Protocol Rules

# Black Swan Event

S&F removes forced trader liquidations. It does not remove market risk or pool insolvency risk.

During a large price move or extreme market event, the protocol can run out of active liquidity or the funding rate can reach its maximum value of 6044.6%. This is called a black swan event.

In that state, the protocol has debt and can no longer fully honor trader PnL. In technical terms, the pool is undercollateralized.

Power perpetuals can make this risk larger because squared and cubed exposure amplify price moves.

The situation can resolve as traders exit the pool. If it does not, exits are handled differently for traders and liquidity providers.

This section is important because "no liquidations" does not mean "risk-free." It means the protocol does not forcibly close trader accounts through a liquidation engine. In a black swan event, profitable trader exits can be discounted by pool debt according to the protocol formula.

# Trader exit with pool debt

For each trader, the pool keeps an averageSharesValue value that updates whenever the trader mints. This value is used to calculate the trader's principal, meaning the average value of the collateral used to mint the synthetic asset. The PnL is then calculated as the difference between the current value of the trader's shares and the principal.

If the pool has no debt, the value received by the trader is equal to Principal + PnL.

In case of debt, the value received by the trader is equal to Principal + PnL * ActiveLiquidity / (ActiveLiquidity + debt).

Only the profitable part of the exit is discounted by debt in this formula. This does not mean the position is risk-free: the token can still lose value from adverse price movement, funding rate, and secondary-market pricing.

If the PnL is positive, the trader receives less profit than they would receive in a debt-free pool.

# Liquidity provider exit with pool debt

Liquidity providers are not directly affected by the debt on exit. They receive the amount of liquidity their position is entitled to receive.