Senior and Junior
Senior and Junior invest in the same vault. Junior takes losses first. In return, it receives its own share of gains plus part of Senior's share. Senior can still lose money once Junior's value is exhausted.
Compare the two tranches
| Outcome | Senior | Junior |
|---|---|---|
| Gains | Its proportional share, minus the premium paid to Junior | Its proportional share, plus the premium from Senior |
| Losses | Absorbs the part that exceeds Junior's remaining value | Absorbs the first losses, down to zero |
| Full loss possible? | Yes | Yes |
Proportional share means the amount based on each tranche's fraction of the vault's value before the gain. Junior's premium raises its return per unit of capital. It does not mean Junior always receives more USDC than Senior.
Coverage
Coverage is Junior's share of the combined tranche value. With 80,000 USDC in Senior and 20,000 in Junior, coverage is 20,000 / 100,000 = 20%.
The vault sets a minimum coverage ratio. A Senior deposit makes Junior a smaller fraction of the total and can be refused if it breaches that floor. A Junior withdrawal can also reduce the ratio, so funding must leave the required cushion in place.
Coverage is capital inside the same strategy, not outside insurance. The assets backing Junior can lose value too.
How gains are split
The premium is the part of Senior's proportional gain transferred to Junior. Its rate comes from the vault's configured premium curve and can change with coverage.
Illustrative example: Senior starts at 80,000 USDC, Junior at 20,000. The vault has 1,000 USDC of net gain available for the ordinary split, and the premium is 30%.
- Before the premium, Senior's proportional gain is 800 USDC and Junior's is 200.
- Senior transfers 30% of 800, or 240 USDC, to Junior.
- Senior receives 560 USDC, a 0.7% return on 80,000. Junior receives 440 USDC, a 2.2% return on 20,000.
Senior receives more USDC in this example. Junior earns the higher percentage return. These are returns for one illustrative period, not annual rates or promises.
How losses are taken
The following independent scenarios start with 80,000 USDC Senior and 20,000 Junior. They show losses passed to the tranche accounts. The accounting guide explains how unallocated profit can absorb a decline first.
Senior: 80,000 · Junior: 20,000 · Lost: 0 USDC
Senior: 80,000 · Junior: 10,000 · Lost: 10,000 USDC
Senior: 75,000 · Junior: 0 · Lost: 25,000 USDC
The two loss rows are independent scenarios, not consecutive events. Each bar represents the original 100,000 USDC.
Junior absorbs all of the 10,000 USDC loss. In the 25,000 scenario, Junior absorbs 20,000 and Senior takes the remaining 5,000.
A sufficiently large loss or a loss reaching Senior can also trigger operating restrictions. Losses and recovery explains those states and how returned value is allocated.
Share prices
Each tranche has its own share token and price. Shares waiting for withdrawal still participate in gains and losses until funded. Read shares and withdrawals before choosing a tranche.
For the formulas and recovery priorities, use yield allocation. For a particular vault, check its current coverage, premium curve and exit conditions.