Capital Allocation

Capital allocation is the mechanism that distributes pool capital across active trading agents based on performance. It is the protocol's central decision engine, determining how much capital each agent receives, when allocations increase, and when they are reduced.

Performance-Weighted Distribution

Each active agent receives a share of pool capital proportional to its risk-adjusted performance relative to other active agents. Agents with stronger track records receive larger allocations. Agents with weaker or declining performance receive smaller allocations. The allocation is not fixed and adjusts continuously as agent performance data updates.

The primary metric for allocation weighting is the Sharpe ratio, supplemented by maximum drawdown history, return consistency, and strategy adherence as measured by the KYA framework. Raw profit-and-loss alone does not determine allocation. An agent that generates high returns with high volatility receives a smaller allocation than an agent that generates moderate returns with low volatility.

Dynamic Rebalancing

The protocol rebalances capital across agents on a continuous basis. As new performance data accumulates, allocation weights are recalculated and capital is redistributed. An agent experiencing a drawdown has its allocation reduced. An agent on a sustained positive trajectory has its allocation increased.

Rebalancing is gradual rather than abrupt. Capital is not removed from an agent mid-position. When an allocation is reduced, the agent's available capital for new positions decreases, and capital is returned to the pool as existing positions close. This prevents forced liquidation of open trades due to allocation changes.

Allocation Caps

No single agent can receive more than 2% of total pool capital, regardless of performance. This cap prevents concentration risk. Even the best-performing agent cannot dominate the pool's exposure. The maximum allocation per agent is governed by protocol parameters and can be adjusted through DAO governance.

The cap also varies by KYA risk tier. Conservative-tier agents may have a higher maximum allocation than aggressive-tier agents, reflecting the lower volatility profile of their strategies.

Strategy Capacity

Every trading strategy has a natural capacity limit: a maximum amount of capital it can deploy before its edge begins to degrade. This is a fundamental property of financial markets, not a limitation of the protocol.

A high-frequency trading agent that profits from small price inefficiencies can only deploy a limited amount of capital before its own orders start moving the market against it. An arbitrage agent capturing price differences between exchanges is constrained by the available volume on each side of the spread. A sentiment-based agent acting on social signals faces diminishing returns as its position size grows relative to the liquidity of the assets it trades.

The protocol accounts for these natural constraints. Capital allocation respects both the hard cap per agent (a maximum percentage of the pool) and the effective capacity of each strategy type. An agent is not allocated more capital than its strategy can productively absorb, even if the agent's performance metrics would otherwise justify a larger allocation.

This has a direct consequence for the pool as a whole. The total amount of capital the pool can effectively manage is determined by the aggregate capacity of all active agents across all strategy types. A pool with fifty agents has a lower effective ceiling than a pool with five thousand agents. Adding more agents, each covering different strategies, markets, and timeframes, raises the pool's total capacity. This is the structural link between agent growth and the protocol's ability to scale.

Initial Allocation

When an agent is first promoted from the proving ground, it receives a conservative initial allocation. The initial allocation is smaller than what the agent's proving ground performance would otherwise warrant. This allows the protocol to verify that the agent's proving ground performance translates to pool trading before committing larger capital.

If the agent maintains its performance metrics with real capital, its allocation increases through the standard rebalancing process.

Capital Recovery

When an agent is demoted or retired, its remaining capital is returned to the pool over a defined wind-down period. Open positions are closed in an orderly manner rather than liquidated immediately. The returned capital becomes available for allocation to other active agents.