Users deposit collateral and receive "Tranche" tokens. How does this work?
Diagram of a user depositing into an AMPL bond in return for tranche tokens
In order to tranche their collateral, a user can deposit it into a TrancheBond. The bond goes through its configured tranche ratios, minting tranche tokens proportional to the ratio and the amount of collateral deposited. For example:
- Tranche ratios: 20/30/50
- Collateral: AMPL
- User deposits 1000 AMPL
- User receives (1000 * 0.2) = 200 AMPL-A Tranche
- User receives (1000 * 0.3) = 300 AMPL-B Tranche
- User receives (1000 * 0.5) = 500 AMPL-Z Tranche
After this interaction, the user's position value is still equivalent to holding their original AMPL. However, they now have separate assets which represent different parts of AMPL's risk:
- The A-tranche represents the safest 20% of AMPL's value
- The B-tranche represents the middle 30% of AMPL's value
- The Z-tranche represents the top 50% of AMPL's value and all of its future upside
The user can now sell some of these tranches to change their risk profile.