Economics

Where the return comes from, what it costs to operate, where the buffer comes from, and how the two tiers are priced against each other.

This page states the structure; the numbers are published per pool, not fixed here.

What the capital funds

The capital is production financing. It is deployed to fund the production cycle of the book; the production earns the revenue; the revenue returns to the pools through the waterfall.

Return is therefore a claim on revenue the capital itself funds into being — not a yield paid on capital held aside. It depends on the performance of the production so funded.

The source of return

Return is the realized revenue of the book, net of the cost of operating it.

For a book of $n$ names, the gross return is the mean of the per-name outcomes,

where $r_k$ is the revenue of the $k$-th name.

The distribution of $r_k$ is power-law (see The thesis); the mean is carried by the few names above the rest.

The distributable return is gross return less cost,

where $c$ is the cost of operating the book. Return comes from holding the whole curve, not from selecting a name on it.

Costs

Cost is taken before distribution, not added on top of it.

The cost of operating the book — sourcing, settlement, and the operation of the monetization itself — is borne off-chain and netted from gross revenue before any position is paid.

What reaches the pools is the net figure. No cost is levied against principal, and the order in which costs are met does not displace the loss order set by the waterfall.

Cost structure is a published parameter, set by governance per pool; this document states that cost is netted first, not what it is.

The baseline

The Stable Pool pays a baseline, set per sector.

The baseline is modeled from the operated record, not promised from it — it is the floor the structure is built to hold, not a forecast of the surplus above it.

It is set conservatively, below the modeled mean net return, so the spread between the two funds the buffer,

The gap is deliberate: a baseline set at the mean would leave nothing to capitalize the Reserve, and nothing to absorb the cycles that land below it.

The Reserve

The Protocol Reserve is the first-loss buffer.

It is capitalized from the spread between the net return of the book and the senior baseline, retained rather than distributed, and held ahead of both pools.

The Reserve grows as the book performs above its baseline; it is drawn only to absorb loss, in the order set by the waterfall.

Reserve adequacy

A buffer protects only to the extent it is sized against what it stands behind.

The Reserve target scales with the concentration it absorbs: the heavier the tail of the book and the larger any single position relative to it, the larger the buffer the structure holds against a cycle landing short.

Adequacy is therefore a function of the book, not a fixed sum — a target set and published by governance, revised as the book changes, and never drawn for anything but loss.

When realized return runs below the baseline, the Reserve is spent down; when it runs above, the Reserve is rebuilt toward its target before surplus is distributed.

The two tiers, priced apart

The Stable and Single Pools hold the same underlying curve at two points on the risk axis,

— the senior tier trades upside for the baseline and the buffer behind it; the junior tier takes concentrated exposure to a single name for the full distribution of its outcome.

The spread between them is the price of the protection that stands under the senior tier.

Parameters are published, not fixed here

Baseline levels, cost structure, reserve targets, and pool capacities are parameters, set by governance and published per pool.

This document describes how they relate, not what they are at any moment.