The Tranches

Before Reading...

We highly recommend reviewing the section about On-Chain Securitization first.

Understanding the Tranches

The Tranches are the primary channels through which capital enters and leaves Zivoe's protocol. By depositing capital into these tranches, users can start earning on-chain yield from real-world consumer loans!

At present, we offer two tranches: the Senior Tranche and the Junior Tranche. Each tranche has unique features to cater to different levels of risk tolerance and return expectations.

Feature	Senior Tranche	Junior Tranche
Priority in Payments	First priority in receiving payments	Receives payments after the Senior Tranche
Returns	Lower returns (Targets 10% APR)	Higher returns (Targets 22% APR)
Risk	Lower risk, protected from defaults by the Junior Tranche	Higher risk, absorbs losses first
Token Minting	1 zSTT per dollar deposited	1 zJTT per dollar deposited
ZVE Rewards	Eligible for ZVE rewards for minting/staking	Eligible for ZVE rewards for minting/staking

Depositing and Minting Tranche Tokens

When you deposit stablecoins into the Senior or Junior Tranche, you receive tranche tokens in a 1:1 ratio. For each dollar deposited, you will receive either 1 zSTT (senior tranche token) or 1 zJTT (junior tranche token).

• Minting Rewards: As an incentive for depositing, you may be eligible to receive ZVE rewards. These rewards are distributed based on the amount you deposit and the current size of each tranche.

• Staking Rewards: To earn yield, you must stake your tranche tokens. Staking is necessary to unlock the earning potential of your tokens and fully participate in the protocol's rewards system. In addition to the yield earned from lending activities, you may also be eligible to earn ZVE rewards from staking your tranche tokens.

• Guides for Minting and Staking: To learn more about how to mint tranche tokens, visit our Minting How-To Guide. For instructions on how to stake your tranche tokens, please refer to our Staking How-To Guide.

Please note, funds deposited in the tranches will be locked for two years or until the protocol reaches $100M TVL, whichever comes first. This is necessary given the duration of loans Zivoe intends to make.

How Defaults Are Handled

In the event of defaults, Zivoe takes a structured approach to protect the tranches and ensure the protocol's stability.

If consumer borrowers default on their loans, Zivoe is responsible for recovering the capital. Typically, Zivoe replaces non-performing loans with performing ones and manages collections internally. The aim is to generate enough revenue from the overall loan portfolio (beyond the yields paid out to stakeholders) to cover any defaults and keep the tranches fully collateralized.

However, if defaults exceed manageable levels and Zivoe cannot replace the defaulted loans, the value of the collateral in the Special Purpose Vehicle (SPV) will be marked down on-chain. In this scenario, the Junior Tranche will absorb the losses first, followed by the Senior Tranche if necessary. Mechanically, the backing of the Junior Tranche and the interest paid out will be reduced proportionally to the amount of defaulted loans. If defaults surpass the size of the Junior Tranche, the Senior Tranche would also see a reduction in backing and interest paid. Future revenues will then be used to replenish the SPV with new loans until it is fully re-collateralized, maintaining the integrity of the securitization.

To summarize, while defaults can occur, Zivoe strives to manage them by generating sufficient revenue to replace defaulted loans and ensure the tranches remain fully collateralized. In extreme cases, losses are absorbed first by the Junior Tranche, then by the Senior Tranche, with ongoing efforts to re-collateralize the SPV and restore stability.

For more information on how defaults are handled and how the tranches remain collateralized, check out this section about On-Chain Securitization