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Settlements in the Fiet Protocol ensure market makers deliver liquidity to AMM pools to meet trading demand, maintaining market stability. A Request for Settlement (RfS) triggers when additional liquidity is needed, guided by the Value-to-Signal (VTS) model. Given settlement risk concerns, Fiet employs mechanisms — collateralisation, guarantors, and proof of settlement — to mitigate risks and protect user funds, ensuring traders’ assets remain secure in a non-custodial environment.

Settlements balance liquidity delivery with safeguards to protect traders and minimise risks.

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How Settlements Work

An RfS is triggered when the VTS ratio for a currency falls below its target, indicating a liquidity shortfall. Market makers must settle the required amount, proportional to their VRL commitment, within a fixed grace period (set at market deployment, e.g., based on bank transfer times). If they fail, settlement guarantors — other market makers or bots — can settle on their behalf, seizing the failing market maker’s collateral or liquidity position as profit. This incentivises timely delivery while ensuring market continuity.

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Managing Settlement Risk

Fiet mitigates settlement risk through multiple safeguards:
  • Collateralisation: Market makers deposit a base VTS collateral (e.g., 2% of their commitment) on-chain, securing their obligations and incentivising guarantors to intervene if needed.
  • Seizure Mechanism: After the grace period, a failing market maker’s position is seizable on a linear scale (e.g., fully seizable after an hour), ensuring guarantors act swiftly to restore liquidity.
  • Proof of Settlement: Market makers can submit zkTLS-verified proof of pending settlements (e.g., a bank transfer) to extend the grace period, reducing seizure risk during delays.
  • Looping: Guarantors with smaller reserves can partially settle and seize proportional positions, iterating until the RfS is fulfilled, broadening participation.
Fiet’s collateral and guarantor system ensures liquidity delivery, even if a market maker faces delays.

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Protecting User Funds

Traders’ funds are protected by Fiet’s non-custodial design and protocol-bound LCCs:
  • Non-Custodial: Traders retain control of their assets, swapping LCCs in the DEX without Fiet holding funds.
  • LCC Restrictions: LCCs are non-transferable, locked to Fiet’s DEX, preventing misuse or external risks.
  • Guarantor Backstop: If a market maker fails, guarantors deliver liquidity, ensuring traders receive their swapped assets.
  • Collateral Buffer: The base VTS collateral absorbs potential shortfalls, protecting traders from losses.
For example, in a USDC/ETH market, if a trader swaps $100,000 USDC for ETH and the market maker fails to settle, guarantors cover the ETH, seizing the market maker’s $2,000+ collateral, ensuring the trader’s ETH is delivered.
Fiet’s non-custodial design and guarantor system safeguard user funds against settlement failures.

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Sequence Diagram

Fiet for Market Makers Sequence Diagram

Fiet Market Maker Sequence Diagram

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Guarantor Incentive Structure

The following scenario offers a breakdown of the incentive structure that guarantees settlements to Fiet Markets.

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Context

In an AMM pool with virtual and realised liquidity, MMs deposit a base collateral equal to 2% of their committed liquidity per currency. Consider a USDC/XYZ pool, with CtotalC_{\text{total}} = $1,000,000, at a 1:1 exchange rate in a 50/50 pool — using a constant sum invariant price algorithm for the sake of simplicity. The pool initially holds:
  • Realised Liquidity: $10,000 USDC and $10,000 XYZ.
  • Virtual Liquidity: $980,000 USD ($1,000,000 total from MMs’ commitments minus realised liquidity)
A trader swaps $100,000 USDC for $100,000 XYZ. The swap requires $100,000 XYZ, but the pool initially holds only $10,000 XYZ in realised liquidity, leaving a shortfall of $90,000 XYZ that MMs must settle proportionally to their commitments. If MM A holds 50% of the pool (CMMAC_{\text{MM}_A} = $500,000), their settlement obligation is $45,000 XYZ (aMMAa_{\text{MM}_A} = 0.5 ⋅\cdot $90,000). If MM A fails to settle, another MM (e.g., MM B) can settle the $45,000 XYZ on MM A’s behalf and seize MM A’s liquidity position.

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Calculations

  • Trader’s Action: Deposits $100,000 USDC, withdraws $100,000 XYZ.
  • Pool’s Realised Liquidity Before Settlement:
    • USDC: $10,000 + $100,000 = $110,000
    • XYZ: $10,000 - $10,000 = $0 (pool provides its $10,000 XYZ to trader, shortfall remains $90,000 XYZ)
  • MM Settlement: MMs collectively settle $90,000 XYZ
  • Realised Liquidity After Settlement
    • to Pool: $110,000 USDC, $90,000 XYZ
    • to Trader: $110,000 USDC, $0 XYZ

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MM A’s Liquidity Position

MM A’s 50% share of the pool’s realised liquidity post-swap is $55,000 USDC (0.5 ⋅\cdot $110,000) Since the pool has $0 XYZ post-settlement, MM A’s position is valued at $55,000 USDC.

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Guarantor’s Profit

If MM B settles MM A’s $45,000 XYZ obligation:
  • MM B seizes MM A’s position: $55,000 USDC.
  • Profit = $55,000 USDC - $45,000 XYZ = $10,000 (assuming 1:1 value).
This $10,000 profit equals half of MM A’s base collateral ($5,000 USDC + $5,000 XYZ = $10,000), incentivising MM B’s intervention.

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Incentive Mechanism

The base collateral acts as an incentive for guarantors (e.g., MM B) to settle on behalf of a failing MM (e.g., MM A), as the seized liquidity position’s value ($55,000 USDC) exceeds the settlement cost ($45,000 XYZ), yielding a profit equal to the failing MM’s proportional collateral. This ensures market liquidity and operational stability.

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