The settlement waterfall is the algorithm that distributes pool assets to tranches at maturity. It's a two-phase priority system with floors and caps.
Before any tranche receives assets, the protocol fee is deducted from total pool yield.
totalYield = withdrawnAssets - totalDeposits // floored at 0
protocolFee = totalYield × cProtocolFee /10000 // only if applyProtocolFees enabled
distributable = withdrawnAssets - protocolFeeFee is charged on total pool yield, not just junior/spectrum profits
Fee is deducted before the waterfall runs
If there's no yield (withdrawnAssets ≤ totalDeposits), fee is zero
Fee cost is effectively borne by riskiest positions (highest spectrum + junior) since they get the residual
Scenario: $1M deposited, $1.1M withdrawn, 10% protocol fee
totalYield = $1.1M - $1M = $100k
protocolFee = $100k × 10% = $10k
distributable = $1.1M - $10k = $1.09MThe remaining $1.09M flows through the waterfall.
The distributable amount is allocated in two steps: reserve floors, then distribute surplus.
Each tranche has a protected floor based on its collateral factor.
Senior
totalDeposits
100% of deposits
Spectrum
deposits × (1 − CF / 10000)
0-50% of deposits
Junior
deposits × (1 − CF_junior / 10000)
0% (CF = 100%)
Collateral Factor (CF) is the portion of deposits pledged as backing for senior. The floor is the un-pledged portion.
If distributable ≥ sum of all floors:
Each tranche gets at least its floor
Proceed to Step 2 with remaining surplus
If distributable < sum of all floors:
Floors are allocated pro-rata by size
No surplus to distribute (skip Step 2)
After floors are reserved, remaining surplus is distributed from safest to riskiest:
Senior → up to full compounded value
Spectrum (lowest rate → highest) → each up to capped return
Junior → all remaining surplus (unlimited)
If surplus runs out mid-tranche:
That tranche receives whatever remains
All lower-priority tranches receive only their floor (if any)
Setup: $1M total deposits, underlying returns +15%, senior at 5%, spectrum at 10%, junior $200k
Withdrawals: $1.15M
Distribution:
Protocol fee (10%): $15k × 10% = $1.5k → Fee beneficiary
Distributable: $1.15M - $1.5k = $1.1485M
Senior floor: $500k ✓ (covered)
Spectrum floor: $150k × 50% = $75k ✓ (covered)
Junior floor: $200k × 0% = $0 ✓ (covered)
Senior cap: $500k × 1.05 = $525k → Senior gets $525k
Spectrum cap: $150k × 1.10 = $165k → Spectrum gets $165k
Junior residual: $1.1485M - $525k - $165k = $458.5k → Junior gets $458.5k
P&L Summary:
Senior: +$25k (5% achieved)
Spectrum: +$15k (10% achieved)
Junior: +$258.5k (129% return!)
Protocol: +$1.5k fee
Setup: Same as above, underlying returns +7%
Withdrawals: $1.07M
Distribution:
Protocol fee: $7k × 10% = $700
Distributable: $1.07M - $700 = $1.0693M
Floors: All covered ($575k total)
Senior cap: $525k → Senior gets $525k
Spectrum cap: $165k, but only $1.0693M - $525k = $544.3k left → Spectrum gets $165k
Junior residual: $544.3k - $165k = $379.3k → Junior gets $379.3k
P&L Summary:
Senior: +$25k (5% achieved)
Spectrum: +$15k (10% achieved)
Junior: +$179.3k (89.7% return)
Protocol: +$700 fee
Setup: Same, underlying returns +3%
Withdrawals: $1.03M
Distribution:
Protocol fee: $3k × 10% = $300
Distributable: $1.03M - $300 = $1.0297M
Floors: All covered
Senior cap: $525k → Senior gets $525k
Spectrum cap: $165k, but only $1.0297M - $525k = $504.7k left → Spectrum gets $165k
Junior residual: $504.7k - $165k = $339.7k → Junior gets $339.7k
P&L Summary:
Senior: +$25k (5% achieved) ✓
Spectrum: +$15k (10% achieved) ✓
Junior: +$139.7k (69.9% return)
Protocol: +$300 fee
Note: Even though market returned only 3%, senior gets its guaranteed 5% because junior absorbed the shortfall.
Setup: Same, underlying returns -20%
Withdrawals: $800k
Distribution:
Protocol fee: $0 (no yield)
Distributable: $800k
Floors needed: $575k (senior $500k + spectrum $75k)
Distributable < total floors → Pro-rata allocation:
Senior floor: $500k / $575k × $800k = $695.7k
Spectrum floor: $75k / $575k × $800k = $104.3k
Junior floor: $0 → Junior gets $0 (wiped out)
P&L Summary:
Senior: -$304.3k (-60.9% loss) — impaired!
Spectrum: -$45.7k (-30.5% loss)
Junior: -$200k (-100% loss, wiped out)
Protocol: $0 fee
Loss absorption order: Junior wiped first, then spectrum (higher rates first), then senior.
When the pool loses money, tranches absorb losses in reverse priority:
Junior — wiped first (no floor if CF = 100%)
Spectrum (highest rate → lowest) — absorb losses down to their floor
Senior — only impaired in extreme scenarios
Deposits: Senior $500k, Spectrum 10% $200k, Junior $300k
Floor allocation:
Junior floor: $0 (CF = 100%)
Spectrum floor: $200k × (1 - 0.75) = $50k (CF = 75%)
Senior floor: $500k
Total floors: $550k
Distributable: $700k (covers floors)
Distribution:
Floors: Senior $500k, Spectrum $50k, Junior $0
Surplus: $700k - $550k = $150k
Senior cap: $525k, needs $25k more → gets $25k
Spectrum cap: $220k, needs $170k more → gets $125k (partial fill)
Junior: $0 (wiped)
Final payouts:
Senior: $525k (full guaranteed return) ✓
Spectrum: $175k (-$25k loss, -12.5%)
Junior: $0 (-$300k loss, -100%)
Two-phase: Protocol fee first (if active), then floor-based waterfall
Floors protect: Each tranche has a minimum claim (except junior with CF=100%)
Surplus priority: Senior → Spectrum (low to high) → Junior
Loss absorption: Reverse order — Junior → Spectrum (high to low) → Senior
Protocol fee: Taken from total yield, not just profits
Time-weighted: All caps are compounded based on holding period
seniorCap =compoundAssets(totalDeposits + accumulatedYield, rSenior, elapsed, period)spectrumCap =compoundAssets(deposits, apyCap, elapsed, period)Withdrawn Assets($X)
↓
Protocol Fee?(only ifyield>0&& feeSwitch =true)
↓
Distributable
↓
┌─────────────────┐
│ Step 1: Floors │
└─────────────────┘
↓
Enough to cover all?
↓
YES ─────→ Reserve all floors → Surplus
↓ ↓
NO ┌──────────────────┐
↓ │ Step 2: Surplus │
└→ Pro-rata floors └──────────────────┘
↓
Senior(up to cap)
↓
Spectrum low→high(up to cap)
↓
Junior(all remaining)