Core Concepts

This page covers the fundamental building blocks of Knox Protocol: tranches, pool lifecycle, and the priority waterfall system.

The Three Tranche Types

Senior Tranche

Purpose: Guaranteed fixed returns with absolute priority

Key Characteristics:

• Receives a pre-agreed APY (e.g., 5%) regardless of market performance

• Has absolute priority over all pool assets at settlement

• Capacity-constrained by collateral from spectrum + junior tranches

• Only loses money in catastrophic scenarios where all subordinate tranches are fully wiped out

Share Pricing Model:

shares =compoundAssets(deposit, rSenior, timeRemaining, poolPeriod)

Early depositors receive more shares to reflect their longer holding period. At maturity, if the senior tranche is fully paid, 1 share = 1 asset.

Example: A deposit of 100 USDC at day 0 in a 365-day pool with 5% APY yields

100 × 1.05 = 105

shares. The same deposit at day 183 yields

100 × 1.05^(182/365) ≈ 102.47

shares.

Spectrum Tranches

Purpose: Customizable risk/reward profiles with capped yields

Key Characteristics:

• Each tranche has a specific APY cap chosen from a configurable grid (e.g., 5.5%, 6.0%, 6.5%, ... 20%)

• Paid in waterfall order: lowest rate → highest rate

• Lower caps = safer (paid earlier, less loss absorption)

• Higher caps = more upside potential but absorb more losses

• Created lazily on-demand via EIP-1167 minimal proxies

Share Pricing Model:

shares =compoundAssets(deposit, apyCap, timeRemaining, poolPeriod)

Same compounding mechanism as senior — early deposits get more shares.

Grid Configuration:

With

rSenior = 5%

,

rMaxSpectrum = 20%

, and

gridStep = 0.5%

, available rates are:

5.5%, 6.0%, 6.5%, 7.0%, ... 19.5%, 20.0%

The first deposit at any grid point creates that tranche's vault. Subsequent deposits use the existing vault.

Junior Tranche

Purpose: Maximum upside potential in exchange for first-loss absorption

Key Characteristics:

• Receives variable, residual yield — everything left after senior, spectrum, and protocol fee

• Absorbs losses first before any impact reaches spectrum or senior

• Captures all upside above the highest spectrum cap

• No capacity constraints (provides collateral for senior)

Share Pricing Model:

shares =(deposit × totalSupply)/juniorTrancheCurrentValue()

Standard ERC4626 proportional shares. First depositor receives

deposit + 1

shares to prevent inflation attacks.

Value Calculation: Junior value is always computed as a residual via the full waterfall — it's whatever remains after all other tranches are satisfied.

Pool Lifecycle States

1

DEPLOYED

Duration: Instantaneous (same transaction as deployment)

What Happens:

• SpectrumFactory clones accountant + senior vault + junior vault via EIP-1167

• initialize() is called, setting all parameters

• Immediately transitions to ACTIVE

• Spectrum vaults are NOT created yet (lazy creation)

User Actions: None

2

ACTIVE

Duration: From deployment until maturity (tStart + dPeriod)

What Happens:

• Deposits open via three paths:

  Router (primary):

  • KnoxRouter.depositSeniorSpectrum()

  • /

  • depositSpectrumTranche()

  • /

  • depositJuniorSpectrum()

  Accountant: Direct calls to

  • SpectrumAccountant.depositSenior()

  • /

  • depositSpectrum()

  • /

  • depositJunior()

  Vault: ERC4626

  • vault.deposit()

  • on existing vaults

• Capital is deployed to underlying market via allocator

• Withdrawals are blocked

Constraints:

• Senior deposits capped by seniorCapacity() (based on subordinate collateral)

• Total deposits capped by cMaxTotalDeposits

• Spectrum rates must be on the grid

• No deposits after maturity

User Actions: Deposit into chosen tranche(s)

3

REDEEMED

Duration: From first redemption call until all market positions are claimed

What Happens:

• Anyone calls redeemShares() (permissionless)

• For synchronous allocators: immediate redemption, moves directly to SETTLED

• For asynchronous allocators:

  • requestRedeem() initiates cooldown period

  • Returns bytes32 exitHandle

  • tracked in pendingExitHandles

• Anyone can call claimRedeemedAssets() to claim ready exits

• When all exits claimed, auto-transitions to SETTLED

User Actions: Wait for redemption to complete (no user action required)

Monitoring:

• maxPendingExitUnlockAt() shows latest cooldown timestamp

4

SETTLED

Duration: Permanent final state

What Happens:

• settlePool() executes the waterfall distribution

• Each tranche vault receives its final asset balance

• Vaults become standard ERC4626 for withdrawals

User Actions: Call vault.redeem() to withdraw proportional share

Special Behavior: Last redeemer of each tranche receives entire remaining balance (prevents rounding dust)

Holding Period Impact

Deposits at different times earn proportionally different returns:

Deposit Day	Pool Period	Holding Period	Return Multiple (5% APY)
Day 0	90 days	90 days	1.0121 (1.21%)
Day 30	90 days	60 days	1.0081 (0.81%)
Day 60	90 days	30 days	1.0040 (0.40%)
Day 89	90 days	1 day	1.0001 (0.01%)

This is encoded in share pricing via compounding:

(1 + APY)^(daysHeld / 365)

Key Takeaways

• Tranche hierarchy: Senior (safest) → Spectrum low-to-high → Junior (riskiest)

• Share pricing: Senior & spectrum use compounding based on time-in-pool; junior uses standard ERC4626

• Lifecycle: Deposits during ACTIVE → Redemption after maturity → Settlement → Withdrawals

• Time matters: Earlier deposits earn more due to longer compounding period

• Lazy creation: Spectrum vaults created on first deposit at each grid rate