Waterfall DeFi
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Waterfall DeFi

WATERFALL DEFI TRANCHES

Waterfall DeFi tranches are structural investment products that package a pool of yield-generating DeFi assets and slices them into different buckets known as “tranches”. Each tranche is classified based on its seniority and has its own set of unique expected yields, risk and maturity.

The word tranche means a division or portion of a pool or whole and is derived from the French for ‘slice’, ‘section’, ‘series’, or ‘portion’ — Merriam-Webster

The cash flows generated from the underlying DeFi assets are paid out sequentially. The Senior tranche users are paid before the Junior Tranche users. This waterfall form of payment is applied to both scenarios where the underlying assets generate profits or incur a loss. In exchange for the first right to cash flows, the Senior tranche users sacrifice some portion of their yield to the lower tranches. In an ideal scenario, the Senior tranche users would earn a safe fixed APR, while the Junior tranche users would earn a dynamic leveraged APR.

The Key Advantages of Waterfall DeFi Tranches:

  1. Diversification: DeFi users can invest in a portfolio of DeFi assets instead of just one asset, ensuring risk and reward diversification.
  2. Leveraged Yield: The lower tranches allow risk-tolerant DeFi users to earn a leveraged return on their existing investment strategies, such as providing liquidity to DEXs.
  3. Fixed-APR products: By tranching a pool of riskier DeFi assets, the platform offers a safe fixed-yield APR to the Senior tranche. The senior tranches will specifically be attractive to risk-averse users.

V1.0 Waterfall DeFi Tranches

The V1.0 Waterfall DeFi platform will package different yield-generating LP tokens (Liquidity Provider tokens) into a portfolio and then slice it into 2 or 3 tranches — Senior, Mezzanine and Junior. Each tranche will be a separate yield-bearing investment product.

For example:

A portfolio of 2 different Pancakeswap LP tokens is sliced into 2 tranches — Senior & Junior

Senior Tranche: Fixed APR, fixed maturity, low risk. At maturity, users are paid Principal + Fixed APR.

Junior Tranche: Variable APR, variable maturity, higher risk. At maturity, users are paid Principal (- Impermanent Loss) + Variable APR

Essentially, tranching allow the Waterfall DeFi platform to offer different investment products (tranches) using the same pool of DeFi assets. Our platform will allow both risk-averse and risk-tolerant users to choose a tranche based on their risk/return profile.

How Does it Work?

Imagine a Waterfall DeFi tranche with the following structure:

· Senior Tranche — 4% fixed APR | Cap — $1000 | Tranche Thickness: 50%

· Junior Tranche — Variable APR | Cap — $1000 | Tranche Thickness: 50%

Assuming both tranches get filled, then the total portfolio value at inception = $2,000.

Scenario A:

At maturity, if the assets perform as intended while keeping its principal value intact, the total portfolio value will become:

Total portfolio value = (Asset A Principal + Yield) + (Asset B Principal + Yield)
= [ $1000 x (1.05) ] + [ $1000 x (1.10) ]
= $1050 + 1100
= $2,150 (+7.5% gain)

In this case, Senior tranche would receive their original principal + fixed 4% APR which equals to a total of $1040, while the Junior tranche would receive the remaining capital = $1110, earning a net APR of 11%.

Scenario B:

At maturity, Asset A performs as intended and without any principal loss. While Asset B experiences a loss of 30%, then the total portfolio value becomes:

Total portfolio value = (Asset A Principal + Yield) + (Asset B Principal + Yield)
= [ $1000 x (1.05) ] + [ $1000 x (0.70) + $1000 x (0.10)]
= $1050 + 800
= $1,850 (-7.5% loss)

In this case, although the net portfolio value is less than what it was at inception, the Senior tranche deposits still receive the full principal + fixed 4% APR equal to $1040, while the Junior tranche deposits receive the remaining capital = $810, incurring a net loss of 19%.

Scenario C:

At maturity, Asset A performs as intended. While Asset B earns a higher than expected yield of 60%:

Total portfolio value = (Asset A Principal + Yield) + (Asset B Principal + Yield)
= [ $1000 x (1.05) ] + [ $1000 x (1.60)]
= $1050 + $1600
= $2,650 (+32.5% gain)

In this scenario, although the net portfolio value appreciated by 32.5%, the Senior tranche deposits only receive principal + fixed 4% APR equal to $1040, while the Junior tranche deposits receive the remaining capital = $1610, earning a net APR of 61%.

Below is a simple Tranche calculator to realize the power of tranching.

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