Tradable Tranches
Last updated
Last updated
The market-determined value of the junior tranche tokens at approval would correspond to the degree of risk-adjusted returns of the instrument. The area under the curve(yellow label) at that instant represents the first loss capital presented by the managers. The more the managers deem an instrument safe, the higher the price, and the larger the area, which entails a larger insurance fund insuring against the instrument's failure.
The yellow area is the amount of collateral presented by the mangers to buy longZCB. It also represents an instrument's first loss caputal.
For these instruments, a fixed redemption price is computed based on the amount of profit or loss generated from the principal. A manager will purchase longZCB when the instrument is being assessed, and redeem it at maturity. The price of longZCB would be quoted less than 1 longZCB/underlying during assessment & before maturity and would be redeemable at a price of 1 if the predetermined yield is fully paid off.
Example: A utilizer is a borrower who wishes to borrow from the protocol with an NFT as collateral. A manager could buy longZCB at a price of 0.82 (hypothetical price, denominated in the underlying asset of the instrument) during the assessment phase, if he thinks the borrower is creditworthy. At maturity,
he would redeem it at a price of 1 if the borrower fully pays out its proposed yield, making a 22% return
he would redeem it at 0<=redemptionPrice< 1 if the borrower fails to pay out its proposed yield.
The yellow area represents the threshold collateral amount that needs to be pulled for the approval criterion to be met. The area also would correspond to the amount of collateral presented by managers - collateral subtracted from shortZCB buys, which also represents the amount of first loss capital.
The blue area corresponds to the profit allocated to longZCB buyers.
The green area corresponds to the collateral presented by the vault. Blue+green area would be the total amount of principal to fund the instrument.
The black area would correspond to the profit allocated for the VT investors. The blue + black area is the total amount of expected yield to be generated by the instrument, as proposed by the utilizer.
For perpetual instruments, managers can redeem longZCB tokens anytime they deem the underlying instrument is expected not to be profitable in the foreseeable future, given there is sufficient liquidity in the instrument to withdraw.
For every longZCB a manager wants to redeem, he will withdraw some constant * redeemed amount of capital from the instrument contract back to the vault. Refer to the diagram in Post Approval. Profit for both the longZCB token redeemer and the vault will be realized in this manner.
For every shortZCB a user tries to redeem, he will supply some constant * redeemed amount of capital from the vault to the instrument contract. This is because, for a shortZCB minted, the P&L for longZCB holders is generated from the collateral provided by shortZCB buyers. If the collateral is redeemed, the P&L should instead be generated by the instrument.
As in fixed instruments, the approval criterion is met when collateral used to buy longZCB + collateral subtracted from shortZCB buys exceed the yellow area. At a point where the approval criterion is met, the price curve becomes flat, where the price the curve becomes flat is the inceptionPrice , or the starting price, of to be newly issued longZCB when the instrument is approved.
A unit instrument always splits into an x amount of junior tokens and a unit-x amount of senior tokens, where x is a predetermined parameter. A pricer will take an exchange rate of the instrument vs its underlying and price the junior and the senior tokens. In this instance, a longZCB token would represent the junior tokens, and shares of VT would represent senior tokens. Every time x longZCB tokens are minted, the system necessitates unit-x VT shares' collateral to be supplied to the instrument, along with the collateral used to mint x longZCB.
Details on how the tranching math works out can be found on the whitepaper. For managers, they can simply simulate the returns of longZCB based on the returns the instrument makes in the UI
