AMM model
Overview
ZEUS operates as a decentralized exchange that allows users to trade both spot and perpetual futures with leverage. The platform utilizes AMM-based liquidity pools but implements enhancements for better price stability and capital efficiency compared to traditional AMM models. ZEUS supports both spot and perpetual markets on Base its Layer-2 solution with low fees and fast transaction speeds.
Key components
ZLP (ZEUS Liquidity Pool)
At the core of the ZEUS model is the ZLP token, which represents a multi-asset liquidity pool. Unlike traditional AMMs that usually focus on two-asset pools (e.g., ETH/USDC), ZEUS’s liquidity pool is composed of various assets that traders can use for margin in perpetual trading.
ZLP Assets: The pool consists of assets like ETH, BTC, stablecoin USDC, and other tokens. The ZLP pool is the backbone of liquidity for both leveraged perpetual and spot trading.
Dynamic Asset Weighting: The protocol adjusts the weights of assets in the pool dynamically based on market demand. This helps balance the pool during times of high volatility or liquidity demand.
Example: If there is high demand for long positions in ETH, more ETH is weighted in the pool. If demand for short positions increases, the protocol reduces ETH exposure and increases stablecoins' allocation.
LP Incentives: Liquidity providers (LPs) deposit their assets into the ZLP pool and, in return, mint ZLP tokens. They earn rewards from trading fees, funding fees, and liquidation fees. This incentivizes LPs to maintain liquidity even during volatile periods.
Oracle-Based Pricing
ZEUS leverages Umbrella Oracles and TWAP (Time-Weighted Average Price) to obtain reliable, real-time pricing data for the assets traded on the platform. This is a critical feature to ensure the perpetual contract prices remain aligned with global market prices, reducing risks of slippage and price manipulation.
TWAP is used to smooth out price volatility and protect against flash loan attacks or other types of market manipulation.
Oracles ensure that the liquidation and margin requirements are accurate, providing more stability and trust in the system compared to pure AMM models that rely on internal pool ratios.
Perpetual Futures with Leverage
ZEUS allows traders to open long or short positions with up to 100x leverage. This means traders can control a position worth 100 times their initial margin deposit. However, this leverage is backed by the assets in the ZLP pool, which requires efficient risk management.
Leverage Process:
Traders open a leveraged position by posting margin (e.g., USDC).
The position is backed by the collateral in the ZLP pool.
Oracle prices ensure accurate liquidation levels.
If the market moves against the trader, they may face liquidation if their collateral is insufficient to cover the losses.
No Order Book, Pure AMM
Unlike centralized exchanges or order book-based DEXs, ZEUS uses its ZLP pool to act as the counterparty for all trades. This allows for instant execution, as trades are made against the pool, and liquidity is always available, provided the pool has the required assets.
Spot Trading: Traders can trade assets like ETH/USDC directly against the liquidity pool without waiting for order book matching.
Perpetual Trading: Traders can open leveraged positions, with the pool dynamically adjusting to handle both long and short positions.
Fee Structure on ZEUS
Trading Fees
ZEUS charges a base 0.1% trading fee on all spot trades. For perpetual trades, there are additional leverage fees associated with opening and maintaining positions.
Spot Trading Fee: 0.1% of the trade value.
Perpetual Trading Fee: 0.1% of the notional value of the position (position size).
Example: A trader opening a $10,000 ETH/USDC long position with 10x leverage (notional value = $100,000) will pay $100 in fees (0.1% of $100,000).
Borrowing (Leverage) Fees
For leveraged positions, ZEUS charges borrowing fees to maintain open positions. This fee compensates the liquidity providers who provide the capital required for the leveraged positions.
Borrowing Fee: Borrowing fees depend on the demand for leverage in the pool. If more traders are going long, the borrowing fee for longs increases, and vice versa for shorts. This creates a natural balancing mechanism to prevent overleveraging in one direction.
Calculation: The borrowing fee is typically calculated per hour based on the asset ratio in the ZEUS pool and the size of the leveraged position. The fee increases with the imbalance between longs and shorts.
Funding Fees
Like other perpetual futures platforms, ZEUS uses a funding rate to ensure the price of perpetual contracts remains aligned with the underlying asset’s spot price.
Funding Rate: The funding rate is the periodic payment made between long and short positions to incentivize the price to converge with the spot market price.
Positive funding: Longs pay shorts.
Negative funding: Shorts pay longs.
Settlement: The funding rate is typically paid every 8 hours and is determined by the demand for long and short positions in the pool. The goal is to prevent price divergence between the perpetual contract and the oracle price.
Liquidation Fees
If a trader’s position drops below the maintenance margin threshold (as determined by the price oracle), the position is liquidated to prevent further losses to the pool.
Liquidation Fee: ZEUS charges a 10% liquidation fee on the remaining collateral. The liquidators (often bots or other traders) that execute the liquidation receive part of this fee as an incentive, while the remainder goes to the protocol.
Example: If a position is liquidated with $1,000 worth of collateral remaining, $100 (10%) is taken as a liquidation fee, rewarding liquidators.
Deposit and Withdrawal Fees
Deposit Fee: ZEUS does not charge deposit fees when users deposit assets to trade or provide liquidity.
Withdrawal Fee: Some small fees may be incurred when withdrawing from the ZLP pool due to dynamic rebalancing of assets. If an asset is underweight in the pool, the protocol may impose a fee to disincentivize the withdrawal of that asset.
Swap Fees
For spot trading (swapping assets in the liquidity pool), a swap fee is charged. This fee varies depending on the asset’s weight in the ZLP pool.
Base Swap Fee: 0.2% for swaps.
Higher Swap Fee: If the swap results in further imbalance in the pool (e.g., swapping an overweight asset for an underweight asset), the fee can increase to 0.3% or higher to discourage further imbalance.
The ZEUS model is a hybrid AMM-based Perpetual DEX that combines the simplicity of AMM liquidity pools with the accuracy of oracle pricing and advanced mechanisms like leverage, funding rates, and liquidations. Its design addresses many of the inefficiencies in traditional AMMs, such as slippage and impermanent loss, by using oracle prices and multi-asset liquidity pools to stabilize the system.
Liquidity
Liquidity providers (LPs) deposit assets into the ZLP pool and receive ZLP tokens in return. These tokens represent a share in the pool and allow LPs to earn fees from trading, funding, and liquidations.
Earning Mechanisms for LPs
Trading Fees: LPs earn a share of the 0.1% trading fee collected from both spot and perpetual trading.
Funding Fees: LPs receive funding fees paid by leveraged traders to maintain their open positions.
Liquidation Fees: A portion of liquidation fees goes to the liquidity pool, benefiting all LPs.
Risk for LPs
As with any AMM-based system, there is the risk of impermanent loss, where LPs may lose value if the price of the assets in the pool changes significantly. Additionally, LPs are exposed to the risks of leveraged positions in the pool. If too many leveraged positions are liquidated, the pool might sustain losses.
However, ZEUS’s multi-asset pool structure mitigates some of this risk by allowing LPs to earn fees and funding payments from traders, balancing the potential for impermanent loss.
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