How a market works

One pair, one balance sheet

A market is created for a base asset and a quote asset, in the order the creator chooses. That order fixes how prices are read: quote per base.

The creator seeds both sides, which sets the opening price (in an oracle-guided market the feed sets it), and picks the market's parameters: the curve shape, the fee profile, the rate model, the price-smoothing half-lives and the borrow limits. Most of them can change later only through the market's operator: a timelocked bundle that waits the longest junior exit notice plus a day. Holding srLP or jrLP grants no vote.

Every market is isolated. Its collateral, debt, tranche backing and losses belong to it alone. A bad day in one market cannot reach another.

Reserves and who owns them

For each side of the market the program stores a live reserve:

$$R_i = C_i + D_i^{f} + D_i^{\ell} + H_i$$

$C_i$ is cash that is actually in the vault. $D_i^{f}$ is public lending debt and $D_i^{\ell}$ is isolated leverage debt, both "cash-backed" because each was created by handing cash to a borrower. $H_i$ is the hLP live component, the part of the reserve owned by the two hedged LP vaults.

Cash is the only part that can leave in a swap or a withdrawal; the rest are claims.

Liquidity providers hold one of three shares. srLP, the senior share, comes from a two-sided deposit: a slice of the whole reserve, burned for a proportional share of both tokens, with no price range to manage. Unpaid interest is left out of that slice; it stays with the holders who earned it and pays them when borrowers do.

jrLP, the junior share, is srLP converted into a first-loss position: it absorbs the market's losses before srLP and takes a larger share of the income in return. A thousandth of the creator's first deposit seeds it permanently.

hLP, the hedged share, comes from a single-sided deposit into one of two vaults, one per token. The vault borrows the other token, holds both as srLP and re-sizes the loan after every trade, so the depositor keeps one token's price exposure. Market anatomy has the full ledger and Senior and junior tranches the two tranches.

Trading on the curve

Swaps execute on the ordinary liquidity tranche: the live reserve with unpaid interest and hLP ownership taken out. The curve is a full-range constant-product tail plus up to two nested bands of concentrated liquidity around a centre that follows the market slowly. A market launched with amplification one and zero widths is an exact constant-product AMM; larger amplification adds depth near the centre while keeping a nonzero tail, so there is always some liquidity at every price.

A swap pays a base fee, plus two surcharges that only bite in stress: a divergence surcharge on trades that push the price outward from the centre, and a volatility surcharge on repeated chop. Together the Dusk fees can never exceed half of the trade's input. A creator can also add a launch schedule, a temporary premium that decays over hours or days.

The curve and fees explains each control; Trade shows what you see in the app.

Borrowing

A borrower deposits one asset as collateral and takes a loan in the other.

The program values the collateral by simulating a sale through a conservative copy of the curve, built from the lower of two smoothed prices and the lower of the observed and averaged depth. That value, times the market's collateral factor, is the liquidation limit; the borrow limit sits 5% below it. Large positions get a smaller factor automatically because the simulated sale moves the price more.

Borrowing does not move the price. Cash falls by the loan and debt rises by the same amount, so the live reserve is unchanged.

Each debt side is secured by that position's collateral in the other asset. A leaky daily budget caps how much new public credit a market issues in 24 hours. Borrowing and rates has the formulas; Borrow is the guide.

Interest

Each asset's utilization counts all of its debt against debt plus cash. The rate answers to it and to junior coverage: it doubles every half-life (14 days by default) while the market's Junior LP capital, discounted by utilization, covers too little of the debt, or while utilization sits above its band (80% by default). It halves, down to a floor, only while coverage is ample and utilization sits below its band (75% by default).

Utilization does not cap new borrowing; the rate does the rationing.

Interest is booked into the debt balance on every interaction. Unpaid interest stays out of the swap curve; a receivable is not new inventory to trade against.

Realized interest, when a borrower repays, is split: the operator's share, if the market has one, comes off base interest, the protocol's markup is paid on top, and the rest goes to the tranches. Junior LP takes the junior income share, 50% by default, and srLP holders the remainder. Swap fees are split between the tranches the same way, after the protocol's share.

Two-sided liquidity draws the whole flow.

Liquidation

A lending position becomes liquidatable when its debt passes the liquidation limit at the symmetric EMA. A keeper can atomically receive quoted collateral and deliver a fixed net debt-token payment, using its own inventory or an external route. Useful partial fills preserve the position.

At the separate emergency health boundary, the internal fallback uses EMA price and smoothed depth, then allocates any funded shortfall to junior backing first and senior backing second.

Leverage positions have their own health test and their own liquidation path through the same swap machinery. Liquidations is the guide; Liquidations and risk is the concept page.

Leverage and hLP

Isolated leverage turns margin in one asset into a long or short of the other: the position borrows inside the market, swaps the notional through the curve and holds the result as collateral. Its initial and maintenance margins are stored at entry from size, depth and opening-side crowding, which caps a small position at 10× and a larger one lower; the program's 20× limit is only a circuit breaker. It can carry take-profit, stop-loss and limit-entry orders executed by keepers.

hLP vaults give one token's price exposure with an LP's income. The vault borrows the other token, holds both as srLP and re-sizes the loan after every trade, so a price move leaves the tokens it holds for you unchanged; the program does this algebraically, without scanning holders. The interest it pays on the loan is a real cost, paid to the market's other LPs.

Leverage and hedging covers both.

Governance

The creator is the initial market operator and may appoint an optional manager for parameter settings. LP balances grant no core voting authority.

Seven parameter families can change through one pending atomic bundle: fees, concentration, the interest controller, price/depth EMA half-lives, the daily borrow limit, the centre controller and junior income share. Every bundle waits the maximum junior exit notice plus one nominal day, then has a seven-day execution window.

The oracle provider and feed remain fixed at creation. Market operators explains authority, limits and exit protection.