> For the complete documentation index, see [llms.txt](https://docs.stormbit.finance/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.stormbit.finance/protocol/how-it-works.md).

# How It Works

Every loan on Stormbit is collared at origination: a put under the collateral, a short call above it, written on Deribit before any USDC moves. No loan exists without its hedge.

***

**1. Lender deposits USDC**

Lenders deposit USDC and receive soUSD. Deposits fund loans for the chosen tenor; yield accrues from the option premium each funded loan generates. See [Earn](/product/earn.md).

**2. Borrower posts collateral and takes a loan**

Borrower posts BTC or ETH and selects a settlement expiry — loans follow listed option expiries, granular from days to months out. The protocol quotes the loan amount and the cap level — the call strike above which upside belongs to the desk until settlement. APR is 0%; the cap is the price of the loan.

**3. The collar is written at origination**

Before USDC is released, the desk executes the collar on the borrower's collateral on Deribit: a put struck at or above the loan value (the floor), and a short call (the cap). The net premium funds the loan economics — the borrower's protection and the lender's yield are paid for at trade entry, not promised from future revenue.

**4. Loan is active — no liquidation**

The borrower holds their USDC. Collateral is locked. No matter what happens to the collateral price during the term, the position cannot be liquidated. There is nothing to monitor — the floor is already bought.

**5a. Borrower repays**

Borrower repays the principal by maturity and gets the collateral back. If spot finished above the call strike, the upside above the strike settles to the desk — that is the cap doing what it was priced to do.

**5b. Borrower defaults**

If the borrower doesn't repay by maturity:

* The put settles or is exercised — covering the loan value down to the floor
* Collateral enters a Dutch auction in [Deals](/product/deals.md) — price drops over time until a buyer steps in
* The lender's principal is covered by collateral plus the put payoff

***

**The floor** — The put strike, set at or above `Loan Amount / Collateral Units` at origination. Above the floor, collateral alone covers the loan. Below it, the put pays the difference.

**Pricing** — The collar is priced from a 2D vol skew surface calibrated weekly against live OTC quotes, with adaptive strike selection. Three inputs drive the structure: LTV, term, and implied volatility. The protocol pauses new originations in extreme volatility regimes rather than writing mispriced collars.

**Settlement** — Lazy. Yield is recorded at loan settlement and distributed when lenders interact with the protocol (deposit, withdraw, or settle). Gas-efficient at scale.


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