Pricing ZLLs

How fair loan terms are determined for ZLLs on MYSO v1

ZLLs can essentially be seen as a swap in which a collateral token is swapped for a combination of a loan token amount and a call option on the collateral token. We can then price the embedded call option leg to derive a fair APR.

To visualize this relationship, decompose a ZLL into two swaps. First, a borrower pledges collateral into a pool. The LPs then become entitled to the pledged collateral on a pro-rata basis and subsequently write an equal number of calls on it. LPs also provide funding for the loan amount on a pro-rate basis. Finally, the borrower receives the total loan amount as well as a call option to reclaim their collateral (net of fees).