> For the complete documentation index, see [llms.txt](https://zion-exchange.gitbook.io/docs/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://zion-exchange.gitbook.io/docs/getting-started/overview.md).

# Overview

Zion is a decentralized perpetual trading protocol designed to deliver efficient execution, deep liquidity, and robust risk management for on-chain derivatives markets.

The protocol provides the infrastructure required to manage the full lifecycle of perpetual trades, including pricing, margin management, funding payments, and liquidation processes.

Zion combines on-chain settlement with off-chain infrastructure components to achieve high-performance trading while maintaining transparency and security.

At its core, the protocol is structured around a liquidity layer known as the *<mark style="color:$success;">Zion Liquidity Pool (ZLP)</mark>*, which provides market liquidity and acts as the counterparty to user trades executed through Zion Trade.

***

### Zion Protocol

The Zion Protocol is the underlying infrastructure that powers all trading applications built within the Zion ecosystem.

It consists of a set of smart contracts and supporting off-chain services designed to coordinate the execution, risk management, and settlement of perpetual derivatives trades.

Users interact with Zion through trading interfaces such as Zion Trade, while the protocol infrastructure manages margin requirements, liquidity provisioning, and market pricing in the background.

The architecture of the protocol is designed around three primary layers:

• <mark style="color:$success;">**Trading Layer**</mark> – user-facing trading interfaces such as Zion Trade\
• <mark style="color:$success;">**Liquidity Layer**</mark> – the Zion Liquidity Pool (ZLP) that provides market liquidity\
• <mark style="color:$success;">**Infrastructure Layer**</mark> – protocol engines responsible for pricing, margin, funding, and settlement

Together, these components allow Zion to support scalable and capital-efficient derivatives markets.

***

### Pricing Oracle

Zion uses a dedicated pricing oracle system to ensure reliable and manipulation-resistant market prices.

The oracle aggregates price feeds from multiple external markets across both centralized and decentralized exchanges.

These data sources are combined to calculate a fair reference price that is used across the protocol for:

• <mark style="color:$success;">Trade execution</mark>\
• <mark style="color:$success;">Margin calculations</mark>\
• <mark style="color:$success;">Funding rate adjustments</mark>\
• <mark style="color:$success;">Liquidation triggers</mark>

For an asset to be listed on Zion, the protocol requires reliable market data sources and a deterministic method for calculating a fair price.

***

### Core Margin & Liquidation Engine

The Core Margin and Liquidation Engine manages collateral requirements and monitors position risk across the protocol.

Every open position is continuously evaluated to ensure that sufficient margin is maintained relative to its exposure.

If a trader’s margin falls below the required maintenance level, the protocol triggers the liquidation mechanism to prevent systemic risk.

Key responsibilities of the engine include:

• <mark style="color:$success;">Calculating initial and maintenance margin requirements</mark>\
• <mark style="color:$success;">Monitoring account health in real time</mark>\
• <mark style="color:$success;">Triggering liquidations when positions become undercollateralized</mark>\
• <mark style="color:$success;">Protecting protocol solvency</mark>

Liquidations are handled at the settlement pool level, meaning that risk events remain isolated and do not affect other users or markets.

***

## Funding Rate Engine

The Funding Rate Engine ensures that perpetual contract prices remain aligned with underlying market prices.

Funding rates are calculated based on the imbalance between long and short open interest across each market.

These periodic funding payments are exchanged between counterparties to incentivize price convergence with the external market.

The engine is responsible for:

• <mark style="color:$success;">Calculating funding rates</mark>\
• <mark style="color:$success;">Tracking open interest across markets</mark>\
• <mark style="color:$success;">Distributing funding payments between counterparties</mark>\
• <mark style="color:$success;">Maintaining price alignment between perpetual markets and spot markets</mark>

***

### Zion Liquidity Pool (ZLP)

The Zion Liquidity Pool (ZLP) serves as the primary liquidity layer of the protocol.

ZLP aggregates liquidity into a shared vault and acts as the counterparty to user trades executed through Zion Trade.

The pool provides market liquidity through an internal market making system that continuously generates bid and ask quotes across supported markets.

ZLP consists of three main components:

• <mark style="color:$success;">Vault</mark>\
Stores and manages the capital allocated to provide liquidity.

• <mark style="color:$success;">Market Making Engine</mark>\
Generates bid and ask quotes for all supported markets.

• <mark style="color:$success;">Risk Management System</mark>\
Monitors exposure and enforces risk limits before trades are accepted.

***

### Market Making Engine

The Market Making Engine is responsible for generating quotes across all supported markets.

It uses inputs from external markets and internal liquidity conditions to dynamically adjust spreads and quote sizes.

The engine evaluates:

• <mark style="color:$success;">External market prices</mark>\
• <mark style="color:$success;">Liquidity depth across venues</mark>\
• <mark style="color:$success;">Internal inventory exposure</mark>\
• <mark style="color:$success;">Market volatility</mark>

This allows Zion to maintain competitive pricing and efficient liquidity across markets.

***

### Risk Management System

The Risk Management System monitors protocol exposure and enforces risk limits across the liquidity pool.

Before any trade is accepted, the system evaluates whether the transaction falls within acceptable risk parameters.

These checks include:

• <mark style="color:$success;">Exposure limits</mark>\
• <mark style="color:$success;">Liquidity utilization thresholds</mark>\
• <mark style="color:$success;">Volatility safeguards</mark>

If a trade exceeds acceptable limits, it may be repriced, partially filled, or rejected.

***

### External Hedging Venues

Zion incorporates market signals from multiple external trading venues to inform its pricing and liquidity models.

These venues include:

• <mark style="color:$success;">Centralized exchanges (CEXs)</mark>\
• <mark style="color:$success;">Decentralized exchanges (DEXs)</mark>\
• <mark style="color:$success;">Automated market makers (AMMs)</mark>

Examples of such venues include major trading platforms such as centralized exchanges, on-chain perpetual venues, and liquidity pools across decentralized ecosystems.

These external markets provide reference pricing and liquidity signals used by the ZLP quoting algorithms.