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Adaptive Yield Split

Products > Yield Tranches > Overview > AYS
The Adaptive Yield Split is a unique feature of YTs that manages the return distribution dynamically conditional to the liquidity deposited on each side (Senior/Junior) of the Tranche.
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Mathematically, the formulas behind this mechanism consider mainly Senior and Junior liquidity ratios to compute Senior and Junior returns.

Liquidity ratios

First, we define the Senior and Junior TVL ratios as
TVL ratioSr=LiquiditySeniorLiquiditySenior+Junior\text{TVL ratio}_{Sr} = \frac{\text{Liquidity}_{Senior}}{\text{Liquidity}_{Senior + Junior}}
TVL ratioJr=LiquidityJuniorLiquiditySenior+Junior\text{TVL ratio}_{Jr} = \frac{\text{Liquidity}_{Junior}}{\text{Liquidity}_{Senior + Junior}}

Senior and Junior yields

The Senior return can be calculated as
APYSr=Base APY×Yield shareSr(1)\text{APY}_{Sr} = \text{Base APY} \times \text{Yield share}_{Sr} \qquad \tag{1}
where the Base APY is the underlying Tranches yield and the Yield share of the Senior side is a piecewise function conditional to the liquidity on the Senior tranche.
Yield shareSr={99%if TVL ratioSr≥99%LiquiditySeniorLiquiditySenior+Juniorif TVL ratioSr>50%50%if TVL ratioSr≤50%\text{Yield share}_{Sr} = \begin{dcases} 99\% & \text{if } \text{TVL ratio}_{Sr} \geq 99\% \\ \\ \dfrac{\text{Liquidity}_{Senior}}{\text{Liquidity}_{Senior + Junior}} & \text{if } \text{TVL ratio}_{Sr} > 50\% \\ \\ 50\% & \text{if } \text{TVL ratio}_{Sr} \leq 50\% \\ \end{dcases}
The Junior return can be calculated as
APYJr=(Base APY−APYSr)×TVL ratioSrTVL ratioJr+Base APY(2)\text{APY}_{Jr} = \frac{(\text{Base APY} - \text{APY}_{Sr}) \times \text{TVL ratio}_{Sr}}{\text{TVL ratio}_{Jr}} + \text{Base APY} \qquad \tag{2}
Normal case
When Senior liquidity represents 50-99% of the funds in the Tranche, we use Equation (1) to compute the Yield share of the Senior side.
Alternatively, we use some fixed percentages. There are two hedge cases:
  1. 1.
    The majority of total Tranche's liquidity lying on the Senior side (more than 99%)
  2. 2.
    Less than half of total Tranche's liquidity lying on the Senior side (less than 50%)
Yield shareSr={99%if LiquiditySeniorLiquiditySenior+Junior≥99%50%if LiquiditySeniorLiquiditySenior+Junior≤50%\text{Yield share}_{Sr} = \begin{dcases} 99\% & \text{if } \dfrac{\text{Liquidity}_{Senior}}{\text{Liquidity}_{Senior + Junior}} \geq 99\% \\ \\ 50\% & \text{if } \dfrac{\text{Liquidity}_{Senior}}{\text{Liquidity}_{Senior + Junior}} \leq 50\% \\ \end{dcases}
In the first case, we set the Yield share of Senior Tranches equal to 99% while in the second case, we set it equal to 50%. These two hedge cases link to the principle that
  • Senior Tranche receives most of the underlying yield when liquidity is low on the Junior side (i.e. low coverage on Senior funds), or receives a guaranteed minimum portion of the underlying yield when Junior liquidity is high (i.e. high coverage on Senior funds);
  • Junior Tranche receives outperforming APYs on the Junior Tranches, no matter what the amount of deposited liquidity on the Senior is.
The guaranteed minimum portion, aka the Yield share of the Senior Tranches, has been set to half the Base APY (see HC#2) when the Senior liquidity is smaller than the Junior one.

Senior coverage and Junior overperformance

The formulas of the Senior coverage provided by the Junior counterparty and the Junior boosted yield vs the underlying return are
Funds coverageSr=LiquidityJuniorLiquiditySenior\text{Funds coverage}_{Sr} = \frac{\text{Liquidity}_{Junior}}{\text{Liquidity}_{Senior}}
OverperformanceJr=APYJrBase APY\text{Overperformance}_{Jr} = \frac{\text{APY}_{Jr}}{\text{Base APY}}

Examples

We compute the returns of the Senior and the Junior sides using the formulas listed previously, assuming
  • An average underlying APY of 10%
  • The total liquidity of the Tranche equal to $10,000,000
Standard case: between 50 and 99% of the total Tranche's liquidity lying on the Senior side
Side
Liquidity
Expected APY
Senior
$8m
8%
Junior
$2m
18%
The Senior Yield share is equal to 80%.
Senior funds coverage is 25% and the Junior overperformance vs base APY is 1.8x.
Hedge case 1: the majority of total Tranche's liquidity lying on the Senior side (
≥\geq
99%)
Side
Liquidity
Expected APY
Senior
$9.9m
10%
Junior
$100
20%
The Senior Yield share is set to 99% (HC#1).
Senior funds coverage is 0% and the Junior overperformance vs base APY is 1.99x.
Hedge case 2: less than half of the total Tranche's liquidity lying on the Senior side (
≤\leq
50%)
Side
Liquidity
Expected APY
Senior
$4m
5%
Juniorthe
$6m
13%
The Senior Yield share is set to 50% (HC#2).
Senior funds coverage is 150% and the Junior overperformance vs base APY is 1.33x.
Last modified 7d ago