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Quantitative Crypto Trading Brings Liquidity But Causes Network Congestion

Last Updated May 6, 2024 8:21 AM
Shraddha Sharma
Last Updated May 6, 2024 8:21 AM

Key Takeaways

  • The introduction of AI and machine learning has changed crypto trading strategies.
  • Tristan Frizza, Founder of Zeta Markets, notes that quantitative trading boosts liquidity.
  •  However, emerging trading strategies could also lead to novel issues like longer verification time.

Tristan Frizza, the founder of Zeta Markets, spoke to CCN to discuss how advanced technologies and quantitative trading firms are reshaping cryptocurrency trading, particularly in decentralized derivatives. Emerging strategies are ensuring better price discovery but it also has its novel challenges. 

The Impact of AI on Crypto Trading

The global artificial intelligence market is projected  to reach 1,811.75b by 2030, expanding at a CAGR of 36.6% from 2024. 

CCN asked Frizza how that would impact crypto trading. The executive notes that AI, machine learning, and sophisticated mathematical and statistical methods have altered cryptocurrency trading. According to Frizza, these technologies have enhanced the accuracy of trading.

Tristan Frizza: These technologies have enhanced the precision of trading strategies and risk management tools, leading to better market efficiency and price discovery.

Quantitative trading firms, in particular, bring significant liquidity and a scientific investment approach. 

Quantitative trading firms utilize sophisticated mathematical models and algorithms to predict market behaviors and execute trades. They often need minimal human intervention.

According to Frizza, “The opportunities created by this evolution include improved trading strategies and heightened arbitrage opportunities, leading to better efficiency in crypto markets and innovation.”

However, Frizza also pointed out that this technological evolution comes with its own set of challenges. One major issue is the potential for network congestion caused by high-frequency trading, which demands ongoing improvements to blockchain networks and decentralized applications (dApps) to sustain their performance and handle the increased activity efficiently.

The executive believes that the entry of quantitative trading firms into the crypto derivatives has influenced the market dynamic.

Tristan Frizza: These firms bring sophisticated trading strategies to the table, which enhances liquidity and stabilizes bid-ask spreads. They utilize AI and statistical models to optimize bid and ask prices, which is particularly beneficial for market makers trying to meet client and market demand. 

Therefore, precise and reliable pricing using AI and other emerging tech could potentially improve how financial markets operate. 

Crypto Derivative Trading Market on Solana 

Improved trading strategies lead to better market efficiency and price discovery. Frizza anticipates that trading will become more sophisticated and user-friendly due to derivatives and better risk management tools.  

A key innovation he highlights is the adoption of a Layer 2 (L2) solution on the Solana blockchain.

Frizza believes L2 solutions are vital because they help offload transactions from the main blockchain (Layer-1) to a secondary layer. He notes that L2s help enhance speed and reduce costs on L1s. 

Frizza discussed how Solana offers an optimal environment for derivatives markets, attracting both retail and institutional traders, which led Zeta Markets to choose Solana for their platform. Frizza highlighted Solana’s high throughput and unique consensus mechanism to process up to 65,000 transactions per second with a block time of just 400 milliseconds, making it significantly faster.

He explained, “In addition, transaction costs are fractionally lower than on platforms like Ethereum, greatly reducing the cost barrier for traders. All of this is crucial for supporting large-scale derivatives trading.”

Regarding the scalability challenges faced as trading volumes grow, Frizza discussed how blockchain networks, including Solana, can experience bottlenecks.  Growing users and an activity surge can disrupt transaction processing and data throughput.

After facing a 5-hour outage in February, Solana experienced another disruption in April on the Solana Devnet. 

Frizza expressed confidence in the network’s ability to handle increased demand effectively, maintaining both performance and security. He explains that with the deployment of new patches and continuous efforts of protocol teams to enhance the software, the network’s performance has seen improvements. 

Broader Impact of Bitcoin Halving and Next Updates

Frizza explained the impact of the Bitcoin halving on the market, noting that it triggered a bullish sentiment. Bitcoin reached an all-time high in March in the pre-halving rallybut it remains relatively muted in the post-halving phase. 

At the time of writing, Bitcoin has been moving in the $64K range. 

The Zeta Markets founder said, “Following the halving, the broader crypto market is experiencing a downturn. Typically, such events lead to increased market volatility, which may pose challenges and create more trading opportunities in the derivatives sector.”

Meanwhile, the next update would also be into the interaction of centralized and decentralized finance. The executive said, ” This, along with other user experience improvements, will likely signal a trend of users from centralized exchanges onboarding DeFi trading.”

The global DeFi market was valued  at $59.26b in 2023 and is expected to expand to reach $337b by 2030 with an annual increase rate of 28.2%. CCN previously noted that crypto platform X10 received backing of $6.5m by promoting hybrid trading at the intersection of centralized and decentralized systems.

Additionally, Frizza pointed out that the market is currently being shaped primarily by the rising popularity of perpetual futures. According to the founder, futures are favored due to their flexibility and the advantages they provide, such as the ability to use leverage and the option for traders to take both long and short positions. 

Frizza says, “These features have quickly made perpetual futures the derivative of choice for many crypto traders. Looking ahead, with the continuous improvement of user experiences and the broader adoption of DeFi, we expect derivatives to transition fully on-chain.”

The founder anticipates that the shift will democratize access to financial instruments and markets further, making it more accessible and equitable for a broader range of participants.

Optimizing Trading With More Tools 

Frizza outlines how the introduction of AI and machine learning has revolutionized trading strategies, enhancing precision and leading to more sophisticated risk management tools. 

Looking ahead, Zeta Markets’ founder expects democratic access to financial instruments and potentially reshaping the financial sector to be more inclusive and efficient.

The trajectory of the crypto derivatives market is gearing towards fully on-chain operations with enhanced features like perpetual futures becoming more mainstream.

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