Deals are often structured in a two-tiered structure. (also called an A/B tranche or senior/junior tranche structure). In this tiered investment structure, investors do not share all risks and returns pro-rata. The returns are distributed via a waterfall structure. This means that losses/defaults are allocated from bottom to top, which means that underwriters (who invest in the junior tranche) take losses first. The liquidity providers are prioritized when receiving their investment back and have a fixed return. The remaining proceeds all flow to the underwriters.
Let's explain the token flow by example. Let's say we have a deal with a principal of 1M USDC and a leverage ratio of 4x (200k USDC investment in the junior tranche by the underwriter and 800k USDC investment in the senior tranche by the liquidity providers). Upon maturity, the interests will accrue to a total of 150k USDC (if we assume an interest rate of 15%)*. Let's investigate the payout of the interest to the liquidity providers, underwriters, and asset manager step-by-step:
The performance fee (10%) is taken. This fee is configurable and will go to the asset manager governing the market (e.g. Credix).
The liquidity providers can expect a yield of 10.5%, see the formula below. In other words, the liquidity providers can expect the interest rate to be discounted by the Credix fee and the underwriter fee. The investors are the first to be paid out and thus bear the least amount of risk.
If no defaults occur, the underwriters can expect a yield of 25.5%, see the formula below. In other words, the underwriters can expect the interest rate plus the underwriting fee, weighted by the leverage in the deal.
*Interests are paid on a monthly basis, but this has no effect on the example.