Tranches and the Waterfall
Every Trilobyte vault splits its investors into two tranches — senior and junior — and pays every repayment through a strict, ordered waterfall. This page explains why, in plain language, using the protocol's own worked example.
Why two tranches?
A single pool of investors sharing every loss equally is fragile: a handful of bad loans can wipe out everyone at once. Trilobyte instead borrows a structure from traditional securitisation (and from DeFi lenders like Goldfinch and Maple): split investor capital into two layers with different risk and reward.
Junior — the first capital to absorb a loss, and the last to get paid. In exchange, it earns a spread on top of the loan's own interest rate.
Senior — protected by the junior layer beneath it. It gets paid first every period, and only loses money once junior is completely wiped out. In exchange, it earns a lower, steadier yield.
The pool manager's own collateral — their skin in the game — is the anchor of the junior tranche. Junior investors can join alongside it. Senior is open to a broader base of investors (including wallet users and external liquidity providers) once the junior cushion is locked in.
The capital stack
The size of the junior cushion is set by the vault's leverage ratio — how large senior capital may be as a multiple of junior. A 4× leverage ratio means senior can be up to four times junior, i.e. junior makes up 20% of the total; a 3× ratio means junior makes up 25%. Governance sets separate leverage caps for uncollateralized loans and for loans where the borrower has also pledged a real-world asset — a pledge lets the junior cushion run thinner, because the pledge is recovered ahead of the residual split.
Junior must be locked (lock_junior) before any senior deposit is accepted — see RaisingFunds.
The six-bucket waterfall
Every repayment — and every default recovery — is allocated in the same strict order. Nothing moves to the next bucket until the one before it is fully paid; an underpaid bucket carries forward as arrears, which must be cleared before any new dues are paid.
Worked example: 100,000 USDC loan, 15% annual rate, 4× leverage, 20% junior spread, 10% protocol reserve fee. Month one's installment is 9,026 USDC (1,250 interest + 7,776 principal). See Payments & the Waterfall for the exact math.
What a short payment looks like
If the borrower can only pay 5,000 of the 9,026 owed, the waterfall still fills in order: reserve fee (125), senior interest (700), then as much of senior principal as remains (4,175). Junior and the borrower get nothing — junior is paid last, and the borrower's residual only exists after both tranches are served. The 4,026 USDC shortfall carries forward as arrears, ahead of next period's dues.
What happens on default
If a loan defaults, both collateral sources — any borrower pledge and the manager's collateral — join the funds already in the vault into one recovery pool. That pool then pays out in the same seniority order: senior principal, senior's unpaid interest, junior principal, junior's unpaid interest, and only then any residual to the manager and the borrower. See Default & Risk Management for the full mechanics.
Effective yields, worked example
Senior
80,000
15.0%
10.5%
Gives up 10% to the protocol reserve and 20% to junior. Paid first.
Junior
20,000
15.0%
25.5%
Keeps its own interest plus the spread taken from senior. Paid last, loses first.
Protocol
—
—
1.5% of the loan
10% of all interest, senior-most in the waterfall.
Borrower
100,000
15.0%
—
Pays 9,026/month. Keeps only what's left after debt service.
These parameters — the reserve fee, the junior spread, and the leverage cap — are all governed settings (see Fees and Covenants, Exposure and Compliance), so the protocol can tune them per market without a contract upgrade.
As of September 2026.
Last updated