The waterfall

Two orders run through the structure: the order in which a baseline is supported, and the order in which loss is absorbed.

They share a direction — the senior tier is reached last in both — but they are not the same order, and the document keeps them apart.

The order of loss absorption

Loss meets the structure from the bottom up.

The Protocol Reserve is drawn first, to the extent it holds.

Beyond it, the Single Pools — the junior, concentrated positions — absorb their own outcomes directly.

The Stable Pool, senior and diversified, is reached last and only after both buffers below it are exhausted.

The order is fixed; it stands outside governance and is not re-priced cycle to cycle.

The order of baseline support

The senior baseline is a separate question from loss absorption: it is what meets the floor, not what absorbs a shortfall against it.

Each cycle, the baseline is met first from the realized revenue of the book.

Where realized revenue falls short of the baseline, the monetization partner's contractual support is drawn next.

Where that too is insufficient, the Protocol Reserve is drawn, in the loss order above.

Realized revenue, then partner support, then Reserve — three sources in a fixed sequence, so the floor does not depend on any single one of them holding.

Scale narrows the band — where the tail permits

As the book grows, the spread of its realized mean narrows. How fast depends on the tail index $\alpha$ (see The thesis).

In the finite-variance regime, $\alpha > 2$, the dispersion of the book's mean falls classically,

for $n$ names in the book — the more names funded, the tighter the band, while the expected return holds.

In the heavy-tailed regime, $1 < \alpha \le 2$, the mean is still well-defined but the variance is not; dispersion falls more slowly, on the order of $n^{\,1/\alpha - 1}$, and a single name can still move a cycle.

The senior tier does not assume the benign regime. Diversification tightens the band where the tail allows; the baseline-support order holds the floor where it does not.

When a buffer is exhausted

Each buffer holds only to the extent it is funded.

If the partner's contractual support is not met, the Reserve is reached earlier, and the counterparty exposure is recorded as such — see Risk.

If the Reserve is exhausted, loss reaches the pools in the fixed order: the Single Pools first, the Stable Pool last. Exhaustion does not re-order the line; it advances the point loss has reached along it.

No buffer is replenished out of a pool's principal, and no pool is made to absorb loss ahead of a buffer that still holds.

What this protects

The waterfall converts the order of loss into the order of protection.

The junior tier is paid for taking concentration; the senior tier is protected by standing behind realized revenue, the partner's support, the Reserve, and — where the tail permits — the law of large numbers.

No tier can move ahead of another in the line, and none can be made to absorb loss out of order.