In just a few years, decentralized finance (DeFi) has created a self-sustaining and viable ecosystem that is now draining billions of dollars and as many eyes from traditional finance. It is difficult, if not impossible, to ignore the bubbling and fascinating planet DeFi.

It is literally before our eyes that it is inventing itself and forging, as newcomers point the tip of their portfolio, its own framework and inventing its own rules. According to the aggregator DefiLlama, there are 222 billion dollars in TVL (Total Locked Value), which means the sum of funds locked up in the DeFi ecosystem, which gives an idea of the scale of the phenomenon.

It is in this rising context that the Waterfall DeFi project comes to bring its stone to the building by proposing a concept which could well upset the DeFi landscape.

Slicing the risks

Those who are interested in traditional finance are surely already familiar with the concept of “tranche”, which is found in particular in the field of structured finance. In the financial sense of the term, each bond represents a different tranche of the transaction’s risk. Thus, tranches are different “classes” of bonds, each identified by a letter in traditional finance (class A, class B, class C securities).

The principle to remember is that with this concept of tranching, a user accepts to obtain a low or even sometimes zero global return but in return, his nominal capital remains guaranteed. This is made possible because the risks are not the same according to the investor’s profile, which logically translates into different potential gains, depending on the tranche chosen.


At the moment, when we want to generate returns with DeFi, we do what we call staking. Specifically, one “stakes” cryptocurrency within a network that works with a proof of stake in a smart contract or in a native wallet of the chosen network. This system generates rewards that are calculated according to the amount of money committed (staked). Users will then be rewarded in the form of an annual percentage yield (APY) that is calculated against the fees generated by the platform.

The concept of slices

Tranches can be thought of as different categories of risk and reward within a capital pool. For example, there are “senior” tranches in the ecosystem offered by Waterfall DeFi; these offer a fixed return and give priority to the collection of interest. There are also “junior” tranches that offer a variable return and “mezzanine” tranches in between.
By dividing the pool of capital invested in DeFi Yield Farming into tranches, users can choose the balance they want between risk and reward according to their profile. Thanks to this innovative system, they can also insure their capital against the volatility of returns.

A sequential (cascading) payment

Earnings are paid sequentially in the WaterFall DeFi ecosystem, with senior tranche users being paid before junior tranche users (see drawing above). This form of “cascading” payment applies equally to cases where the underlying assets are generating profits and where they are making a loss.

In the latter case, the users of the senior tranche first receive their capital and the fixed return, and then the users of the junior tranche receive the remaining capital when they suffer a capital loss. In the former case, the senior tranche users receive only their fixed return, with the additional returns going to the junior tranche users.

For those who want to get into the details of this cascade payment system, see this detailed page.

Three benefits of Waterfall DeFi’s tranche system

Diversification: DeFi users can invest in a portfolio of multiple DeFi assets instead of just one, allowing them to benefit from risk and reward diversification.

Leveraged Return: The lower tiers allow DeFi users with a certain risk tolerance to earn leveraged return on their investment strategies by providing liquidity to DEXs for example.

Higher fixed interest rate products: By using the tranche system within a pool of riskier DeFi assets, the platform offers a safer fixed yield product that provides a higher return than traditional products. The senior tranches will be particularly attractive to risk-averse users.

Huge possibilities for investors

The system offered by Waterfall DeFi has many advantages. Institutional investors, for example, who were previously too risk averse to use a particular yield pool, can now get downside protection for a lower yield. On the other side of the spectrum, investors looking for high returns will be able to take advantage of leveraged returns (without the actual cost of a highly leveraged transaction).