Leverage and hedging

Two mechanisms let one asset carry more exposure than a plain deposit: isolated leverage, a position that borrows and swaps in one step, and hLP, the hedged vault behind single-sided liquidity, which borrows the other token so a one-token deposit can sit in the market as two-sided liquidity. Both reuse the swap, debt and cash machinery every other instruction uses.

Isolated leverage

A position is opened with margin $m$ in one asset and a multiplier $\mathcal L$. Idealised, it borrows $m(\mathcal L - 1)$ of the same asset from the market and swaps $m\mathcal L$ through the curve; the output is held in the leverage collateral vault as the position's collateral, and the loan is tracked in the market's isolated debt bucket for that asset. Actual entry pays fees, impact and any transfer costs, so the collateral is a little less than the notional divided by the entry price.

Each position stores its margin terms when risk is added:

Crowding can raise the equity required for new risk. Existing stored requirements do not move merely because other traders open positions or LP liquidity later changes.

Health uses symmetric-EMA collateral value minus debt against the position's stored maintenance requirement. Public-borrow aggregates play no part; a leverage position never affects a lender's health check even though its debt counts toward utilization and pays the same rate.

Opens, size changes and closes use the concentrated swap path. Margin increases repay debt without changing collateral; liquidations use the atomic flash or emergency settlement paths.

A conditional order or liquidation trigger authorises an attempt rather than guaranteeing execution.

The leverage-delegate program

Orders live in a second program. A position owner creates a delegation naming the delegate program and the actions it may take. The delegate flow is two hooks: a before hook that approves a close, and an after hook that approves the settlement, so a keeper can execute a bounded partial or full close into a custody account without ever holding unchecked control of the position.

Every executed built-in order pays a flat protocol fee of 10 bps of its executed value to the futarchy treasury, in addition to swap fees and the executor's incentive. hLP order execution also deducts a 5% executor bounty from the withdrawal output before the owner's minimum-output check.

Protection orders

A sponsor, who need not be the borrower, can escrow srLP or hLP and authorise a keeper to repay a position's debt or top up its collateral when its health drops to a trigger, up to a target, within per-execution limits. The keeper advances the payment, redeems the sponsor's escrowed LP through the ordinary withdrawal path, is reimbursed plus a bounded reward, and the remainder returns to the sponsor. Everything happens in one instruction and rolls back on any failure.

Anyone may also repay or donate collateral to any position directly, with no order and no reward.

hLP vaults

Each market has a base vault and a quote vault. The base vault holds a funded srLP position whose net exposure is base; quote is symmetric. Writing $E_b, E_q$ for the vaults' target-asset equities and $(U, V)$ for the ordinary tranche, the canonical endpoint after any trade is

$$X_b = U + E_b + E_q\frac{U}{V},\quad X_q = V + E_q + E_b\frac{V}{U}, \qquad D_b^{h,*} = E_q\frac{U}{V},\quad D_q^{h,*} = E_b\frac{V}{U}$$

The opposite-asset claim each vault holds equals its funding obligation. Vault-owned shares are reconstructed from the ordinary supply $S_o$:

$$s_b = \left\lfloor \frac{S_o E_b}{U} \right\rfloor,\qquad s_q = \left\lfloor \frac{S_o E_q}{V} \right\rfloor,\qquad S = S_o + s_b + s_q$$

None of this scans hLP holders. A trader is quoted on $(U, V)$; the program then rebuilds both vaults at the quoted endpoint and checks the debt, cash, interest and reserve changes within three raw atoms per side.

Leverage of a vault

Gross leverage of the base vault relative to its equity is

$$\mathcal L_b = 1 + \frac{V}{U p},\qquad \mathcal L_q = 1 + \frac{U p}{V}$$

Both are exactly 2 at a balanced constant-product point and drift with the inventory weights on a concentrated curve away from the centre.

Funding

hLP funding debt bears the full indexed borrow rate. When it is paid, the protocol takes its share and the rest is indexed only over srLP held outside the vaults, at the balance frozen for that operation.

A deposit is admitted only if the vault's projected funding debt fits the borrowed asset's current cash headroom; that is a deposit check, not a guarantee that funding stays under cash after every trade. Cash-constrained transitions can reject; when hLP leverage-up cannot execute for lack of cash, swaps stay live and the unexecuted rebalance is carried as residual exposure.

Recovery and closeout

Let $D$ be a vault's funding debt, $A$ its opposite claim and $Y$ revenue available for netting. The recovery gap is $g = \max(D - Y - A, 0)$. Gaps under 25 basis points of $A$ are ignored; above that the market offers swaps that supply the borrowed asset a discount

$$d = \min\!\left(0.05,\ \frac{0.8\,g}{A}\right)$$

paid as extra target-asset output out of that vault's equity, capped by the equity itself. Solvent gaps can use preview_hlp_flash followed by atomic begin_hlp_flash and settle_hlp_flash, allowing the caller to source the fixed payment externally instead of forcing execution through Dusk's curve.

If the vault becomes insolvent at both the live curve mark and symmetric EMA, permissionless native or flash terminal closeout retires its srLP. Recovery repays principal first; funded principal shortfalls are allocated to junior backing first, then senior backing, and unpaid interest is canceled.

Already funded yield claims remain recorded. The native closeout pays a bounded caller bounty from recovered interest.

Related

• Leverage and Single-sided liquidity: the guides.
• Keeper roles: who executes orders, flash recovery and closeouts.
• Program reference: leverage and hLP and yield.