Solana (SOL) currently shows $8.3 billion in on-chain derivatives monthly trading volume so far in August, which is an 8.7% dominance, according to DefiLlama’s data. Zeta Markets is the third largest decentralized exchange for perpetual trading (Perp DEX) in Solana’s ecosystem, registering $24 million in weekly volume.
The team behind Zeta is aiming at the creation of Zeta X, a layer-2 (L2) blockchain based on Solana with the specific purpose of being a Perp DEX. According to Tristan Frizza, founder of Zeta, a Solana L2 will be able to support faster trading and a higher success rate for transactions.
“A derivatives exchange built completely on the Solana L1 still faces several challenges such as latency, which is the time it takes for an order to be submitted to the exchange plus the time taken for the result to be communicated to the user,” Frizza explained to Crypto Briefing.
He also adds that congestion is also a challenge for L1 Perp DEXes, as users face elevated gas fees, longer confirmation times, and reduced transaction success rates.
The third major challenge is liquidity provision since market makers tasked with providing liquidity encounter several obstacles that hinder efficient quoting, such as non-deterministic order placement and cancellations when transactions take 20 to 30 seconds to confirm in periods of congestion, on top of high gas fees.
Thus, Frizza stated that an L2 blockchain is needed to address these issues.
Benefits are in metrics
According to Zeta’s founder, the migration of Zeta to an L2 could boost transactions’ soft confirmations, which can happen within 3 to 5 milliseconds. This threshold is similar to that of centralized exchanges, he added.
Moreover, other benefits include a high throughput of 10,000 transactions per second (TPS), a seamless 1-click user experience without needing to sign multiple transactions and confirmations, and close to zero failed transactions and triggers, even during times when Solana mainnet is congested.
Liquidity fragmentation
A common issue faced by the decentralized finance (DeFi) ecosystem nowadays is fragmentation of liquidity. As more L2s are created, liquidity flows in different ways, affecting the user experience in trading.
Solana is usually praised by the community for its focus on application development, as the network’s throughput is already enough to deal with current user demand. Thus, the creation of an L2 might start the liquidity fragmentation issue within its ecosystem.
“Contrary to this worry, we have had considerable excitement coming from users, protocol teams, and individuals within the Solana Foundation looking forward to the deployment of the L2 which will scale the specific use cases that require higher throughput,” Frizza highlighted.
The reason is the intent of Zeta’s team to create a high-performance decentralized finance system, and not just an L2 for valuation or total value locked (TVL), he added.
“Furthermore, some applications (perps exchanges included) don’t benefit from these liquidity benefits as different derivative exchanges have different margining systems and aren’t necessarily composable as they would be on a spot layer,” Frizza concluded.
