LP Payoff

Description of LP's perspective and ZLL payoff in MYSO v1

From a LP's perspective, funding a Zero-Liquidation Loan can be seen as a swap in which the LP provides some amount of loan token to a pool (which then turns into pro-rata funding for an incoming loan), receives some amount in pledged collateral, and writes a call option that gives a borrower the right, but not the obligation, to repay their loan and receive their collateral back.

Before funding a ZLL, a LP simply holds their liquidity contribution amount, which is independent of the underlying price of an asset. After the LP funds an incoming ZLL, their position turns into an in-the-money covered call - this means that they're long in the underlying collateral but also short an in-the-money call option.

If at expiry of the loan the underlying collateral price is above some strike price K, then the borrower is naturally incentivized to repay, and the LP will be able to claim a pro-rata share of the repayment amount. Otherwise, if the underlying price falls below the strike price, then the borrower naturally will not repay and the LP will be able to claim a pro-rata share of the collateral.