Capital reservation and capacity
Reserve
When a contract is sold, the most it can pay is reserved in full:
The reserve is the notional multiplied by the distance between the strike and the limit, divided by the rate at purchase: the most the contract can pay.
Who it is reserved from
The reserve is split between the underwriters who are backing new sales and whose longest length allows this contract, in proportion to their free money (less any amount pending withdrawal):
Your part of the reserve is the contract's reserve multiplied by your share of all the backers' free money.
Example
A contract reserves 1,052.63 USDC. Two underwriters back the pool, with 4,000 and 6,000 USDC free:
| Underwriter 1 | Underwriter 2 | |
|---|---|---|
| Free money before | 4,000.00 | 6,000.00 |
| Share of free money | 40% | 60% |
| Reserved | 421.05 | 631.58 |
Each reserve stays locked until the contract expires and settles.
Available capacity
A pool's capacity is the total free money of underwriters who are backing new sales. It is the largest reserve the pool can take in one contract right now. A request whose reserve is larger is refused.
Utilisation
Utilisation is the share of the pool's capital that is reserved.
A highly utilised pool has most of its capital working and little room for new sales. It earns premiums on more of its capital, and has more of it exposed to payouts.
Why full reservation
Because every contract is reserved in full, a pool can never owe more than it holds, and a payout never depends on future deposits. The trade-off is that capital is locked even when a contract is far from paying out.