Approval Criterion

Managers who deem the proposed creditline has a favorable risk-reward profile buy longZCB from a newly deployed AMM. Any vault investors 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. This total collateral is then used for first loss capital. A diagram is presented below for visualization.

Put simply, there exists an approvalPrice of longZCB. For example, if the initialPrice of longZCB when the instrument is first proposed is 0.8 , the approvalPrice could be 0.9. Details on how the approvalPrice is computed are outlined in the whitepaper.

How much the approvalPrice is greater than the initialPrice corresponds to the amount of insurance provided for the vault investors (since the collateral used to buy longZCB is used as first loss capital and a larger price difference necessitates more collateral pulled).

Creditline Denial

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