Tranching
Credit Vaults can optionally activate a tranching mechanism to allow users to tailor their lending experience to various risk appetites.
Yield split
The Tranching feature relies on a unique mechanism that manages the return distribution dynamically conditional to the liquidity deposited on each side (Senior, Junior) of the Credit Vault.
Senior class receives most of the underlying yield when liquidity is low on the Junior side (low coverage), or receives a guaranteed minimum portion of the underlying yield when Junior liquidity is high (high coverage)
Junior class receives outperforming APYs, no matter the Senior class liquidity
Yield and loss scenarios
Let's assume to have a Credit Vault generating a 10% yield (base APY), where users deposit 10,000,000 DAI split as follows: 70% on the Senior class, and 30% on the Junior class.
Standard case
Between 50 and 99% of the total vault's liquidity lying on the Senior side
Senior
8,000,000 DAI
8%
Junior
2,000,000 DAI
18%
The Senior Yield share is equal to 80%. Senior funds coverage is 25% and the Junior overperformance vs base APY is 1.8x. The Tranche coverage is 20%.
Hedge case #1
Majority of the total vault's liquidity lies on the Senior side (≥ 99%). See the Formulae section.
Senior
9,999,900 DAI
10%
Junior
100 DAI
20%
The Senior Yield share is set to 99% (HC#1). Senior funds coverage is 0% and the Junior overperformance vs base APY is 1.99x. The Tranche coverage is 0% as well.
Hedge case #2
Less than half of the total vault's liquidity lies on the Senior side (≤ 50%). See the Formulae section.
Senior
4,000,000 DAI
5%
Junior
6,000,000 DAI
13%
The Senior Yield share is set to 50% (HC#2). Senior funds coverage is 150% and the Junior overperformance vs base APY is 1.33x. The Tranche coverage is 60%.
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