Protection model

The waterfall

The vault tracks two value buckets:

• Senior: the asset value claimable by lcSEN holders.
• Junior: the asset value claimable by lcJUN holders.

On every interaction, the protocol re-checks the underlying vault's total value and applies whatever has changed since the last check:

1. Gain → split between senior and junior pro-rata to current size. Both share prices rise together.
2. Loss → applied to junior first, capped at the depth of junior. Any residual is then absorbed by senior.

In practice: a 5% drop while junior is healthy doesn't move the senior share price at all, since junior absorbs the whole thing. A 30% drop after junior is wiped marks senior down by the residual past junior's depth.

If an underlying loss is later reversed, topped up, or offset by new yield, the positive delta is treated as a new gain and split pro-rata by the then-current senior/junior split.

How the 20% protection target is enforced

The 20% protection target is a target level of senior cover, not a hard ceiling on payout the way a per-position cap would be. It's enforced on the deposit side as a cap on senior leverage: senior can be at most 4× junior.

A new senior deposit is rejected if it would push senior past 4× junior. As long as the system stays under that ratio at deposit time, junior is sized to absorb at least 20% of senior, so the waterfall keeps senior whole through the first ~20% drawdown of the underlying.

Premium accrual is part of the waterfall

The premium also flows continuously between the two sides: a steady drip of value from senior to junior, scaled by the current premium rate. The premium is paused while either side is empty.