> For the complete documentation index, see [llms.txt](https://contango-2.gitbook.io/exchange/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://contango-2.gitbook.io/exchange/protocol/how-it-works.md).

# How it works

Contango protocol synthesises expirable positions by using spot exchanges and borrowing and lending at a fixed rate, i.e. cash flows of expirable positions are replicated through [fixed interest rate markets](/exchange/resources/glossary.md#fixed-rate-market). The different steps are realized atomically, i.e. in one transaction each time a trader buys or sells an expirable. If for any reason the transaction fails then no position will be taken neither by the trader nor by the protocol.

## Position opening

Below are presented the steps to open an expirable position.

![Steps to open a position on ETHDAI.](/files/pebce7tdS9JgvOxPbn3Q)

| Short                                                                                                                                                                                                                                                                               | Long                                                                                                                                                                                                                                                                            |
| ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| <ol><li>Trader sells a expirable</li><li>Protocol borrows the base currency</li><li>Protocol sells the borrowed amount for an equivalent amount of the quote currency on the spot market to synthesize a short position.</li><li>The amount of the quote currency is lent</li></ol> | <ol><li>Trader buys a expirable</li><li>Protocol borrows the quote currency</li><li>Protocol sells the borrowed amount for an equivalent amount of the base currency on the spot market to synthesize a long position</li><li>The amount of the base currency is lent</li></ol> |

## Position closing

Below are presented the steps to close an expirable position.

![Steps to close a position on ETHDAI.](/files/wX9PvYyAjyfYxeOsB61s)

| Short                                                                                                                                                                                                                                                                                                  | Long                                                                                                                                                                                                                                                                                             |
| ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |
| <ol><li>Trader closes a short position</li><li>Protocol gets the principal and the interest from lending the quote currency</li><li>Protocol swaps the quote currency for the base currency on the spot market</li><li>Protocol gives back the borrowed funds including the accrued interest</li></ol> | <ol><li>Trader closes a long position</li><li>Protocol gets the principal and interest from lending the base currency</li><li>Protocol swaps the base currency for the quote currency on the spot market</li><li>Protocol gives back the borrowed funds including the accrued interest</li></ol> |

{% hint style="info" %}
In order to quote a price to a trader, Contango simulates what would happen in a real execution and enriches the answer with min/max values, also simulating how the position status would look like after execution. To achieve that Contango uses the "preview" functions provided by the underlying protocols.
{% endhint %}