System Design

How does the Button Zero system work?

ButtonZero is a composition of the Tranche protocol and an automated market maker (AMM). The ButtonZero "router" smart-contract takes a user's collateral and carries out the transactions necessary to create a loan--it will mint tranches, swap them in the AMM, and return the loan and collateral claim back to the user.

Prerequisite knowledge from Tranche

A- and B-Tranche tokens represent senior future claims on $1 worth of the collateral token.

Due to this, A- and B-Tranche tokens should generally trade for $1 or less on an exchange. If less, the difference accounts for some risk that the value of the collateral drops so far as to dig into the redeemable value of the tranche tokens. B-Tranche tokens lose value before A-Tranche tokens, and thus generally are expected to trade at a steeper discount.

Z-Tranche tokens represent junior future claims on the collateral token. They receive all of the upside exposure.

How are loans created?

Borrowers can initiate a loan by tranching their collateral, and then selling their safe tranches to lenders for cash. The result of this operation is as follows:

  • Borrowers hold Z-Tranche (equity) tokens. These represent all of the price upside of their original collateral.

  • Borrowers hold cash (or stablecoins) in return for the safe part of their collateral.

  • Lenders hold A- and B-Tranche tokens. These are safe and likely to be worth $1 each.

  • Lenders gave away some cash (or stablecoins) for a likely return on the safe tranche tokens

This emulates a traditional loan where lenders hold senior debt, and borrowers hold junior debt.

Learn more about the lender flow here


Learn more about the borrower flow here


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