Profit haircuts

A market pays its winners no more than it was underwritten for. Nothing is set aside when a position opens. When a winning position closes and its market cannot cover every winner in full, profit is paid at a fair share and the rest is not paid. Losses are always collected in full.

There is no auto-deleveraging. The auto_deleverage instruction stays on chain so its address and accounts do not change, and refuses every position.

Key figuresCopy Anchor Link

The formulaCopy Anchor Link

A closing position is owed its equity, less the close fee, past the collateral it put up:

owed  = max(equity - close fee - collateral, 0)
paid  = owed × min(1, available / winners)

• available is what the market can still pay: its remaining loss budget, or the money there is to pay with, whichever is smaller.
• winners is the profit every winning position in the market holds at the closing price, counted gross. A loser does not offset a winner, on either side: a loser's loss is not money the market holds until that loser closes.

Every winner is paid the same fraction, whoever closes first. Example: two longs are each up $500 and the market has $400 left. Each is paid $200 of its profit, in either order, and keeps its collateral.

Counting winners without walking positionsCopy Anchor Link

The market keeps three sums per side over its positions: size, size over entry, and size over entry squared. From those it reads an upper bound on the side's gross winners:

winners on a side ≤ (net + sqrt(S × M2)) / 2

S is the side's size, net its net profit, and M2 the sum of each position's size times its return squared. The bound is exact when every position on the side has the same entry, and a little high when entries spread. It is never low, so no close is paid more than its fair share. When it is high, winners are paid slightly less than a full share.

A winner hidden behind a loser on the same side is still counted. A side holding a position opened before these sums existed counts at its net profit until that position closes or is added to. A corporate action empties the sums the same way (see Corporate actions).

A close takes its own size over entry off its side, so the side's average entry stays the harmonic mean of the positions still open.

Worked exampleCopy Anchor Link

At $110, with $500 available and close fees left out:

The long side nets to zero, but its bound reads $502.08. Winners count as $502.08 + $500 = $1,002.08.

No order pays past the budget, and neither closer is paid more than $250.

Order of protectionsCopy Anchor Link

A market's losses are paid from three places, in sequence, and never past its remaining loss budget:

1. Backing, posted by whoever underwrote the market.
2. LP liquidity.
3. Insurance fund, only for what liquidity cannot cover.

Why winners carry itCopy Anchor Link

This keeps markets separate. Without it, a market that had spent its budget would pay its winners from the shared pool and the insurance fund, capital put up for every other market. One mispriced or manipulated market could drain liquidity that never underwrote it.

Holding capital against every open position was the other way, and it froze backing a balanced book never needed. The haircut puts the risk on unrealized profit instead. Capital is committed only once a loss is realized.

A close is never shrunk by the haircut. It fills what the auction gives it, and only the profit it is paid is cut. A winner in a market that has spent its budget can always leave.