Markets and tranches

What is a market?

A market is defined by a shared set of components:

• Loan token: the asset lenders supply and borrowers borrow.

• Interest rate model (IRM): the logic that determines borrow rates.

• Liquidation module: the logic that prices and executes liquidations.

A market also has a risk-ordered set of tranches. Tranches are the units that express risk choices.

What is a tranche?

A tranche is one risk configuration inside a market. Tranches are ordered by risk:

• Senior tranches (lower risk)

• Junior tranches (higher risk)

Each tranche can have its own:

• Collateral token

• Oracle (used for loan health checks)

• LLTV (liquidation loan-to-value threshold)

The LLTV determines when a position becomes eligible for liquidation. If a position has a loan-to-value ratio (LTV) greater than the LLTV, it can be liquidated.

In general:

• A higher LLTV gives more borrowing power, but less safety margin for lenders.

• A lower LLTV gives less borrowing power, but more safety margin for lenders.

What is a risk axis?

A risk axis describes the reason for the order of tranches in a market. The most common risk axis is LLTV. These markets are called LLTV Ordered Markets. The Lotus Protocol supports a variety of risk axes including, but not limited to:

• LLTV Ordered Markets

• Collateral Quality Ordered Markets

• Oracle Sensitivity Ordered Markets

Currently, all markets on Lotus are LLTV Ordered.

What changes across different LLTV Ordered tranches?

If you borrow, your tranche affects:

• how much you can borrow for the same collateral

• how close you are to liquidation at a given price move

• the borrow rate you pay (higher risk tranches have higher borrow rates)

If you lend, your tranche affects:

• the risk you underwrite

• your expected return profile (subject to demand and utilization)

Next: Read Liquidity flow to understand how Lotus keeps liquidity connected across tranches.