Waterfall DeFi

What is Tranching

Tranching, much TradFi, much wow...
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 yield, 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 in a sequential manner where Senior Tranche users are paid out 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 the latter case, first, the Senior Tranche users are paid their principal + fixed-return and then the Junior Tranche users are paid the remaining capital where they incur a principal loss. While in the former case, the Senior Tranche users are only paid their Fixed APY, while all additional returns are paid to the Junior Tranche users.

The Key Advantages of Waterfall DeFi Tranches:

  1. 1.
    Diversification: DeFi users can invest in a portfolio of DeFi assets instead of just one, thereby benefiting from risk and reward diversification.
  2. 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. 3.
    Higher fixed-APY products: By tranching a pool of riskier DeFi assets, the platform offers a safer fixed-yield product that pays a higher yield than traditional vanilla products. The senior tranches will specifically be attractive to risk-averse users.