Assessment & Decision Aggregation

Managers who deem the proposed Instrument has a favorable risk-reward profile buy longZCB from this newly deployed AMM. Any Vault holders who deem that the instrument is too risky can choose to opt out of the potential returns by buying shortZCB. When the cumulative area under the AMM bonding curve(which is the total collateral for longZCB bought - shortZCB bought) exceeds a threshold, canbeApproved returns true. A diagram is presented below for visualization.

When canbeApproved validators can finalize the instrument approval. If approved, liquidity will then be directed from the vault to the new Instrument contract.

Put simply, the instrument's approval criterion depends on whether the resulting price of longZCB exceeds a certain price(approval price set as a instrument specific parameter). The more people buy longZCB, and the less people buy shortZCB, the higher the price.

During the assessment phase, the utilizer is the sole market maker by allowing the protocol to issue longZCB in this prediction market. This means participants willing to buy longZCB/shortZCB can simply buy from the AMM without needing externally provided liquidity.

Approval Criterion

Approval Criterion is the condition that has to be met for the instrument to be approved by the validators, which will allow the protocol to direct the funds from the Vault to the Instrument contract.

For both fixed-term and perpetual instruments, there exists an approvalPrice of longZCB. If the initial price of longZCB when the instrument is first proposed is X, the approvalPrice is Y for some Y> X. Details on how Y is computed are outlined in the whitepaper. How much Y is greater than X corresponds to the amount of insurance provided for the vault investors(VT minters) (since the collateral used to buy longZCB is used as first loss capital and a larger price difference necessitates more collateral pulled).

Y axis is price of longZCB, X axis is net incremented supply of longZCB. Area under curve represents collateral used to buy from supply A to B.

A simplified diagram of the approval criterion is shown in this illustration of a bonding curve. Participants buy longZCB up the curve or buy shortZCB down the curve. Approval criterion is satisfied when the area below the curve exceeds a threshold(area labeled as the yellow X mark).

Instrument Denial

When !canbeApproved for a prolonged amount of time, the market would automatically close and all participants will redeem their ZCB for their collateral.