows SDX to cover the entire expiration and strike price surface as depositors take the opposite side of each trade.
To balance the pool out SDX prices options relative to the change in the pool greeks the trade does. This approach attempts to disincentivize behavior where depositors would be extremely short or long volatility and attempts to ideally maintain the pool neutral. As the protocol doesn’t allow the use of leverage, there is no risk of bad debt accruing to the pool. The pool is automatically delta-hedged by a bot.
One major benefit to traders is the cross-collateralization of positions, which is capital efficient for multi-legged trade strategies.
Overall the fee structure of SDX markets depends on several factors — the affect the trade has on the pool, which either increases or decreases the Black-Scholes determined price, a capital utilization fee for locking up capital in the pool to mint options, and a trade fee that is the lower of 10% of the trade price and 0.3% of the underlying.
DeVol
DeVol is another AMM-style options platform focused on multi-legged, short-duration European-style options. The platform is centered around offering cheap options and uses a novel pricing approach that uses an expected price range for the underlying asset over the time to maturity and splits it into blocks that can be used to synthetically create any desired payoff structures.
All options on DeVol are cash-settled and fully-collateralized. Similar to SDX, the positions are cross-collateralizated to reduce required collateral on the portfolio level.
The platform charges 0.005% of the nominal value for each block, which is usually about 0.01%-0.03% of the trade size.
Structured products
After perps, structured products are arguably the second most popular derivative product in crypto. On Solana, Cega, Ribbon, Dual Finance, and PsyFi offer structured products.
Cega
Cega is a structured product protocol offering option vaults for users to generate attractive yields on their stable holdings. Cega’s infrastructure effectively sells deeply out-of-money call and put options to generate options premium, which is used as the yield paid to their depositors. The options are backed by the collateral pooled in Cega’s smart contracts by depositors. Cega requires 27 day lock ups.
Given Cega’s structure as a financial management platform, their fee structure is similar to a fund structure. The platform currently charges 2% annualized management fee (on deposited assets) and 15% performance fee (on profit only).
In addition to safer products where at most conversion of deposit assets into underlying occurs, Cega also offers leveraged yield products that can cause significant losses in case of high market volatility.
As a per-se financial management platform, TVL (or in TradFi words AUM) is the best indicator of Cega’s performance. Currently, the platform secures over $21 million in TVL, up quite significantly from the bear of 2023.
Ribbon Finance
Although not a Solana project, Ribbon supports Solana vault in its structured products offering. It operates exactly the same way as Cega where it sells out-of-money call options for depositors to generate option premium yield.
Ribbon’s fee structure is similar to Cega, charging 2% annualized management fee but their performance fee is set at 10%. Ribbon requires one-week lock ups.
Dual Finance
Dual Finance is an options vault platform focused on reimagining DAO’s treasury management. The platform has several products through which, it attempts to prevent token dumping. The protocol introduced staking options financial primitive, which rewards protocol users with options on tokens rather than the underlying tokens.
In addition to staking options that are reimaging token incentives and governance distribution, Dual Finance also launched Dual Investment Pools which are flexible option vaults. Unlike other option and structured product protocols covered, Dual Investment Pools are physically settled.
PsyFi
PsyFi and the platform’s structure has already been discussed above but to mention their fee structure, PsyFi only charges 0.1% withdrawal fee and 10% performance fee.
Conclusion
Overall, Solana’s derivatives landscape features the key products offered on other chains in a similar composition — majority of traction experienced by perp DEXs, good level of traction with structured products, and some experimentation with options.
Some products missing from the suite would be volatility indices such as EVM Volmex and credit default swaps or exotic experimentations such as non-expiring options. Nevertheless, Solana’s performance gives way for more experimentation and ability of developers to bring fully on-chain order book based exchanges, not only AMMs, to life.
