Senior and junior tranches

Every market splits its liquidity into two tranches, senior and junior. A deposit gives you srLP, the senior share. Any srLP holder can move some of it into the junior tranche as jrLP, the junior share.

Junior takes the market's losses first and earns a larger share of its income in return. Neither tranche moves tokens: both are claims on the same reserve, and converting between them only changes who owns which slice.

Two claims on one reserve

The program records how many of the market's reserve shares belong to Junior LP, $S_J$, and how many jrLP exist, $N_J$, counting the permanent seed and jrLP waiting to exit. One jrLP is worth

$$x = \frac{S_J}{N_J}$$

reserve shares, which is the jrLP exchange rate. Junior swap fees that compound raise it and losses lower it. srLP stays one-for-one with every other reserve share, including the srLP inside the two hLP vaults, so hLP is senior too.

Funded loss2% of capital

Junior LP−20.0%

10% of capital, earns 5.0× the average yield

srLP0.0%

90% of capital, earns 0.56× the average yield

The whole loss lands on Junior LP: 20.0% of its value. srLP loses nothing.

The creator's seed

At a market's first deposit, a thousandth of the creator's shares, after the permanently locked minimum liquidity and rounded up, becomes the junior seed. The creator receives the rest as srLP. The seed is jrLP that nobody owns and nobody can redeem, so every market has a junior tranche from its first deposit, and junior income is observable before any outside underwriter joins.

The seed earns junior income like any other jrLP and grows from three sources:

• Its own income. Anyone can move the seed's collected interest into the reserve with fund_junior_seed and reinvest its balance with compound_junior_seed. Reinvestment takes no slippage limit from the caller, so it only runs while the spot price is within 0.01% of the curve's centre average.
• Exit fees. The fee on every exit request is paid in jrLP to the seed.
• Burned jrLP. jrLP destroyed outside the program becomes part of the seed.

Entering Junior LP

Converting srLP into jrLP is immediate and free. The program burns the srLP, mints jrLP at the current exchange rate and checks it against the minimum you set; no asset moves. From that moment the jrLP earns the junior income share and stands first in line for losses.

Entry is closed only while a generation is wiped out, until the next one opens. See Wipeout.

Leaving Junior LP

Junior capital is what lenders and the rate controller rely on, so it cannot leave the moment a loss comes into view. Leaving takes three steps:

With $Q$ the jrLP waiting to exit, this request included, the notice is

$$T = 7\ \text{days} + 3\ \text{days} \times \frac{Q}{N_J}$$

so a rush to the exit waits longer than a single holder leaving.

Nobody else waiting

Notice · 7 daysExit

All jrLP waiting

Notice · 10 daysExit

Request7d10d12d

You can cancel at any time, including during notice. Cancellation returns the remaining jrLP claim to your wallet without refunding the request fee; its value still reflects junior losses.

To change the split or restart an expired request, cancel and submit a new nonzero request. The new request pays 50 bps on its full amount and starts a full notice from submission.

The app can submit cancellation and the replacement together in one atomic transaction. A pending request cannot be increased or renewed in place, and capital stays junior until conversion.

Where the income comes from

Swap fees and interest are split the same way. After the protocol's share, and on interest a referral partner's cut, the LP part goes to the two tranches: the junior income share, 50% by default and governed between 10% and 90%, goes to jrLP, and the rest to srLP holders, including the srLP the hLP vaults hold. Funding interest the hLP vaults pay is split the same way, except that the vaults' own srLP takes no part.

The share does not depend on how large Junior LP is, so the yield on each jrLP moves with the junior tranche's size. With Junior LP holding a tenth of the reserve shares and the default 50% share, a jrLP earns five times the market's average yield per reserve share, and a srLP about 0.56 times. As Junior LP grows, the yield on each jrLP falls toward the average; as it shrinks, the yield rises.

• Swap fees. The market's compounding share applies to both tranches. Compounded junior fees raise the jrLP exchange rate; the claimable part accrues to jrLP holders' yield accounts.
• Interest. Interest accrues every slot but is paid only when borrowers pay. As it accrues, the market books it in an income book, one per asset, plus separate books for hLP funding interest, and splits it at once between Junior LP, ordinary srLP and each hLP vault. Cash from repayments and liquidations pays every unit in the book in proportion; interest written off in a default is lost to all of them alike. A holder keeps the units issued while they held, even after leaving, and collects as the cash arrives.
• Liquidation charges. The solvent liquidation charge is fixed at 300 bps. The protocol takes 20% of it and the junior tranche the rest, as pay for underwriting. See Liquidations.

Losses

When a liquidation or an hLP closeout leaves a funded principal shortfall, the program burns junior reserve shares worth the loss. The jrLP exchange rate falls and srLP keeps its value per share. Only a loss larger than all junior capital reaches srLP holders.

For example, with Junior LP holding 10% of the reserve shares, a loss worth 2% of the market's funded value burns a fifth of the junior reserve shares. Each jrLP is then worth 20% less, and srLP is untouched. A loss of 15% would burn all of them and take the remaining 5% from srLP.

Unpaid interest cancelled in a default is not a junior loss: it leaves the income books instead, as above.

Wipeout and the next generation

A loss that burns every junior reserve share wipes out the current generation: its exchange rate is zero, so every jrLP of that generation, including jrLP waiting to exit, is worth nothing. The junior lane of each income book ends, and new entries and exit requests stop. Borrow rates react too: with no junior capital the coverage signal is zero, so the rate doubles every half-life, with no adjustable economic APR cap, until junior capital returns or the debt is repaid.

The junior income share keeps accruing while nobody holds it, to the seed, as capital for the next generation. Anyone can then call initialize_junior. It retires the wiped generation, freezing its income ledgers, and opens a new jrLP mint with no holders.

Holders of the retired jrLP keep the income it earned up to the wipeout: burn_retired_junior records that claim and burns the tokens, including any left in an exit request. New jrLP comes from srLP holders converting again and from the seed compounding.

Market control

srLP and jrLP ownership do not grant governance authority in Dusk core. The deployer begins as operator and can appoint an optional manager.

Changes use the full maximum junior exit notice plus one day; existing exit-ticket dates and earned income are preserved. See market operators.

Parameters

For developers

An income book that has paid out everything it was owed must be rolled into a new epoch before it can book more interest. Until someone calls roll_income_epoch, the market's next interest accrual fails, and with it every instruction that accrues interest first, which is most of them.

Holders carry their units into the new epoch the next time they checkpoint. The accounts, seeds and events are in the hLP and yield reference.

Related

• Two-sided liquidity: depositing, harvesting and withdrawing srLP.
• Borrowing and rates: how junior coverage sets the borrow rate.
• Liquidations and risk: the full loss waterfall.
• Governance: operators, managers and timelocked tranche income changes.