On-Chain Cash Flow Waterfall and Tokenized Tranches
How senior, mezzanine, and junior tranche waterfalls work when mortgage and receivables cash flows are encoded in smart contracts.
What a cash-flow waterfall is
In structured finance, a waterfall defines the order in which collections are paid to different tranche holders — typically senior first, then mezzanine, then junior — and how losses are absorbed in reverse.
On-chain, the same payment priority can be encoded in the distribution logic so each settlement follows the agreed rules transparently.
Tokenized tranches
Tokenized tranches map each risk/return slice to a distinct permissioned token (or partition) backed by the same underlying pool.
Senior pool tokens usually prioritise yield stability; junior tokens take subordinated risk for higher potential yield. PazaLabs mortgage pools use senior / mezzanine / junior structures with waterfall distribution and reverse sequential losses.
Why encode it on-chain
Automated distribution reduces reconciliation lag and makes the payment order observable to verified holders.
When paired with ERC-3643 transfer rules, only eligible investors can hold each tranche token while cash flows continue to follow the waterfall schedule.
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