Rehypothecation

Rehypothecation is Fira's mechanism for making idle reserves productive. A portion of FW-USDC held in fixed-rate market pools is allocated to a variable-rate vault, where it earns floating yield. That yield flows to Coupon Token (CT) holders.

This creates the bridge between Fira's fixed-rate and floating-rate layers: LPs provide liquidity to the fixed-rate AMM, and the unused portion earns floating-rate yield in the background.

Reserve Allocation Model

The system manages reserves through a reserve ratio φ — the fraction of liquid (unrehypothecated) reserves relative to total FW-USDC in the pool:

Three parameters control the allocation:

Parameter	Role
$\varphi _{min}$	Minimum reserve ratio — below this, the system withdraws from the vault
$\varphi _{max}$	Maximum reserve ratio — above this, the system deposits into the vault
$\varphi _{target}$	Target ratio — rebalancing restores φ to this value

Currently, these are respectively set to 89.89%, 91% and 90%.

How Rebalancing Works

The reserve ratio is checked on every market swap. If φ falls outside [φ_min, φ_max]:

• $\varphi < \varphi _{min}$ — Too much capital is rehypothecated. The system withdraws FW-USDC from the variable-rate vault back to liquid reserves.

• $\varphi > \varphi _{max}$ — Too much capital sits idle. The system deposits excess FW-USDC into the variable-rate vault.

In both cases, the system restores φ to φ_target.

How CT Holders Earn Yield

All interest earned by rehypothecated liquidity is distributed to outstanding Coupon Token (CT) holders. The mechanism:

1. Rehypothecated USDC earns floating yield in the variable-rate vault

2. This yield increases the FW wrapping rate μ(t) — each FW represents more underlying over time

3. CT holders can claim the difference between the current and previous wrapping rates

Claimable Yield

$$\text{CT}_{\text{claim}}(t) = \left(1 - \frac{\mu_s(t^*)}{\mu_s(t)}\right) \times \frac{\text{Balance}_{\text{CT}}(t)}{\mu_s (t*)}$$

Where $\mu _s(t)$ is the modified wrapping rate (see Token Mechanics) at the last update and μ(t) is the current rate. The yield is distributed proportionally to CT balances, paid in FW-USDC.

After maturity, CT no longer accrues rehypothecation yield — only active markets generate returns.

CT Price Dynamics

CT is a hybrid instrument: its cash flows come from a floating-rate source, but it trades in the fixed-rate market. Regardless, a natural price equilibrium can be achieved:

• CT overpriced relative to expected future yield → holders sell → FW supply increases in pool → more capital for rehypothecation → higher future yields for remaining CT → price adjusts down

• CT underpriced → buyers enter → FW supply decreases → less rehypothecation → lower future yields → price adjusts up

In equilibrium, the CT market price equals the discounted expected value of remaining rehypothecation yield.

Governance

All rehypothecation parameters (φ_min, φ_max, φ_target) are set by the DAO. Key principles:

• Liquidity first — The DAO prioritizes redemption availability over yield maximization

• Conservative by design — Parameters are chosen through stress testing to ensure sufficient liquidity under adverse conditions

• Manual updates — Parameters are not automated; updates happen no more than monthly or quarterly

• Future delegation — The DAO may delegate parameter management to a curator

Related

• Fixed-Rate Markets — Where rehypothecated reserves originate

• Floating-Rate Markets — Where rehypothecated capital earns yield

• Token Mechanics — CT token properties and behavior

• Whitepaper — Full mathematical treatment