# What makes Covenant different? Covenant is a permissionless, immutable protocol for tranching risk on tokenized vaults. The design choices that follow set the tranching primitive apart from other on-chain credit structures. * **Both sides of the tranche are fungible.** The senior Yield Coin and the junior Leverage Coin are both fungible ERC‑20 claims, transferable, composable, and redeemable to the Base Asset. There are no per-position accounts, no per-borrower LTVs, and no bespoke collateral mixes. Leveraged exposure is a token a user holds, not a position they manage. * **No looping for leverage.** Leveraged exposure is embedded in a single ERC‑20. A user mints (or buys) a Leverage Coin and the leverage is structural; there is no recursive deposit-borrow loop, no liquidation price to monitor, and no margin account to maintain. * **No liquidation cliffs.** Risk is repriced continuously by the [Latent Swap AMM](/protocol-mechanism/latent-swap-amm.md). As the junior buffer thins, leverage gets progressively more expensive, drawing in new junior capital before the senior buffer is exhausted. At sufficiently high LTV the protocol halts both junior withdrawals and additional senior minting, which prevents a death-spiral; no individual position is ever force-closed. * **A priced market against NAV.** Yield Coins and Leverage Coins trade at market prices against the Base Asset's NAV, cleared continuously by the Latent Swap AMM. A senior holder can [soft-lock a rate](/protocol-mechanism/priced-markets-vs-nav.md) by buying at a price; the market can price tranches above or below NAV when the market disagrees with reported NAV. * **Works on assets without native yield.** Senior yield is generated by leverage demand against the AMM, not by a slice of the underlying's yield stream. A Covenant Market can be deployed against a Base Asset that produces no native yield (e.g. raw ETH, WBTC) and still produce a meaningful Yield Coin rate purely from leverage appetite. * **Works on assets with redemption windows.** Tranching does not borrow against the underlying; it splits the existing collateral. There is no liquidation race against an unbonding clock, no forced redemption of the underlying, and no looping. RWAs and other slow-settling assets can be levered natively without a synthetic redemption layer. * **Permissionless and immutable.** Markets can be deployed permissionlessly against any oracle-priced Base Asset. Once a market is live, its parameters (oracle, debt duration, price band, fees) are fixed for the life of the market. There is no upgrade path, no curator with allocation authority, and no governance-set rates. Admin authority is limited to a Pause function controlled by external Governance. * **Fee accrual to the junior tranche.** Latent Swap exit fees (5 bps for ERC‑4626 vault Base Assets, 30 bps for volatile collateral) accrue to Leverage Coin holders rather than to a protocol treasury. This compounds the dynamic that makes the junior side an attractive home for first-loss capital. * **Concentrated or pooled senior exposure.** Lenders can hold a specific market's Yield Coin to target one Base Asset, or hold the Covenant sUSDz Yield Fund (`$sUSDz`) for diversified senior exposure across markets. Both are fungible ERC‑20s and both are redeemable through the protocol. --- # Agent Instructions: Querying This Documentation If you need additional information that is not directly available in this page, you can query the documentation dynamically by asking a question. Perform an HTTP GET request on the current page URL with the `ask` query parameter: ``` GET https://docs.covenant.finance/protocol-mechanism/what-makes-covenant-different.md?ask= ``` The question should be specific, self-contained, and written in natural language. The response will contain a direct answer to the question and relevant excerpts and sources from the documentation. Use this mechanism when the answer is not explicitly present in the current page, you need clarification or additional context, or you want to retrieve related documentation sections.