Senior and Junior Tranches
The pool has two tranches with different risk and return. Think of a building with two floors. Senior is the upper floor: it is paid first and kept dry longest. Junior is the ground floor: it absorbs any flooding first, and in return it gets most of the extra income.
Side by side
| Senior | Junior | |
|---|---|---|
| Risk | Lower | Higher |
| Payout order | Paid first: a 7% a year priority on its balance | Paid after Senior's priority |
| Share of income above the priority | 25% | 75% |
| In a loss | Last to absorb | Absorbs before Senior |
| Target APY (published model) | ~9% | ~32% |
| Exit | Instant from the reserve with a 0% to 3% haircut, or a queue with no haircut | 45 day notice, then a queue |
| Lockup | None | 45 day notice |
| Withdrawal fee | 0.20% | 0.20% |
How income is split
- Senior's priority
- Each period, Senior is paid first: 7% a year on Senior's balance.
- The excess
- Whatever the pool earns above that is split 25% to Senior and 75% to Junior.
- A shortfall
- If the pool earns less than Senior's 7% priority, Senior takes everything available and Junior gets nothing. The 7% is a priority, not a guarantee, and any shortfall does not carry over to later periods.
How losses are absorbed
Losses reach Senior only after the whole Junior tranche is used up, and losses from bad debt only after the Insurance Fund too. See The Loss Waterfall.
The Junior minimum
Junior must be at least 12% of the pool while the pool's yield rate is above Senior's 7%. This keeps enough first loss capital in front of Senior. When Junior is below the minimum:
- New Senior deposits pause until Junior grows.
- Junior withdrawals that would take it below the minimum are blocked.
Why two tranches
Without tranches, every lender would share the same risk and return. Tranching lets cautious lenders take steadier returns and lets lenders who want more return take more risk, and it gives the pool a layer of loss absorbing capital in front of the cautious money.