Pricing

The price is set by a utilization curve. One funded pool sits between the two sides. Longs deposit capital and are first loss. Shorts pay a fixed premium up front for a set term and are paid the realized loss. The more of the pool that is shorted against, the higher the cost.

The two sides and the pool

• Long: deposits USDC, earns the 3.63% risk free rate in tokenized treasuries plus what shorts pay, and absorbs a loss first.
• Short: opens at the rate quoted then, pays a fixed premium up front for a set term, and is paid the realized loss on its notional if the book takes a loss during the term.
• Pool: the counterparty to both, fully funded, holding the deposited USDC in treasuries until a short is opened against it.

The price is a utilization curve

The cost rises as the pool fills. Utilization is the short notional divided by the pool capital. Below the 80% target the cost climbs gently. Above it the cost climbs steeply toward a cap, which rations the last capacity. At the target the cost equals the market's spread divided by 0.8, the point where the long earns exactly the credit's coupon.

A short locks the rate it opens at and pays the whole term up front, so the curve moving later changes only the quote for a new short, not a term already bought. A long earns the treasury base plus the premiums the open shorts have paid in, so the pool yield rises as more shorts open and is highest when the pool is full. Short notional can never exceed the capital, so the pool can always pay.

Term and withdrawal

• A short buys a fixed term up front and is covered to the end of it. There is no running balance to keep funded and no way to be repriced mid term. At term end the position expires and the short re ups at the rate then, with no refund and no payout unless a loss landed in the term.
• A long withdraws any capital not currently backing a live short, any time. Capital backing a short is committed until that short expires or new deposits arrive, so in a fully utilized book a long is not instantly liquid.
• A loss between a deposit and a withdrawal is handled by the share price. Whoever holds the long token at the loss block absorbs it. A long who joins after a loss buys in at the lower price and does not bear the earlier one.

Settlement

A loss is read off the chain after workout and recovery, through a bonded challenge and a determination panel. On a loss of fraction L the pool pays L times each short's notional, the long token's price drops by the same amount, and whoever holds the long token at that block absorbs it. A hack or exploit of the protocol's own contracts does not settle. The full process is in Settlement.