Protect

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Protect

Protect splits a yield-bearing asset into two tokens. Senior gives up a share of its interest and is insulated from the first losses. Junior collects that share on top of its own yield, and absorbs those losses in exchange. A market on USDC produces srUSDC and jrUSDC, both transferable and usable anywhere on Solana. Structured finance has allocated risk this way for decades. Here the waterfall is enforced by a program rather than an indenture, and the price of protection is set by an open market rather than an insurance fund.

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How The Split Works

A market holds 10M senior and 2M junior, both deployed in the same underlying strategy. Senior passes 20% of its interest to junior. The strategy earns 5%.

• Senior’s capital earns $500,000. Junior's capital earns$100,000.
• Senior passes $100,000 across and keeps$400,000, a rate of 4%.
• Junior collects $200,000 on$2M of capital, a rate of 10%.

Now the underlying loses value. Junior’s capital is the cushion, so losses come out of it first.

• Pool down 10%, or $1.2M. Junior absorbs all of it and falls from$2M to $800,000, a 60% loss on junior’s capital. Senior is untouched.
• Pool down 16.7%, or $2M. Junior is exactly wiped out. Senior is still untouched.
• Pool down 20%, or $2.4M. Junior is gone, and the remaining$400,000 reaches senior. Senior loses 4% rather than 20%.

Senior gave up one point of yield and turned a 20% loss into a 4% one. Junior earned double the underlying rate and stood in front of the first 16.7% of losses to make that possible. Note the asymmetry. Junior earns 2x the underlying rate here, but absorbs the whole pool’s losses on one sixth of the capital, which is 6x the loss exposure. Junior is leveraged in both directions and not by the same multiple.

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Coverage Ratio

Junior capital measured against senior capital, published live in basis points. In the example above, $2M against$10M is 20%. The ratio sets senior’s protection and junior’s amplification at the same time. Holding the share at 20%:

• 10% coverage. Junior earns roughly 3x the underlying rate, and is wiped out by a 9% fall in the pool.
• 20% coverage. Junior earns roughly 2x, and is wiped out by a 17% fall.
• 40% coverage. Junior earns roughly 1.5x, and is wiped out by a 29% fall.

Senior begins to lose only at the point junior is exhausted, so those same figures are the depth of senior’s cushion. Note that a coverage ratio is not a protection threshold. Junior holds the same asset it protects, so when that asset falls, junior’s cushion is marked down alongside it. $2M of junior capital cannot absorb a full$2M of senior loss, which is why 20% coverage protects senior against a fall of 16.7% rather than 20%. So scarce junior capital commands a higher rate until enough of it arrives. Abundant junior capital compresses its own rate and deepens senior’s cushion. Nobody sets the price of protection.

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What Can Be Tranched

Any yield-bearing asset that has cleared review: Reflect plus assets from Earn, institutional credit, regulated T-bill products, onchain savings rates, and delta-neutral basis strategies. Senior positions can also be used as collateral in Create, so an issuer can build an index made entirely of protected exposure.

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Risks

• Senior’s rate is not fixed. Senior receives a share of the underlying rate, so if the strategy’s yield falls, senior’s falls with it. Senior buys a cushion against loss, not certainty about return.
• Senior is protected, not guaranteed. Protection extends only as far as the junior tranche beneath it. A larger loss reaches senior directly.
• Junior can lose everything. It is designed to be exhausted before senior loses a dollar. Treat the whole position as at risk.
• Underlying risk passes straight through, including smart contract, venue, liquidity and collateral risk. Coverage also thins as junior capital leaves.

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