Subordination Floor
CAPITAL STRUCTURE
The constraint
Vessel enforces one ratio at all times:
B / (H + B) >= theta_min = 20%
H is Hull NAV, B is Ballast NAV. The ratio is the share of the book that sits in the junior tranche. The litepaper calls theta_min the subordination floor. It is not checked at epoch boundaries only; it is a condition every state-changing action must leave intact.
The floor constrains two things and nothing else: how much new Hull can be issued, and how much Ballast can be withdrawn. Losses can push the ratio below 20 percent. The floor does not prevent that. It prevents users from taking the book there voluntarily.
What it constrains
New Hull issuance
Hull is issued in fixed-maturity series (4-week at launch). A new series, or additional subscriptions to one, increases H. The issuance is capped where the floor would break. Rearranged, the constraint says H <= 4 × B: for every unit of Ballast in the book, at most four units of Hull can sit above it.
This means Ballast depth sets the Hull supply. Hull demand alone cannot expand the senior tranche. If no new Ballast enters, Hull issuance stops.
Ballast withdrawals
Ballast withdrawals pass through a 48-hour cooldown. The cooldown is necessary, not sufficient. When the cooldown ends, the withdrawal is still subject to the floor: it executes only to the extent B / (H + B) stays at or above 20 percent afterwards.
A Ballast depositor whose cooldown has elapsed can therefore still be unable to exit, in whole or in part, while the floor is binding. The exit path opens as Hull matures and H falls, or as new Ballast enters. Whether a blocked withdrawal executes partially or reverts in full is not stated in the litepaper: partial fill versus full revert on a floor-constrained withdrawal UNVERIFIED — PENDING GATE-0.
Two examples of the floor binding
Both examples are illustrative, not a forecast. Figures are chosen for arithmetic, not taken from any deployment.
The book holds H = 800 and B = 200. The ratio is 200 / 1000 = 20%, exactly at the floor. A new Hull subscription of any size would push the ratio below 20 percent, so no Hull can be issued. If 50 of Ballast is then deposited, B = 250, and the maximum Hull becomes 4 × 250 = 1000: 200 of new Hull capacity opens.
The book holds H = 800 and B = 300. A Ballast holder completes the 48-hour cooldown and requests 150. The minimum Ballast for H = 800 is 800 / 4 = 200, so only 100 can leave. The remaining 50 waits for Hull maturity or new Ballast deposits to change the ratio.
Why a floor is not a promise
Twenty percent is the minimum cushion the protocol maintains by refusing actions. It is not a loss cap on Hull.
The shortfall ordering is: Ballast NAV absorbs losses first, then the Reserve, and only then is Hull principal impaired. The floor guarantees that, at the moment losses begin, at least 20 percent of the book is Ballast standing in front of Hull. It does not guarantee that losses stop at 20 percent. A loss larger than Ballast plus Reserve reaches Hull. That is a credit event, and the floor does not prevent it.
Two other things the floor does not do:
- It does not restore itself. If losses push the ratio below 20 percent, the protocol does not liquidate Hull or force Ballast deposits. The floor only blocks new Hull issuance and Ballast withdrawals until the ratio recovers.
- It does not size Ballast to risk. Twenty percent is a fixed parameter, not a function of funding volatility, leverage, or venue state. Whether that parameter is governance-adjustable in the deployed contracts is not stated in the litepaper UNVERIFIED — PENDING GATE-0.
Hull's rate is a contract parameter, not a performance figure. The floor is a parameter of the same kind. Neither is a forecast of outcomes.
Vessel is experimental software in testnet. The deployed contracts hedge against SimVenue SIMVENUE — SIMULATED, a simulated venue with an owner-settable funding rate. Contract source is not yet published in the public repository, so the enforcement described here is the litepaper design, not independently reviewed code.
Related
- Accrual and shortfall waterfall: the order in which yield is distributed and losses are absorbed.
- Ballast: the junior tranche, its cooldown, and what it earns for standing first in line.
- The litepaper is the source for the constraint and its parameters.