How to underwrite a market

OverviewCopy Anchor Link

A market takes no position until it has a loss budget. That budget is collateral somebody posts, not an allowance an administrator grants. Posting it is underwriting, or backing. Any account can back any market that is not paused. A paused market takes no new backing, and the Back tab leaves it off.

Backing stands in front of the liquidity pool on the market's losses, and is paid in front of the pool on the market's fees.

Backing or the poolCopy Anchor Link

Both show in the portfolio in their own cards, apart from trading positions (see Portfolio). The pool's rules are on The pool.

What a backer takes onCopy Anchor Link

1. Losses first. A market's losses are drawn from its backing before they reach the pool.
2. Gains only up to what was drawn. When the market recovers, gains go back to the backing up to what losses took from it, and no further. Backing is not a leveraged claim on the pool's profits.

Backing a market that has been drawn onCopy Anchor Link

What a later gain puts back belongs to the backers it was drawn from. So a new share is priced against the pot plus what the market still owes back to it, in USDC and in kind. The new backer pays for their part of that repayment at face.

Example:

1. Backers post $100,000. Losses draw $90,000. The pot holds $10,000 and $90,000 is owed back.
2. A new backer posts $10,000 and gets 10,000 shares against the original 100,000. Not 100,000.
3. A gain repays the $90,000. The pot holds $110,000: the new backer can take out $10,000, the original backers $100,000.

Priced against the $10,000 pot alone, the new backer would have bought half the shares and taken $55,000.

A backer who withdraws takes their part of the pot and leaves their part of what is owed back to the backers who stay. In and straight back out never profits.

What a backer earnsCopy Anchor Link

Fees. Backers of a market take half of the pool's share of that market's trading fees. The cut is taken after the protocol (20%), chain (10%) and insurance (10%) shares, so on a backed market it is 30% of every fee. See Fees.

The fee is not paid to an account. It is credited to the market's backing, so every share is worth more and the income compounds until the backer withdraws. It does not raise the market's loss budget: fee income belongs to the backers, and letting it widen the allowance would let a busy market underwrite itself with money nobody chose to put at risk.

Points. 2 points per $1 of backing per day (see Referrals and points), on what the stake is still worth:

1. Counted on what was posted, in dollars at the time.
2. Cut in proportion to the shares withdrawn.
3. Cut to the stake's value when the market's losses draw on it. mark_backing does that for any backer; it is permissionless, and the server runs it every 10 minutes.
4. Zero in a pool whose points are switched off.

What backing can be posted inCopy Anchor Link

Backing is held in whatever it was posted in. Nothing is swapped on the way in. USDC sits in the pool's vault. Every other token sits in a custody of its own, priced by oracle.

SOL counts at less than its value because first-loss cover held in SOL shrinks in the crash it exists to absorb. When SOL falls, the budget falls with it. It does not rise again when SOL recovers; raising a budget takes a deposit. A deposit raises the budget by what it counts for, never past the backing behind the market: $1,000 of SOL raises it by $800.

A backing share is a claim on the whole pot behind a market, and it is paid out in the same mix of tokens the pot holds.

When a loss reaches past the USDCCopy Anchor Link

Every market settles in USDC. When a loss runs past the USDC behind a market, the pool covers the difference, and sync_backing moves tokens worth the same amount, at the oracle, from the backers to the LPs. From then on they count in the pool's assets, and an LP who leaves takes their share of them in kind. When the market recovers, the same instruction hands the backers back what the recovery earned. It is permissionless: it only moves a market's backing to where the books already say it belongs.

Each vault's pageCopy Anchor Link

Every row on Earn opens a page of its own: /vault/<symbol> for a market's backing, /vault/pool for the pool. It shows what the vault holds, its APY and utilization, your share, a chart of value per share (one point every 2 minutes, from /api/apy?series=1), and the market it stands behind with that market's leverage, maintenance margin and budget. Deposit and withdraw from there or from the row.

WithdrawingCopy Anchor Link

A backer can withdraw at any time, in one transaction, up to what their shares are worth after the market's losses, less their part of what the market's traders are up right now.

1. What is held back is what the backing would pay if every open position closed now: the traders' profit net across both sides, at the oracle or the market's risk price, whichever makes it larger, and never more than the pot.
2. If the price cannot be read, the whole remaining budget is held.
3. It stays in the pot for the backers who stay. They pay it if the loss is realized and keep it if the price turns.
4. A balanced book holds nothing back. Only the visible loss is held, not the positions' size.

Example: a $50,000 pot behind longs that are $20,000 up. A backer with half the shares can take out $15,000, half of the $30,000 not already owed.

The budget follows the backing. Withdrawing lowers the market's remaining budget so that it is at most the backing left. After $30,000 of losses against a $50,000 budget and $50,000 of backing, $20,000 remains of each, and withdrawing $1 leaves $19,999 of both. A new deposit raises the remaining budget by what it counts for. Winners are paid only out of the remaining budget, at a fair share when it falls short (see Profit haircuts).

Why anyone would do itCopy Anchor Link

Somebody who wants a market to exist shows it with their own capital, not the LPs', and is paid for carrying the first loss.

1. No grants. An allowance granted by the pool authority would make listing permissionless in name only: every new market would still wait on the authority.
2. LPs sit behind the backer, not in front.
3. Brake only. The authority can lower a market's budget with set_market_budget. It cannot raise one.