Tranches

Awake's Borrower Pool smart contracts consist of two tranches, junior and senior, which together make up 100% of a Borrower Pool's capital.

Anchors contribute to the junior tranche, while the Senior Pool provides funds for the senior tranche in accordance with the leverage ratio. When a Borrower repays their loan, the Borrower Pool first directs the payment towards any interest and principal due for the senior tranche, followed by any interest and principal due for the junior tranche.

This structure aligns incentives. Anchors, who actively evaluate the viability of individual Borrower Pools, assume the highest risk by providing first-loss capital through the junior tranche. This encourages Anchors to thoroughly assess the Pools, as they will be the first to miss repayment in case of a default.

Liquidity Providers, on the other hand, contribute capital to the Senior Pool, which is distributed across Borrower Pools. They take on less risk by providing second-loss capital through the senior tranche, giving them the added assurance that they will be repaid first if a positively evaluated Pool defaults.