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The share price is the single most important metric for liquidity providers. It represents the USDC value of each vault share token and reflects the cumulative performance of the pool over time. Understanding what drives share price changes is essential for evaluating LP returns and risk.

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Formula

sharePrice = poolEquity / totalSupply
Where:
  • poolEquity = totalAssets + poolPnl (Computed: derived at query time from vault state and aggregate PnL)
  • totalAssets = USDC balance held by the vault contract (Onchain: ERC-4626 vault balance)
  • poolPnl = -aggregateTraderPnl (zero-sum: pool PnL is the negative of all trader PnL combined, Computed: derived from open positions)
  • totalSupply = total vault share tokens outstanding (Onchain: ERC-20 total supply)
When totalSupply is zero (no shares outstanding), the share price defaults to 1.0. The first depositor receives shares at a 1:1 ratio with their USDC deposit.

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What Drives Share Price Up

Three sources of income increase pool equity and therefore share price:

Trader Losses

When traders lose money on their positions, the pool gains. Every dollar of trader loss is a dollar of pool gain. This is the primary driver of share price increases.

Trading Fees

70% of all trading fees flow to the pool (the remaining 30% goes to the protocol treasury). Fees are collected on every open, increase, settlement, close, and reduce operation.

Penalty Fees

70% of liquidation penalties accrue to the pool. When a position is liquidated, the penalty fee on top of the standard trading fee provides additional income to the pool.
Oracle fees (flat per-price-read fees) are also split 70/30, with 70% going to the pool. While smaller in magnitude than trading fees, they accumulate with every forward price lookup.

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What Drives Share Price Down

Trader Profits

When traders profit, the pool pays. Large collective trader gains reduce pool equity and share price. This is the primary risk for LPs.

Bad Debt Absorption

If a position’s losses exceed its locked margin (bad debt), the pool absorbs the shortfall. The risk management system is designed to minimize this through timely liquidation, but it can occur in extreme market moves.

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Pool Equity Breakdown

The pool equity formula has two components that move independently: 
poolEquity = totalAssets + poolPnl

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totalAssets

The actual USDC balance in the vault contract. Increases when:
  • LPs deposit USDC
  • Fees are distributed to the pool
  • Trader losses are realized (USDC transferred into the vault)
Decreases when:
  • LPs withdraw USDC
  • Trader profits are paid out (USDC transferred from the vault)

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poolPnl

The unrealized component, computed as the negative of aggregate trader PnL across all open positions. This value fluctuates as forward prices move but only materializes when positions settle, close, or are liquidated.
Pool equity is clamped to zero — it cannot go negative. If aggregate trader profits exceed total pool assets, the share price reaches zero and LPs have effectively lost their entire deposit. The protocol’s risk caps, margin requirements, and liquidation mechanisms are the primary defenses against this scenario.

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Example Scenarios

The following scenarios illustrate how share price evolves over time. All examples start from the same initial state.
MetricValue
Total Assets1,000,000 USDC
Pool PnL0
Pool Equity1,000,000 USDC
Total Supply1,000,000 shares
Share Price1.000000

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Fee Contribution to Share Price

Fees provide a consistent upward pressure on share price, partially offsetting trader profit payouts. The pool receives 70% of all collected fees:
Fee TypeTypical RatePool Share
Trading fee5 bps (0.05%) of notional70% = 3.5 bps effective
Liquidation penalty30 bps (0.30%) of notional70% = 21 bps effective
Oracle fee0.10 USDC flat per price read70% = 0.07 USDC effective
For a pool with balanced long and short exposure, the fee income alone provides positive expected returns for LPs, even if aggregate trader PnL is zero. The higher the trading volume, the more fees accumulate.

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PnL Application Mechanics

When a position is settled, closed, or liquidated, the SettlementEngine calls applyPnl(int256 pnl) on the PoolVault:
When pnl > 0, the pool has gained from a trader loss. The USDC from the trader’s locked margin (minus fees) flows into the vault, increasing totalAssets. Pool equity increases. Share price increases.
When pnl < 0, the pool must pay a profitable trader. USDC is transferred out of the vault via transferOut(), decreasing totalAssets. Pool equity decreases. Share price decreases.
When pnl == 0, only fees are distributed. The pool receives its 70% fee share, resulting in a small share price increase.

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Deposits and Share Price

New deposits do not change the share price. When an LP deposits USDC: 
sharesReceived = depositAmount * totalSupply / poolEquity
Both totalAssets (numerator component) and totalSupply (denominator) increase proportionally, leaving the share price unchanged. Existing LPs are not diluted. Similarly, withdrawals do not change the share price for the same reason — both numerator and denominator decrease proportionally.

ERC-4626 Vault

How the vault operates as the counterparty to all positions.

Fee Distribution

Detailed breakdown of fee types, collection, and distribution.

Pool Utilization

How utilization caps protect pool liquidity.