Tranched Vaults
How senior and junior capital share income and absorb losses.
Vault capital is structured into two tranches with explicit seniority. The structure decides who earns what and who loses first.
The two tranches
| Senior tranche | Junior tranche | |
|---|---|---|
| For | Protected, lower-volatility income | First-loss capital seeking yield |
| Loss order | Touched only after junior is exhausted | Absorbs losses first, in full |
| Return | Steadier base income | The levered residual |
The senior tranche is protected by structure. The junior tranche is staked first-loss capital, and its yield is compensation for taking first loss, not a bonus.
The loss waterfall
Losses flow through the structure in a fixed order. Junior absorbs first, in full, and senior is reduced only after junior is exhausted:
In one line
Losses land on junior capital first and in full; senior deposits are touched only after junior capital is completely gone.
This is standard tranche arithmetic. Income flows the other way: junior earns the levered residual once senior's claim is met.
Idle capital
Balances that are not deployed into credit do not sit dormant. Idle capital earns a base money-market rate from the first block, so depositors are paid while the protocol waits for eligible demand.
The launch bound
At launch, total credit outstanding is capped by junior capital:
In one line
At launch, total lending is capped at junior capital, so even if every loan lost everything at the same moment, the loss could not reach senior depositors. No model or estimate is involved; it is arithmetic.
Because all borrowing is bounded by first-loss capital, even simultaneous defaults cannot reach senior depositors. Senior protection at launch rests on arithmetic, not on estimation.
The protocol scales beyond this bound only as fast as its published calibration record supports. The formal treatment is in the Cusp whitepaper.