> For the complete documentation index, see [llms.txt](https://own-protocol.gitbook.io/docs/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://own-protocol.gitbook.io/docs/sell-side-underwrite/sell-side-guide.md).

# Sell-side Guide

## Own Underwriting 101: How Sell-side Works in Own Protocol

***

### What Is Sell side in Own?

In **Own Protocol**, Sell side LPs enable synthetic exposure to real-world assets like stocks by committing capital to on-chain asset pools.

Minters gain exposure by paying a **floating interest rate**, and Sell-side earn this yield in return for underwriting that exposure.

At its core, Sell side LPing in Own is modeled on a **Total Return Swap (TRS)**:

* Buy-side LPs receive the **asset’s performance**.
* Sell-side LPs earn **interest** for offering that performance

***

### Understanding Sell-side LP Commitment vs LP Collateral

In Own Protocol, when you provide liquidity as a sell side LP, you're **not depositing your entire committed capital on-chain**. Instead, the protocol is designed for **capital efficiency**, where only a **portion of your commitment is actively used**, and the rest is kept off-chain under your management.

Let’s break down the two key concepts:

#### LP Commitment = Your Total Capital Reserved to the Pool

This is the **full amount you’re allocating** to the protocol — even if it’s not all used right away. It determines your **ownership share** of the pool and the amount of synthetic asset exposure you’re expected to support.

For example:\
If you commit **$100,000**. That’s your total capital set aside for Own.

This capital will be split between:

* **Asset exposure (off-chain)**
* **Idle capital (unused)**

#### LP Collateral = The On-Chain Margin You Deposit

In addition to your committed capital, you must deposit **a percentage of it** on-chain — this is the **collateral**. It acts as a security buffer and protects the protocol in case an LP fails to rebalance or cover their exposure.

The collateral ratio is **pool-specific** and depends on asset volatility. For example, a low-volatility asset pool might require **20%** collateral.

For example:\
If you commit **$100,000** and the pool collateral ratio is **20%**, you must deposit:\
→ **$100,000 × 20% = $20,000**

This means your total capital required to participate is:\
→ **$100,000 (commitment) + $20,000 (collateral) = $120,000**

The collateral is separate from your commitment and remains fixed relative to it. It’s not used for synthetic asset backing or daily rebalancing.

#### Key Takeaway

* **LP Commitment** determines your pool share and exposure responsibility.
* **LP Collateral** is posted on-chain but is only accessed if you fail to rebalance.
* Rebalancing and backing the asset is your active responsibility from the capital committed.
* Your **earnings (yield)** is based on how much asset you are backing, not your full commitment.

***

### Rebalancing & Delta-Neutrality

Every market day, the protocol **rebalances** based on asset price changes.

If the asset price rises:

* Users’ exposure is marked up.
* LPs owe that increase — but if they’ve **bought the asset off-chain**, their external holding offsets this liability.

This is how LPs stay **delta-neutral** — no directional risk, just net floating yield.

***

### LPing in Practice — A Step-by-Step Example

#### Initial Pool State

* LP1 & LP2: $250K each committed → Total = **$500K**
* Asset price = $100
* Users have minted **2,000 synthetic units** → Synthetic value = `$200K`
* Collateral ratio = 2**0%**

Utilised capital =\
`$200K (asset value)`\
\
**Utilisation Ratio = $200K / $500K = 40%**

#### LP3 Enters with $100K commitment

You joins the pool. Now:

* Total commitment = **$600K**
* Your share = `100K / 600K = 1/6` → **16.67%**
* Your backing 1/6 of 2,000 units = **\~333.33 units**
* Synthetic exposure = `333.33 × $100 = $33.33K`

You allocate:

* **$33.33K** → Buy asset off-chain

#### If Asset Price Increases to $110

Now:

* Synthetic exposure = `333.33 × $110 = $36.66K`
* Value increase = **$3,333.3**
* Rebalance requires LP to cover this increase

But your off-chain asset also appreciated by **$3,333.3** → no loss.\
➡️ You remain **delta-neutral**.

New utilisation = `$36.66K`\
**Utilisation = 36.66%**\
\
**If Asset Price Decreases to $90**

Now:

* Synthetic exposure = `333.33 × $90 = $30K`
* Value decrease = **$3,333.3**
* LP claims this amount from the pool via rebalance

Your off-chain asset also lost **$3,333.3** in value, so again — no net PnL impact.\
➡️ You remain **delta-neutral**.

New utilisation = `$30K`\
**Utilisation = 30%\`**

***

### Capital Efficiency & Yield

The **goal of all LPs** is to collectively commit just enough capital so the pool’s **utilisation stays in the optimal range** (e.g., 40–80%).

Why?

* If underutilised, your capital sits idle and earns nothing.
* If overutilised, the system becomes risky and may reject new minting.

Important:\
LPs **earn yield only on the capital that is deployed to back user exposure** (i.e., asset). Unutilised capital does **not earn interest**.

***

### Risks to Keep in Mind

| Risk                       | Description                                         |
| -------------------------- | --------------------------------------------------- |
| **Price Rebalance Risk**   | LPs must keep rebalancing in sync with asset prices |
| **Poor Hedging Execution** | Misaligned off-chain hedging leads to exposure      |
| **Overcommitting Capital** | Low utilisation = low yield                         |
| **Automation Dependence**  | Active management is required                       |

***

### Active vs Passive Management

* On **volatile market days**, there are **significant market-making opportunities** — LPs can profit from rebalancing activity and spreads.
* On **calm days**, rebalancing can be automated using:
  * AI agents
  * Web3 bots (e.g. Chainlink Functions or Tenderly)
  * Delegate vaults (planned)

***

### Sustainability

* Yield is **driven by real user demand**, not token incentives.
* LPs are fully collateralized and optionally **delta-hedged off-chain**.
* Supports both **fully-backed** and **purely synthetic** pools depending on LP preference.
* Optional zk-proofs can verify off-chain asset holdings for institutional confidence.

***

### TL;DR

| Feature                 | Description                                                     |
| ----------------------- | --------------------------------------------------------------- |
| **Yield Source**        | Floating interest from user exposure                            |
| **Delta-Neutral**       | Yes, via off-chain hedging                                      |
| **Management Style**    | Active, with optional automation                                |
| **Capital Utilisation** | Earns yield on utilised capital (exposure + collateral)         |
| **Goal**                | Commit capital so pool utilisation stays optimal for high yield |
| **Sustainability**      | High — no reliance on emissions or inflation                    |