Fixed-Liability Covered Continuous-Unwind Model v3.6.1 (PR #2764)
A covered short in Bittensor is a leveraged bearish bet on the alpha token. You fund a TAO floor (P), borrow a fixed amount of alpha at today's price, and profit if alpha depreciates. You must buy back the alpha debt to close, and your max loss is capped at that floor P.
Unlike margin shorts on exchanges, there is no liquidation at a price level — defaults happen only when your retained buffer reaches dust. This makes shorts MEV-insensitive: nobody can force you out by manipulating price.
All key symbols in order:
| Letter | Meaning | Notes |
|---|---|---|
| C | Collateral (gross size) | Gross position size, C = P + N. Derived, not posted — you only fund the floor P; the rest (N) is raised by selling the borrowed α. Here C ≈ 62.5 + 37.48 = 100 τ. |
| P | Principal (floor) | Your max loss; the τ you fund directly. If you abandon, P is put into the TAO emission pool as tao_in — not returned to you. Fixed at open. |
| N | Notional retained proceeds | τ raised by selling the borrowed alpha into the pool; becomes buffer R. |
| R | Retained buffer | Your profit channel; starts at N, decays daily. Max profit ceiling. |
| E | Escrow | Pool-funded buyback reserve; decays daily; always returns to pool. |
| Q | Quantity owed (liability) | Alpha debt fixed at open; price-independent. You buy this back at close. |
| A | Pool alpha | Alpha reserve in the AMM pool. Used in the footprint and the close cost. |
| T | Pool TAO | TAO reserve in the AMM pool. Spot price = T / A. |
| B | Footprint (utilization) | Λ·C; measures your claim on pool resources; capped subnet-wide. |
| Λ | Base LTV (governance) | Loan-to-value ratio; default 0.50. Drives your effective leverage. |
| ϕ | Coverage ratio | Fraction of pool alpha A deployed to your short (Q = ϕ·A). Solves via N and pool depth. |
This is the same worked example as the Flow page. Pool starts at 1,000 τ / 100,000 α (price 0.01 τ/α). You're opening a short with floor P = 62.5 τ.
Step 1 — Borrow α from the pool. The pool gives up ϕA = 3,900 α and
ϕT = 39 τ together — a proportional withdrawal, so price doesn't move (still 0.01). The 39 τ goes
into protocol-held E (escrow). The 3,900 α is borrowed and about to be sold. This 3,900 α is your
fixed debt Q — it never changes.
Step 2 — Sell the borrowed α back into the pool. This is what moves price. Selling 3,900 α into the (now smaller) 961 τ / 96,100 α pool yields 37.48 τ out. Pool TAO drops to 923.52, pool α returns to 100,000, and price falls 0.01 → 0.00924 (−7.6%) — the short has happened. Those 37.48 τ proceeds become your buffer R (and N = R₀ = 37.48 τ).
Step 3 — Fund the floor P. You send 62.5 τ of your own τ to the protocol as the non-decaying floor. Open is done. TAO reconciles: pool 923.52 + E 39 + R 37.48 = 1,000 τ ✓; your 62.5 τ floor is fresh capital on top.
So after opening you hold a position defined by: floor P = 62.5 τ, buffer R₀ = 37.48 τ,
escrow E = 39 τ (protocol-held), and a fixed debt Q = 3,900 α you'll buy back to close.
Once the short is open, it doesn't sit still. R (your buffer) and E (the escrow) both decay every day at the same rate, d ≈ 0.45%/day. This is the engine behind the whole trade — and it's the same Part 2 mechanic shown on the Flow page.
Where the decayed τ goes. Each day a slice of E + R is peeled off and flows back into the AMM pool (the restoration zap). Pool TAO refills, so the spot price drifts back upward. That upward drift is your carry cost — the price of keeping the short open.
Two things shrink at once: R is your profit ceiling, so as R decays your best-case payout falls. And because price drifts up, the buyback (price × 3,900) you'll owe at close drifts up too. Both move against you.
E behaves the same way but it's never yours — it's pool-funded buyback reserve, decays daily, and always returns to the pool. You never receive E.
To close, you must put the borrowed Q = 3,900 α back. You buy that α from the pool at the current price, so closing has a τ cost:
When you close you get back P + R, and you separately pay the buyback. So your outcome is
(P + R) − buyback, compared against the 62.5 τ floor you funded. Three cases (same as the
Flow page, R = 35.78 τ on day 10):
| Price at close | Buyback (price × 3,900) | Outcome |
|---|---|---|
| 0.005 τ/α (fallen) | 19.50 τ | Buyback < R → profit. Keep R − buyback = +16.28 τ on top of P. |
| 0.0095 τ/α (near flat) | 37.05 τ | R ≤ buyback < P+R → small loss. Buyback eats all of R + 1.27 τ of P. Net −1.27 τ — still better than abandoning. |
| 0.030 τ/α (risen) | 117.00 τ | Buyback ≥ P+R → abandon. Closing costs more than walking away. You lose the full −62.5 τ floor. |
Meanwhile R decays daily, so even with price flat your buyback creeps up relative to a shrinking R — that's the carry cost of holding the short open.
The daily decay above is itself a slow loss: R (your profit ceiling) shrinks while price drifts up, so even a flat market turns a winning short into a losing one over time. It doesn't close you out — it just erodes what you'd get back, and eventually pushes you into one of the two cases below.
If α has risen, the buyback (price × 3,900) is larger than R but still less than P + R. Closing is rational — it limits the damage — but the buyback eats all of R and some of P:
(P + R) − buyback, which is negative but better than −P. You still get
the leftover of P back.
If the buyback cost reaches P + R or more, closing would cost more than the floor itself. The rational move is to walk away and never send the buyback τ. You take no action; the protocol settles it:
tao_in (the protocol recycle sink) — not returned to you, not used to pay the α debt.The end-state arrives via one of two protocol paths, neither needing a trader action: time-based default (R decays to the dust floor) or subnet deregistration (terminal settlement). There are no price-based liquidation levels, no liquidation price to target, no short squeeze, no cascade — a deliberate design property.
Shorts inject discipline into subnet economics:
tao_in). No TAO is left stranded over the position's life.
tao_in — it leaves your hands and is not returned. This penalizes reckless leverage.
When you close a short, funds are repaid in order:
You receive P + R, and separately pay the buyback (price × 3,900) to put Q back. Escrow E returns to the pool. If the
buyback exceeds P + R, abandoning is rational and your floor P is put into the TAO emission pool as tao_in.
For interactive simulation of opens, closes, and decay, see the Simulator. For full technical details and storage layout, see Technical.