> ## Documentation Index
> Fetch the complete documentation index at: https://docs.berafarm.com/llms.txt
> Use this file to discover all available pages before exploring further.

# The Tranche Waterfall

> How Berafarm continuously settles gains and losses between Stable and Alpha tranches, including performance fees and path dependency.

This page defines exactly how gains and losses are divided between the Stable and Alpha tranches. It is the rulebook behind the two share prices, every rule below is enforced by the vault contracts and verifiable on-chain.

### Definitions

* **S** = Stable tranche capital (`seniorVaultInvestments`)
* **J** = Alpha tranche capital (`juniorVaultInvestments`)
* **V** = S + J (total vault capital)
* **P** = the vault's profit or loss over a settlement interval
* **r** = the Stable target rate, set on-chain as a per-block rate (`seniorRatePerBlock`) and compounded over the elapsed blocks of the interval. Any APY figure shown in the app is derived from this per-block rate and Berachain block times.

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#### When the waterfall runs: continuous settlement

The waterfall is **not** settled weekly or per epoch. It is marked **continuously, on every vault interaction**: every deposit, every withdrawal, and every keeper-triggered update runs the settlement, applying the waterfall to the change in strategy balance since the previous settlement.

Two practical consequences:

* **Withdrawals are always settled to the moment of exit.** A withdrawal first runs settlement, then redeems at the resulting share price, you can never exit against a stale NAV.
* **A "week" of performance is actually many small settlement intervals**, and as the next section explains, that matters.

#### The yield waterfall (profitable interval)

When an interval is profitable, distribution follows strict priority:

1. **Stable is paid first**, up to its accrued target for the interval: `Stable receives min(P, S × r)`
2. **Alpha receives the entire residual**: `Alpha receives max(0, P − S × r)` , subject to Alpha's performance fee (below)

Because the residual lands on Alpha's smaller capital base, Alpha's gross return is a levered function of vault performance:

```text theme={null}
Alpha gross return = (V × R − S × r) / J
```

**Performance fee:** when Alpha receives residual profit, a **20% performance fee** applies to Alpha's gain above its high-water mark. Stable pays **no performance fee**. So Alpha's net on new highs is 80% of the residual, and after a drawdown, Alpha pays no performance fee until its value recovers above the prior high-water mark.

#### The Stable target is a cap, not a guarantee

This is the single most important thing for Stable depositors to understand.

* **Stable only accrues yield out of profit.** The target claim is added only when an interval is profitable. In a flat or losing interval, Stable earns **zero,** time alone does not accrue yield; profit does.
* **Shortfalls are forfeited, not carried forward.** If a weak interval's profit doesn't cover Stable's full target, Stable receives all of that profit and the clock resets. The missed amount is never owed later,  there is no deficit accumulator in the contract.
* **Consequence:** Stable's realized yield can drift below the nominal target rate across weak, flat, or losing stretches. The target defines Stable's *first-priority maximum* per interval, not a promised return.

#### The loss waterfall (losing interval)

Losses flow in reverse priority:

1. **Alpha absorbs all losses first**, up to its entire capital: Alpha bears `min(L, J)`
2. **Stable is only touched once Alpha is exhausted**: Stable bears `max(0, L − J)`

The key protection metric for Stable is the **coverage ratio**:

```text theme={null}
Coverage = J / V
```

If Alpha is 20% of the vault, Stable principal is protected against any drawdown up to 20% between settlements.

**No clawback:** if a severe drawdown exhausts Alpha and reaches Stable principal, the next profitable interval resumes the normal split immediately. Alpha does not have to restore Stable's loss before earning again, Stable's protection is forward-looking seniority, not a repayment claim.

#### Path dependency: volatility favors Stable

Because settlement is continuous and the target is non-cumulative, **the order of returns matters, not just the total**.

Consider a vault that gains +2% in one interval and loses −2% in the next, net zero. The tranches do *not* end flat: on the up-interval, Stable books its target claim and keeps it; on the down-interval, Alpha absorbs the entire loss. Volatility around a flat path systematically transfers value from Alpha to Stable.

For depositors this means: Alpha's realized return depends not only on the vault's total performance but on *how* that performance arrived. Choppy paths cost Alpha more than smooth ones and symmetrically, Stable's yield is more resilient in choppy conditions than the raw vault numbers suggest.

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