Contract Cap
The contract cap refers to the upper bound of LP position value that can be fully protected against impermanent loss by a Writer Pool, based on the current amount of collateral deposited by Writers and the protection rate parameter settings.
The contract cap represents the upper limit of LP positions that can be fully protected against IL using the aggregate collateral deposited by Writers. If the contract cap for a Writer Pool is reached, it indicates that demand for IL protection outweighs supply. No Buyers can open new NIL contracts for that Writer Pool until Writers deposit more collateral into the pool (thereby increasing the contract cap).
The risk of the contract cap being reached is mitigated by funding rates, because when the utilization rate of a Writer Pool is too high, the funding rate for contracts backed by the pool is increased to incentivize Writers to deposit new collateral or for Buyers to close their active contracts.