Risk-tranching is a way to split a single pool of assets or cash flows into distinct layers (tranches), each with a clearly defined risk–reward profile. This allows different users to choose exposure that matches their risk appetite, rather than everyone earning the same blended APY with hidden risks. By design, risk-tranching makes risk explicit and intentional.
Strata implements this fully on-chain by transforming a one-size-fits-all yield into two tokenized, risk-based tranches: senior and junior. The senior tranche is a yield-bearing token with priority on cash flows, while the junior tranche is a risk-bearing token that absorbs losses first in exchange for higher potential returns.