# How it Works

## Overview

Essentially, PIKA stablecoins are backed by long positions’ loss at the time of the underlying token depreciation. At the time of the underlying token appreciation, the long positions’ profit are generated from both short positions’ loss and PIKA stablecoins' collateral token appreciation.

## Example

Let’s assume the current price of ETH is $2000 and Bob deposits 1ETH to Pika Protocol to mint 2000 PIKA stablecoins. This effectively opens a 1x short position of ETHUSD in the inverse perpetual swap margined in ETH. 

Assume the total value of all the long and short positions in the exchange are both $10000 (5 ETH), meaning there are $10000(5 ETH) values of long position and other $8000(4 ETH) of short position in the exchange. When Bob uses the 2000 PIKA to claim back their ETH at a later point, there could be three scenarios:

**ETH price remains the same:** 

Since both the longs and shorts positions of the exchange have 0 profit or loss, Bob can deposit 2000 PIKA to claim back their 1 ETH, with $2000 worth.

**ETH price goes up:** 

* Assume the price goes up to $4000.
* Net profit of longs: 10000 \* (1/2000 - 1/4000) = 2.5 ETH
* Net loss of shorts: 2.5 ETH
* Net loss of Bob’s position: 0.5 ETH
* As a result, Bob’s current collateral is 0.5 ETH(1 - 0.5). If Bob burns the 2000 PIKA stablecoins to claim back ETH now, it is still worth $2000. 

**ETH price goes down:** 

* Assume the price goes down to $1600.
* Net loss of longs: 10000 \* (1/1600 - 1/2000) = 1.25 ETH
* Net profit of shorts: 1.25 ETH
* Net profit of Bob’s position: 0.25 ETH
* As a result, Bob’s current collateral is 1.25 ETH(1 + 0.25). If Bob burns the 2000 PIKA stablecoins to claim back ETH now, it is still worth $2000.

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