Payout waterfall
The payout waterfall decides who absorbs loss and in what order. Without a waterfall, insurance language can accidentally promise that suppliers are always made whole, borrowers keep residual equity, protocol reserves remain intact, and future equity absorbs everything. Those promises cannot all be true at once.
This page is conceptual methodology. Lyrasing has no implemented accounting code, payout formula, reserve contract, active insurance pool, deployed market, or supplier claim process in this repository.
Waterfall components
A future waterfall should separate at least these components:
| Component | Role in loss ordering |
|---|---|
| Affected borrower collateral | The first asset-side source of value, including any impaired LRT balance, share, wrapper, or claim object. |
| Liquidation proceeds | Value recovered through market sale, redemption, claim settlement, or other collateral realization. |
| Borrower residual equity | Borrower value that remains after debt and liquidation costs are covered, if any. |
| Protocol reserves | Non-insurance reserves or treasury-like buffers, if they exist and are contractually assigned. |
| Insurance capacity | Capacity allocated to the covered slash surface before the event. |
| External backstop | Separate backstop capital, if enforceable and seniority is defined. |
| Supplier shortfall | Residual loss after collateral realization and assigned buffers. |
| Protocol equity | Future junior capital or equity-like layer, if one exists and is allowed to absorb loss. |
| Recovery or clawback | Later redistribution, burn correction, claim finalization, legal recovery, or reconciliation after payout. |
The order must be defined before the event. Changing priority after a slash would make risk pricing impossible.
Suggested ordering language
The conservative review order is:
| Stage | Question |
|---|---|
| 1. Confirm covered event | Is the loss tied to a covered AVS, operator, vault, strategy, withdrawal, or LRT collateral surface? |
| 2. Mark collateral impairment | How did the event affect the token unit, share rate, redemption claim, backing value, or account health? |
| 3. Apply liquidation and redemption proceeds | What value can be realized from affected collateral without assuming impossible liquidity? |
| 4. Resolve borrower equity | Is there any residual borrower equity after debt, liquidation costs, and impaired collateral accounting? |
| 5. Use assigned reserves | Are non-insurance reserves available and contractually senior to the insurance pool? |
| 6. Use allocated insurance capacity | Is capacity mapped to this surface and not already reserved for another claim? |
| 7. Recognize supplier shortfall | What residual loss remains after all assigned layers are exhausted? |
| 8. Apply junior protocol equity or backstop | Does a junior layer exist, and is it obligated to absorb the remaining loss? |
| 9. Reconcile delayed recovery | If redistribution, Burner settlement, or claim recovery arrives later, how are accounts adjusted? |
This is not a formula. It is the minimum ordering language a future accounting implementation would need.
Borrower collateral and liquidation proceeds
Insurance should not replace ordinary collateral realization. If a borrower account can be liquidated and the proceeds are available, those proceeds belong in the waterfall before reserve use. The hard part is timing: an LRT may have a spot price, a primary redemption queue, a wrapped exchange-rate unit, and a pending slash settlement at the same time.
The LRT collateral framework should determine which value is usable: market sale, primary redemption, claim object, share-rate accounting, or a conservative impaired value. If the realization route is delayed, insurance may need to reserve capacity without final settlement.
Supplier shortfall and protocol equity
Supplier shortfall is the part of the loss that remains after collateral, liquidation proceeds, assigned reserves, and insurance capacity are exhausted. It should be measured plainly. Hiding shortfall behind “coverage” language makes future LTV and cap policy worse.
Protocol equity, if it ever exists, should be junior by explicit rule, not by assumption. A future equity layer could absorb residual shortfall only if the contract, treasury policy, or legal backstop says so before the event.
Delayed settlement and reconciliation
Slashing flows can settle in steps. EigenLayer documents burn and redistribution paths, including clearing flows after slashed shares are marked. Symbiotic documents Burner routing and VetoSlasher request/veto/execute stages. Those steps mean the waterfall may need a pending state:
| Pending state | Reconciliation need |
|---|---|
| Slash requested but not executed. | Reserve capacity, compress related caps, and wait for final status. |
| Slash executed but outflow not cleared. | Estimate impairment conservatively and reconcile once cleared. |
| Redistribution arrives after payout. | Apply recovery or clawback rule if defined in advance. |
| Pending withdrawal was later claimable. | Reconcile claim value against the original impairment. |
| Burner route changes recovered value. | Update the incident record and capacity balance. |
Delayed settlement should not create double recovery. If suppliers are paid from insurance and later recovery arrives, the policy must decide whether that recovery replenishes insurance, repays suppliers further, restores borrower equity, or follows another predefined rule.
Source notes
EigenLayer slashing and redistribution docs support the burn, redistribution, non-atomic clearing, Unique Stake, and safety-delay concepts used in this waterfall. Symbiotic docs support vault epoch, VetoSlasher stages, and Burner routing. This page does not implement accounting code or assign legal priority.