LPs
LP Guide: Understanding & Evaluating Royco Tranches
This guide helps liquidity providers understand what they're underwriting and how to evaluate markets before depositing.
What You're Underwriting
As Senior
You're earning yield with built-in protection. Your position is straightforward:
Junior absorbs losses first — Up to the coverage %, you're fully protected
If losses exceed coverage — You can exit immediately (emergency exit)
What you're underwriting: That the Junior buffer exists and will absorb losses before they reach you. Even in the worst case (coverage depleted), you can withdraw — you're never trapped.
Liquidity: Fully liquid under normal conditions. During Protection Mode (e.g., 7 days), withdrawals are temporarily paused — but secondary market sales remain available if you need immediate liquidity.
As Junior
You're earning higher yield in exchange for absorbing losses from the underlying on behalf of Seniors.
You absorb all loss types equally:
Market drawdowns
Smart contract exploits
Oracle failures
Liquidation shortfalls
The protocol doesn't distinguish between causes. If the underlying loses value, you absorb it first.
Your max loss: Capped at the coverage % (your proportional share of the buffer).
How Juniors Should Evaluate a Market
As Junior, you earn higher yield because you're providing first-loss protection for Senior capital. But since you're absorbing losses on behalf of a larger capital base, losses hit you faster than they hit the underlying.
1. Understand the loss profile
If Senior capital is 5x Junior capital, you're absorbing losses for 5x your deposit:
A 2% loss to the underlying = 10% loss to Junior
A 10% loss to the underlying = 50% loss to Junior
A 20% loss to the underlying = 100% loss to Junior (wiped out)
The ratio of Senior to Junior capital determines how fast losses affect you.
2. What's your expected APY?
The key question: After 6 or 12 months, what do I expect to earn given realistic loss assumptions?
Consider:
How often does this strategy draw down?
What % of drawdowns persist past Protection Mode?
What's the average loss when they do?
Example:
Setup: Senior is 5x Junior (you absorb losses at 5x rate)
No loss
0%
0%
~48 weeks/year
Small drawdown
3%
15%
~3x/year
Medium drawdown
6%
30%
~1x/year
If Junior APY is 40% and expected annual loss is 12%, net expected return = 28%
3. Use the calculator
Each tranche page has a scenario simulator where you can model:
Your expected return at 3mo, 6mo, 12mo
Impact of different loss scenarios
Net APY after accounting for potential drawdowns
We're also happy to walk through analysis for specific markets.
Historical data is provided for each market to support this analysis.
How Seniors Should Evaluate a Market
Your protection is only as good as the Junior buffer. Key questions:
1. Is coverage sufficient for this strategy's risk profile?
Compare the coverage % to the underlying's historical max drawdown. If max historical drawdown is 15% and coverage is 20%, you have headroom. If coverage is 10%, you're exposed to tail risk.
2. What's the worst-case illiquidity period?
Protection Mode duration (e.g., 7 days) is your maximum illiquidity window. Can you tolerate this?
3. Has coverage ever been breached?
Review the market's loss history:
How many loss events?
Did any exceed coverage (triggering emergency exit)?
How quickly did Junior TVL recover after losses?
4. What's the underlying strategy?
Even with Junior protection, understand what you're exposed to. A 20% coverage buffer means nothing if the underlying can go to zero overnight.
Risk Factors
Smart Contract Risk
Royco Dawn is built with security as a priority.
Protections:
Audit: Hexens
Formal Verification: Certora
Bug Bounty: Immunefi
[Audit reports linked when available]
Oracle Risk
NAV calculations depend on price feeds. Each market documents:
Oracle provider(s)
Update frequency
Fallback mechanisms
Review the oracle setup before depositing — oracle failures can cause losses that Junior absorbs.
Liquidity Risk
Senior: Withdrawals pause during Protection Mode. If you need immediate liquidity, secondary market sales are available.
Junior: Fully liquid until coverage hits the minimum requirement. Deposits pause during Protection Mode (to prevent dilution).
Underlying Strategy Risk
Royco Dawn is only as safe as its underlying yield sources. Before depositing, evaluate:
What is the underlying strategy?
How long has it operated?
What's its historical drawdown profile?
What are the specific risks (smart contract, collateral, liquidation, etc.)?
Governance & Parameters
Who Controls the Protocol
[To be specified — multisig, DAO, admin keys]
What Can Change
Coverage Ratio
Yes
Royco
TBD
Protection Mode Duration
TBD
TBD
TBD
Fees
TBD
TBD
TBD
[Timelock and notice period details to be added]
New Markets
Royco creates new markets. Each market specifies:
Underlying yield source
Coverage ratio
Protection Mode duration
Oracle setup
Fees
Vault Performance Fee
10% of yield
Tranche Performance Fee
15% of yield
Fees are on yield generated, not on principal.
Vaults
For LPs who don't want to pick individual markets, Royco offers managed Vaults:
Senior Vault — Allocates across whitelisted Senior tranches
Junior Vault — Allocates across whitelisted Junior tranches
Vaults rebalance based on each market's coverage, yield, and risk parameters.
Security
Audit
Hexens
Complete
Audit (Competition)
Cantina
Complete
Bug Bounty
Immunefi
Active/Pending
[Links to audit reports when available]
Team & Fundraising
Series A (2025) - Lead: Electric Capital
Additional investors:
Coinbase Ventures
Hashed
Amber Group
DCF God
Checklist Before Depositing
Senior
[ ] Coverage % is sufficient for my risk tolerance
[ ] I can handle temporary illiquidity (Protection Mode duration)
[ ] I've reviewed the underlying strategy
Junior
[ ] I understand I absorb ALL loss types (not just market risk)
[ ] I've reviewed historical drawdown data for this market
[ ] Expected APY exceeds my expected loss estimate
[ ] I've reviewed the underlying strategy's specific risks
Questions?
Reach out to us in Telegram: @james_waymont or @iamJBiamJB
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