Liquidity Flow

Unused liquidity in junior tranches can be used by borrowers in more senior tranches. This behavior is called cascading supply, and it keeps capital productive when demand is uneven across risk levels.

This has two practical effects:

• A junior lender’s capital can support borrowers at the same tranche or at more senior tranches.

• A borrower in a senior tranche can access more liquidity than that tranche’s direct deposits because senior borrowing can draw from junior supply.

Cascading supply works from junior to senior, not the other way around.

What This Looks Like in Practice

Because liquidity can move through the tranche stack:

• A tranche can show more borrowed than directly supplied.

• Lenders at junior tranches can supply to and earn interest from multiple tranches.

Why Lotus does this

Cascading supply helps Lotus avoid the common tradeoff in lending markets:

• Splitting risk levels into separate pools fragments liquidity and disconnects rates.

• Forcing one risk setting for everyone means some participants won't participate.

By letting tranches share liquidity, Lotus keeps a single market deep while still letting each participant choose their risk level.

Cascading supply lets Lotus keep a single market deep while still letting each participant choose their risk level.

For exact definitions and worked examples, see Protocol math (advanced).

Next: Read Utilization and rates to see how demand drives borrow pricing.