Notional, strike and limit
These three numbers define what a protection contract pays.
Notional
The notional is the amount you protect, in US dollars (paid and settled in USDC). It is usually the size of the payment or receipt you are worried about. The minimum is 10 USDC.
The notional is not what you pay. You pay the premium, which is a fraction of the notional.
Strike
The strike is the rate at which protection starts to pay.
- For an Up cover, the strike is at or above today's rate. The contract pays if the rate settles above it.
- For a Down cover, the strike is at or below today's rate. The contract pays if the rate settles below it.
You can enter the strike as a rate (for example 1,360) or as a percentage from today's rate (for example 2.26%, or as fine as 0.02%). Percentages can have up to four decimal places. The further the strike is from today's rate, the cheaper the protection and the larger the move you absorb yourself.
Each pool sets how close to today's rate a strike may be. That is the underwriter's choice: some pools start at today's rate, others at 2% from it. Any strike from that point onwards works.
A strike set as a percentage follows today's rate until you buy. A strike set as a rate stays fixed, so if today's rate moves past it before you confirm, the app asks you to choose again.
Limit
The limit is the rate beyond which the payout stops growing. It limits the most the contract can pay, which is what lets underwriters reserve the full amount in advance.
There are two ways to set it:
| Structure | Who sets the limit | How |
|---|---|---|
| Limited | You | You choose the protection limit, within the distance from the strike that the pool allows. |
| Open | The pool | The limit is the strike plus (or minus) a fixed share of today's rate, set by the pool. For example, with a 30% maximum payout, the limit is 30% of today's rate beyond the strike. |
The limit is always kept between half and twice today's rate.
How they combine
For an Up cover, the payout is the notional multiplied by how far the settlement rate ended above the strike (counted only up to the limit), divided by the rate when you bought. Nothing is paid if it ends at or below the strike. A Down cover mirrors it. See Payout calculation for every case.