Open interest

Open interest is a supply management mechanism and forward-looking demand signal where users place limit orders in an order book that express buy interest at specific price levels. These orders exist continuously—they are not tied to specific minting events but rather represent standing buy interest in the collection. The issuer can observe this demand at various price levels and plan acquisitions accordingly, transforming minting from a supply-push process into a demand-pull process.

Think of it as a continuous order book that provides real-time market intelligence. Instead of the issuer acquiring an asset and hoping the market will absorb the new supply, the issuer can see real demand at various price levels before making acquisition decisions. When tokens are minted and released, these standing orders execute automatically if their price conditions are met.

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Why open interest matters

The CL AMM limitation

In a Concentrated Liquidity AMM, there is a fundamental constraint: buy orders cannot exist above the current market price. Liquidity providers can only provide liquidity within specific price ranges, and once the price moves to the top of a range, there is no native mechanism for upward price movement unless more token liquidity is added to the pool.

Case A (acquisition price > pool price) is straightforward: the issuer adds sell liquidity at acquisition price, and market participants decide whether to buy. No problem.

Case B (acquisition price < pool price) creates a critical challenge:

• No price discovery: The fair price is unknown. We only know it's above acquisition cost
• Buyer disenfranchisement: Market participants willing to pay above pool price have no mechanism to express that interest
• Forced dumping: Without forward demand signals, the issuer must sell into existing buy-side liquidity, pushing prices down
• Unfair allocation: Those willing to pay more cannot compete; tokens are distributed according to AMM rules

Open interest solves this: It acts as an order book for crowdfunding liquidity and crowdsourcing the price. Users place limit orders at various price levels, revealing true willingness to pay and enabling:

• Fair price discovery: Market expresses what it will pay for new supply
• Upward liquidity: Buy interest above pool price allows natural price movement
• Orderly execution: Tokens fill limit orders instead of dumping into the pool
• Merit-based allocation: Those willing to pay more get priority access

Without open interest

Without open interest, the issuer operates blind:

• Uncertain demand: No visibility into how much supply the market can absorb
• Execution risk: Risk that newly minted tokens won't find buyers at acquisition price
• Capital inefficiency: Issuer must acquire assets without knowing if market wants them
• Price discovery lag: Market learns about new supply only after minting
• CL AMM constraint: No mechanism for upward price movement when new supply enters

With open interest

With open interest, the issuer has forward visibility:

• Demand signals: Clear view of buy interest at various price levels (including above current price)
• Capital commitment: Real orders that will execute when tokens are released
• Acquisition planning: Can size acquisitions to match market demand
• Price discovery: Market expresses preferences before assets are acquired
• Upward liquidity: Creates buy-side pressure that allows price to move up naturally

This creates a two-way information flow between market and issuer, enabling more efficient capital allocation and reducing execution risk. It transforms the CL AMM from a purely reactive pricing mechanism into a forward-looking demand discovery system.

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Formal structure

Let:

• $p$: price level
• $q(p)$: quantity of limit orders at price $p$
• $Q(p) = \int_p^\infty q(x) \, dx$: cumulative demand at or above price $p$
• $p^{\text{acq}}$: acquisition price (to be determined)
• $m$: tokens to be minted (to be determined)

Open interest curve: The function $Q(p)$ represents total buy interest at or above each price level. This is the demand schedule that the issuer observes before making acquisition decisions.

Issuer decision: Choose acquisition size $m$ and price $p^{\text{acq}}$ such that:

$$m \leq Q(p^{\text{acq}})$$

This ensures that committed demand at or above the acquisition price is sufficient to absorb the new supply.

Execution: When tokens are minted and released, limit orders execute in price-time priority:

1. Highest-priced orders execute first
2. Within same price level, earlier orders execute first
3. Execution continues until all released tokens are absorbed or order book is exhausted

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Worked example

Setup

An issuer is considering acquiring a new asset for a collection. Before making the acquisition, they observe the open interest curve in the order book:

Price level	Quantity at level	Cumulative demand
$5,200	100 tokens	100 tokens
$5,000	200 tokens	300 tokens
$4,800	300 tokens	600 tokens
$4,600	250 tokens	850 tokens
$4,400	150 tokens	1,000 tokens

Current pool price: $p_t = 5{,}000$ USDC per token

Scenario 1: Demand matches supply

Issuer decision:

• Acquires asset at $p^{\text{acq}} = 4{,}800$ USDC per token
• Mints $m = 600$ tokens (80% = 480 tokens subject to release)

Execution:

• Orders at $5,200 execute: 100 tokens filled
• Orders at $5,000 execute: 200 tokens filled
• Orders at $4,800 execute: 180 tokens filled (partial fill)
• Total: 480 tokens absorbed by limit orders
• Average execution price: $\frac{100 \times 5{,}200 + 200 \times 5{,}000 + 180 \times 4{,}800}{480} = 4{,}975$ USDC

Outcome:

• All released tokens absorbed by limit orders
• No impact on pool price (no AMM trades needed)
• Acquisition cost: $600 \times 4{,}800 = 2{,}880{,}000$ USDC (already paid)
• Token sales revenue: $480 \times 4{,}975 = 2{,}388{,}000$ USDC
• Issuer retains: 120 tokens (20% of 600) valued at $120 \times 4{,}800 = 576{,}000$ USDC (at acquisition price)
• Total value: $2{,}388{,}000 + 576{,}000 = 2{,}964{,}000$ USDC

The issuer recovers 100% of their $2.88M investment (tokens never sell below acquisition price). The $84K surplus is distributed according to the profit-sharing structure outlined in Coordinated supply management.

Scenario 2: Supply exceeds open interest

Issuer decision:

• Acquires asset at $p^{\text{acq}} = 4{,}200$ USDC per token
• Mints $m = 1{,}500$ tokens (80% = 1,200 tokens subject to release)

Execution:

• All limit orders execute: 1,000 tokens filled at various prices (average ~$4,700)
• Remaining: 200 tokens must be sold
• Tokens sold into AMM, pushing pool price down
• Pool price reaches $4,200 (acquisition price)
• Issuer adds remaining tokens as sell liquidity at $4,200

Outcome:

• 1,000 tokens absorbed by limit orders (average price ~$4,700)
• 200 tokens sold into AMM until pool price reaches $4,200
• Remaining unsold tokens become sell liquidity at $4,200
• Pool price drops from $5,000 to $4,200
• Issuer still recovers 100% of investment (no sales below acquisition price)
• Market impact: Existing holders see 16% price drop

This scenario shows the risk of over-minting: when new supply exceeds committed demand, the excess pushes the pool price down toward acquisition price, causing significant dilution for existing holders.

Profit distribution

When limit orders execute above acquisition price, the surplus is distributed according to the protocol's profit-sharing structure outlined in Coordinated supply management. This incentivizes both good acquisitions by issuers and participation by market participants (specific distribution strategy to be determined).

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Outcome

Demand-driven acquisitions

Open interest enables demand-driven rather than supply-driven acquisitions:

• Before open interest: Issuer acquires assets → mints tokens → hopes market absorbs them
• With open interest: Market signals demand → issuer acquires to match → tokens absorbed by committed orders

This inverts the traditional model, reducing execution risk and improving capital efficiency.

Price discovery before minting

Open interest creates forward-looking price discovery:

• Market expresses preferences before assets are acquired
• Issuer can see real demand at various price levels
• Acquisition decisions informed by committed capital, not speculation

This reduces the information asymmetry between issuer and market, creating fairer and more efficient outcomes.

Capital efficiency

Open interest improves capital efficiency for both issuer and market:

• Issuer: Knows how much capital is needed to complete acquisition
• Market: Commits capital only at acceptable price levels
• Protocol: Reduces reliance on AMM to absorb new supply

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Why it works

Open interest transforms minting from a one-way broadcast (issuer → market) into a two-way conversation (market ↔ issuer). The issuer can see what the market wants, and the market can express preferences before assets are acquired.

This creates better outcomes for all participants:

• Issuers: Reduced execution risk, better capital planning
• Buyers: Ability to commit capital at desired price levels
• Existing holders: Less price impact from new supply
• Protocol: More efficient capital allocation

Trade-offs

Advantages:

• Demand visibility for issuer
• Capital commitment from buyers
• Reduced price impact (orders absorb supply before AMM)
• Forward-looking price discovery

Disadvantages:

• Requires liquidity (market must have capital to commit)
• Privacy concerns (public orders reveal demand)
• Complexity in managing order book
• May not work in illiquid or stressed markets

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Privacy considerations

Open interest orders create price signals that reveal market demand. While this transparency benefits the issuer (who can plan acquisitions) and the market (which can see aggregate demand), it also creates information leakage risks that become more significant as the protocol grows.

The information leakage problem

Public limit orders reveal:

• Price levels where buyers are willing to commit capital
• Order sizes at each price level
• Aggregate demand for the collection
• Market sentiment about future valuations

This information can be exploited by:

• Front-runners who position ahead of anticipated minting
• Competitors who use demand signals for their own acquisitions
• Manipulators who place fake orders to mislead issuers

Public orders (initial implementation)

The initial release uses public orders for simplicity:

• Visible to all participants (including issuers)
• Transparent demand signals
• Simple implementation: No cryptographic complexity
• Risk: Information leakage and potential front-running

Private orders (future enhancement)

As the protocol matures, private order placement will be critical:

• Prices and volumes hidden from public view
• Potentially visible to issuers for bargaining power and acquisition planning
• Executed automatically when conditions are met
• May Require: Zero-knowledge proofs to prevent exiting the system when an order is placed
• Benefit: Prevents information leakage while maintaining demand signals for issuers

Private orders enable users to express demand without revealing their intentions to competitors or front-runners, while still providing issuers with the market intelligence needed for efficient acquisition planning.

Design considerations

The privacy mechanism must balance:

• User privacy: Hiding order details from public view
• Issuer visibility: Providing demand signals for acquisition planning
• Execution guarantees: Ensuring orders execute when conditions are met
• Manipulation resistance: Preventing fake orders or gaming

This is a critical feature for protocol maturity, as information leakage becomes more problematic as market size and sophistication increase.

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Configuration

Open interest parameters are configurable per collection:

• Minimum order size: Prevents spam orders
• Maximum order lifetime: Orders expire after fixed duration
• Price bounds: Orders must be within reasonable range of current price
• Capital requirements: Orders may require collateral or deposit

These parameters ensure that open interest represents real demand rather than speculative or manipulative orders.

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Related reading

• Price dynamics and risks for detailed Case B analysis
• Hold period mechanism for preventing immediate dumping
• Release curve mechanism for gradual supply entry
• Spot Trading CLAMM for limit order mechanics