How It Works

# Liquidity and Funding Rate

Liquidity providers back trader exposure.

In exchange, they can earn funding rate and swap fees. They also take the opposite side of trader PnL.

# Funding rate as a market

Liquidity providers choose the rate at which they are willing to provide liquidity.

Traders consume the cheapest active liquidity first. As more liquidity is needed, the funding rate can move higher. As traders exit and liquidity is released, the funding rate can move lower.

This makes the funding rate a market price for counterparty risk.

S&F does not use emissions or privileged rewards to decide which liquidity matters. Active liquidity matters when traders are willing to pay for it.

If traders want exposure and the pool needs more collateral, funding rises toward the rates LPs have offered. If LPs compete to back the same exposure, cheaper liquidity is used first and the rate can fall.

The protocol does not promise that liquidity is always cheap. It exposes the price of risk.

# Activation rate

A liquidity provider can choose an activation rate.

If the pool funding rate is below that activation rate, the position is inactive. If the pool funding rate reaches that activation rate, the position can become partially or fully active.

Active liquidity earns funding rate and swap fees. Inactive liquidity does not.

# Example

Alice deposits ETC into an S-BTC pool at a 5% activation rate.

If trader demand can be satisfied by cheaper liquidity, Alice's liquidity stays inactive.

If demand grows and the funding rate reaches Alice's activation rate, her liquidity becomes active and starts backing trader exposure.

# Market-maker loop

A market maker can also be an LP and a trader at the protocol level.

For example, a market maker can mint S-BTC through OTC settlement, sell it in a secondary market when demand is strong, buy it back when the market trades below settlement value, or provide LP capital when funding is attractive.

That loop can deepen secondary markets while also helping the protocol absorb demand. The market maker earns from spreads, arbitrage, funding, fees, and inventory management, while still relying on S&F contracts for canonical settlement.

# Auto-compounding

Liquidity positions are auto-compounded.

Funding rate, swap fees, and trader PnL are reflected directly in the value of the liquidity position. LPs do not need to separately claim those flows.