I have been researching DROP and TIN for the past few days and I think that I found how do DROP and TIN tokens work. If I made wrong assumptions please feel free to tell me so (I am still learning ).
When you invest in tinlake pool you get TIN and DROP tokens, in the ratio that you specified.
Let’s assume that you invested 10k USD and that the ratio is 8k USD in DROP and 2k in TIN, and let’s assume that senior tranche is guaranteed a fixed return of 4%, and the pool we invested is targeting 7,5% average annual interest rate.
We have 3 scenarios:
- Pool reached 7.5% interest rate, and there is no default rate - Profit from our initial investment is 750 USD. Drop holder (senior tranche) is the first to receive payment, in the amount of 4% of 8kUSD which equals 320. The remainder of the profit, 430 USD goes to TIN holder, which in turn is a profit of 21,5%
- Pool reached 7,5% interest rate but there is 3% default rate - Out of our initial 10kUSD, 3% of the assets defaulted, which means that the value of our portfolio is 3% less, and our profit is 427,5 USD. Again the senior tranche is the first to receive its fixed return of 4% which is 320 USD. This leaves us with residual interest of 107.5 USD. But we had 3% default rate, which is 300 loss, and TIN holder (junior tranche) is the one taking the loss and their value drops to 1700USD. They still receive residual intrest which brings them to the value of 1807,5 USD, which is a loss of 9,625%.
- Potential defaults are equal as volume of junior tranche - This is the lowest point where the senior tranche is protected. In this case senior tranche still gets fixed 4% of interest and all losses are transfered to TIN holders.