Xena Tranche Pools (upcoming)

Disclaimer: Currently, Xena is operating with a singular XLP pool at its core. However, we have grand visions for the future growth and diversification of our platform. As the popularity of Xena platform increases, we have devised a strategic plan to increase our offerings by segmenting the XLP into three distinct tranches, details of which are outlined below.

This expansion is driven by our commitment to offering our users a versatile platform where they can choose the level of risk they are comfortable with, drawing from the proven strategies of the RMLP system traditionally utilized in traditional markets. By diversifying the risk profiles associated with each tranche, we aim to cater to a wider spectrum of investor preferences, thereby fostering a more inclusive and dynamic trading environment.

What is a Tranche?

A tranche, a concept prevalent in conventional finance, denotes a segment of a broader asset portfolio. This process, known as tranching, separates a collection of assets or securities into different segments based on their associated risk levels. This segmentation allows these assets to be tailored to a diverse range of investors with varying risk appetites.

Let's use a mutual fund as an example. A mutual fund typically pools together a variety of assets, including stocks, bonds, and other securities. Now, if this fund is divided into tranches, each tranche would represent a different risk level and potential return.

At Xena Finance, each tranche represents a specific pool of assets from those available on the platform, such as BTC, ETH, and XEN. By providing different risk profiles, each tranche allows XLPs to choose the level of risk they are willing to undertake.

Xena Finance offers 3 tranches for XLPs:

All Tranches earn fees from traders on the platform, shown as Fee APR on each Tranche page. These fees are automatically compounded into each XLP token, leading to an increase in the price of each XLP. Consequently, the total amount of XLP tokens for a Tranche will not increase, but their value will.

Each tranche is directionally exposed to its underlying assets and also acts as the counterparty to traders on the platform. Tranches share directional risk to the underlying liquidity assets on the platform equally. On the other hand, counterparty risk is allocated according to the following Risk Factors.

Tranche Risk Factors (Counterparty Risk)

In cases of unexpected shortfalls due to adverse market conditions or other incidents, the Hades Tranche bears the highest risk. To balance the increased risk compared to the Zeus and Poseidon tranches, the Hades Tranche receives the highest allocation of platform revenue and thus has the highest APR.

Conversely, the Zeus Tranche bears the lowest risk but also earns the smallest portion of platform profits.

These ‘Risk Factors’ indicate the amount of PnL exposure of a tranche and the proportion of distributed fees collected.

Trade Example

Scenario 1: All tranches have sufficient assets

  1. Warrior Kevin opens a position of 100 ETH.

  2. Kevin's position fees are distributed as follows:

    • 20% to Zeus Tranche

    • 35% to Poseidon Tranche

    • 45% to Hades Tranche

  3. To ensure liquidity is available to settle Kevin's trade, Xena Finance reserves a total of 100 ETH in the pools as follows:

    • Zeus Pool: 100 x 20% = 20 ETH

    • Poseidon Pool: 100 x 35% = 35 ETH

    • Hades Pool: 100 x 45% = 45 ETH

  4. Kevin closes his position 20% in profit and books 20 ETH

During certain market situations, one of the tranches might not have enough assets to cover the profits from a trade. When this happens, the deficit is made up of other tranches that have enough assets. As a result, the Reserve Ratio might not match the token's Risk Factor. The Risk Factor sets the ideal Reserve Ratio for each tranche. If liquidity is sufficient, the Reserve Ratio equals the Risk Factor. This Reserve Ratio is used to calculate the Return Fee and the Return PnL for a tranche.

Scenario 2: A tranche lacks sufficient assets

  1. Consider that Warrior Kevin initiates a position of 1000 ETH.

  2. The fees from Kevin's position are divided as follows:

    • 2% to the Zeus Tranche

    • 38% to the Poseidon Tranche

    • 60% to the Hades Tranche

  3. Ideally, to ensure liquidity is available to close Kevin's trade, XENA Finance would earmark a total of 1000 ETH from the pools:

    • Zeus Tranche: 1000 ETH x 2% = 20 ETH

    • Poseidon Tranche: 1000 ETH x 38% = 380 ETH

    • Hades Tranche: 1000 ETH x 60% = 600 ETH

  4. However, the Hades Tranche has only 500 ETH at the time. XENA Finance compensates for this shortfall from the Poseidon Tranche, which results in a new reserve ratio differing from the original token risk factor:

    • Zeus Tranche: 20 ETH (2%)

    • Poseidon Tranche: 480 ETH (48%, increased from 38%)

    • Hades Tranche: 500 ETH (50%, decreased from 60%)

  5. Kevin concludes his position with a 10% profit, securing 100 ETH as demonstrated in the given example."

The allocation of fee income to each tranche corresponds to their risk factors. This design ensures that tranches with higher risk are associated with a higher yield, thereby encouraging LLPs who are ready to shoulder more risk for greater returns.

Last updated