# Glossary A list of terms commonly used in Covenant's documentation and their corresponding descriptions.
TermDescription
Base AssetThe underlying collateral (e.g., aHYPER, ETH, WBTC, stETH, sUSDe) deposited into a Covenant Market.
Covenant Market

A self-contained market within the Covenant Protocol that splits a deposited Base Asset into two fungible ERC‑20 tranches: a senior Yield Coin and a junior Leverage Coin.

Each Covenant Market is defined by:

  1. a specific Base Asset;
  2. a price oracle (denominating that asset in a quote unit);
  3. a debt duration parameter (used in the Perpetual Debt mechanism); and
  4. a min / max market price (concentrating liquidity in the Latent Swap AMM).

All Yield Coins and Leverage Coins in a given Covenant Market are fully collateralized and redeemable back to the Base Asset at any time.

Prices and the funding rate in each Covenant Market are continuously set by the Latent Swap AMM, which couples Yield Coin price, the implied funding rate, and market LTV so that funding and leverage remain self-balancing rather than fixed by governance or managed via forced liquidations.

Covenant Protocol

The set of smart contracts and mechanisms that power the Covenant tranching protocol. The Covenant Protocol is responsible for:

  • Collateral management: accepting deposits of Base Assets into Covenant Markets and minting fully collateralized Yield Coins and Leverage Coins.
  • Funding rate setting (via Perpetual Debt): the Yield Coin's market price continuously determines its implied funding rate and notional accrual.
  • Market clearing (Latent Swap AMM): a concave swap curve that links Yield Coin price, market LTV, and leverage, so that funding and risk are self-balancing without governance-set rates or per-position liquidations.
  • Redemptions: Yield Coins and Leverage Coins are always redeemable back to the underlying Base Asset at market rates.
  • Optional pooling ($sUSDz): the Covenant sUSDz Yield Fund diversifies senior exposure across multiple USD-quoted Covenant Markets.
Funding rateThe rate at which the Leverage Coin pays the Yield Coin in a Covenant Market. Implied by the Yield Coin's market price P via the Perpetual Debt formula r = -ln(P / D), where D is the market's debt duration parameter. Funding accrues continuously as a transfer of NAV from the Leverage Coin tranche to the Yield Coin tranche, not as a separate cash payment.
Junior trancheThe first-loss equity claim in a Covenant Market. In Covenant, the junior tranche is the Leverage Coin, which absorbs losses on the collateral ahead of the senior tranche in exchange for leveraged exposure to the Base Asset.
Latent SwapCovenant's automated market maker (AMM) that clears swaps between Yield Coins, Leverage Coins, and the underlying Base Asset within a Covenant Market. The swap invariant is concave and concentrates liquidity within a defined price band, so leverage becomes progressively more expensive as LTV rises and progressively cheaper as LTV falls.
Leverage Coin

The junior tranche of a Covenant Market: a fungible ERC‑20 equity claim that gives leveraged exposure to the Base Asset's price and (where applicable) its native yield. The Leverage Coin's NAV equals the residual Base Asset NAV after Yield Coin notional, evaluated at the market's target LTV. Effective leverage is 1 / (1 - LTV).

Leverage Coin holders pay funding to Yield Coin holders at the rate implied by the Yield Coin's market price. Funding accrues through the dilution of the Leverage Coin's claim, not as a separate payment.

Leverage Coins are redeemable to the Base Asset on a per-market basis (not pooled across assets).

LTV (loan‑to‑value)The ratio of Yield Coin NAV to Base Asset NAV in a Covenant Market: LTV = V_Y / V_B. LTV determines the effective leverage available to junior holders and is the input variable that the Latent Swap AMM prices against.
NAV (net asset value)

The mark-to-market par value of any quantity in a Covenant Market, denominated in the market's quote unit. Three NAVs are tracked:

  • Base Asset NAV = mark-to-market value of the collateral pool;
  • Yield Coin NAV (also called notional) = total par debt outstanding to senior holders;
  • Leverage Coin NAV = the residual Base Asset NAV after Yield Coin notional, evaluated at the market's target LTV.

The Latent Swap AMM clears each tranche at a market price relative to its NAV: Yield Coins trade at a discount to NAV (the discount is the implied funding rate), and Leverage Coin prices relative to NAV move with leverage demand.

Perpetual DebtThe financial primitive that defines Yield Coin behavior. A Yield Coin is a continually refinancing zero-coupon bond: rather than expiring at a fixed maturity, the Yield Coin's notional balance accretes (or, in extreme cases, decretes) over time at a rate implied by its market price.
Senior trancheThe first-call debt claim in a Covenant Market. In Covenant, the senior tranche is the Yield Coin, which has priority on Base Asset collateral and earns funding paid by the junior tranche.
sUSDz Yield Fund

The Covenant sUSDz Yield Fund is an optional pooled product that diversifies senior exposure across multiple Covenant Markets with USD as their quote unit.

Lenders deposit supported USD-denominated assets into the fund and receive $sUSDz, a fungible ERC‑20 receipt token representing their share of the fund's NAV. The fund allocates capital by holding a portfolio of Yield Coins across markets, so $sUSDz holders are effectively long a diversified set of yield exposures.

This structure provides a simple way for lenders to participate in the Covenant marketplace without selecting and managing exposure to individual Base Asset markets.

TrancheA claim on a specific slice of risk and return in a structured product. A Covenant Market produces two tranches against the same collateral pool: a senior Yield Coin and a junior Leverage Coin. Both are fungible ERC‑20 claims, both fully collateralized, and both redeemable to the Base Asset at any time.
Yield Coin

The senior tranche of a Covenant Market: a fully collateralized debt claim minted when the Base Asset is deposited. A Yield Coin is a perpetual zero-coupon bond whose NAV (notional) accretes continuously at a rate implied by its market price (Perpetual Debt). The Yield Coin trades on the Latent Swap AMM at a market price relative to its NAV; the discount to NAV is the implied funding rate.

Yield Coins are fungible ERC‑20 claims redeemable to the Base Asset on a per-market basis (not pooled across collateral assets). Lenders seeking diversified senior exposure across markets can hold the Covenant sUSDz Yield Fund ($sUSDz) instead.

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