Risk Waterfall
How returns are paid and how losses are absorbed
TL;DR
Returns flow top-down: cash first fulfills P (principal), then C (coupons), and any surplus flows to S.
Losses flow bottom-up: S absorbs losses first (the airbag), then C is reduced, and P is only touched in extreme cases.
Two flows, One System
1) Distribution of Returns (when money comes in)
P-Token – Principal repayments are honored first.
C-Token – Scheduled interest payments are distributed next.
S-Token – eceives its coupon/fee share and, at maturity, any unused safety buffer (residual).
Think of it like a waterfall flowing over three ledges. The top pool (P) fills first. Overflow goes to the second pool (C). Whatever is left cascades down to the third pool (S).
2) Protection Against Losses (when default)
When the underlying asset loses value or defaults, losses are absorbed in the opposite direction:
S-Token loses first – The first-loss buffer absorbs defaults and shortfalls, up to its full coverage.
C-Token is next – If losses exceed S, C holders take a pro-rata haircut (everyone takes the same percentage cut).
P-Token last – Only if losses remain after S and C are both exhausted would P be affected.
Think of S as the airbag in your car. In a small accident, the airbag absorbs the impact and you walk away fine. In a bigger crash, the airbag still helps, but the car (C) takes some damage. Only in a catastrophic wreck does the cabin (P) get compromised.
Examples
Setup: $100 pool. S coverage is 10%, meaning there is a $10 first-loss buffer.
Scenario 1: No Loss
Everyone is happy.
P receives principal at maturity ($1.00 per token).
C receives scheduled coupons.
S receives its coupon share, fee share, and any unused portion of the $10 buffer at maturity.
Scenario 2: $6 Loss
A manageable loss -- the airbag handles it.
S absorbs $6 of its $10 buffer.
C is untouched.
P is untouched.
Scenario 3: $15 Loss
A bigger hit -- the airbag is used up and C takes some damage.
S absorbs $10 (fully used up).
C takes a $5 haircut (pro-rata across all C holders).
P is still untouched.
Scenario 4: $28 Loss
A severe event -- damage reaches beyond S and C.
S absorbs $10 (fully used up).
C absorbs $18 (pro-rata haircut).
P would be affected by any remaining loss beyond that.
Is This a Tranche?
Short answer: yes, but it’s more than that.
In a traditional securitization, tranches only determine who takes losses first. They are static slices that you buy and hold. In AquaFlux, P / C / S are cash-flow layers with loss priority that you can compose.
In other words, the Tri-Token model is not just risk slicing, it lets users shape their payoff curve, not merely their place in the waterfall. Check out the Composable LEGO strategies for more.
FAQ
What does “haircut pro-rata” mean? Every holder in that token takes the same percentage reduction.
Can P be affected? Only in severe loss scenarios after S and after C are reduced.
Does S always get residuals? Only if the asset repays in full and the safety buffer is unused (per pool rules).
Do these rules ever change? Each pool defines its own parameters (coverage, fee shares, schedules). Always check the pool’s settings in the dApp.
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