Debt Mechanism

The Polynomial liquidity layer acts as the counterparty for derivative applications, which can result in debt accumulation.

How Debt Works

Pool-Level Debt: Debt is distributed across all liquidity providers according to their share of deposits Shared Responsibility: All stakers share in both profits and losses

What Causes Debt

⚠️ Warning: Market skew or poor performance can cause debt to increase.

• Market skew: Imbalanced long/short positions

• Trader performance: Poor trading outcomes

• Market conditions: Volatile or unfavorable market movements

Paying Back Debt

To withdraw liquidity from the pool, you must first pay off any outstanding debt:

1. Bridge additional funds: Debt must be bridged to Polynomial Chain

2. Pay from new funds: Debt won't reduce your staked amount

3. Complete repayment: Once debt is paid, you can unstake

4. 24-hour waiting period: After unstaking, wait before withdrawal

Important Notes

• Additional funds required: You need to bridge extra funds to settle debt

• No reduction in stake: Your staked amount remains unchanged

• Timing matters: New deposits reset the 24-hour withdrawal timer

Risk Mitigation

For Liquidity Providers:

• Monitor debt levels before depositing

• Consider market conditions when staking

• Follow market trends and trading activity

For the Ecosystem:

• Higher caps encourage arbitrageurs to balance markets

• Open interest limits help manage risk during early phases