Settlement

A loss settles by reading the realized loss off the chain after recovery and moving capital from the long side to the short side, in code. A loss from credit settles. A hack of the protocol's own contracts does not.

What settles

• Settles: a borrower default, a collateral shortfall, or a liquidation that recovers less than the loan.
• Does not settle: a hack or exploit of the protocol’s own contracts.

How a loss is read

A loss is read off the chain after workout and recovery, not on a soft impairment flag. It passes through a bonded challenge window and a determination panel before it settles. The full process is in How a loss is decided.

How the payout works

On a loss of fraction L, the pool pays L times each short's notional to the shorts, and the long token's price drops by L. Whoever holds the long token at the loss block bears it. A long who buys in after a loss buys at the lower price and does not bear the earlier one.

The capital is funded up front and held in the pool, so a settled loss moves capital that is already there. Once the loss finalizes, the contract executes the transfer.

Edge cases and limits

The cases the model is built to handle, like a manufactured loss or a run on the long side, and the limits that remain, are laid out in Edge cases and limits.

Custody

The deposited USDC is held in custody in tokenized treasuries for the life of the position, and moves to the short side when a loss settles.