> ## Documentation Index
> Fetch the complete documentation index at: https://docs.tythe.finance/llms.txt
> Use this file to discover all available pages before exploring further.

# First-Loss Coverage

> What stands between a defaulted Loan and a lender's money, in the order it is consumed, and what Tythe puts at risk first.

A lender needs to know one thing before anything else: when a Loan fails, whose money goes first. On Tythe the answer is fixed in code, enforced in a single transaction, and verified before mainnet. This page sets out the layers, the order, and the limits.

### The principle

Tythe loses its own money before any lender loses theirs. A first-loss reserve, funded from Tythe's capital and revenue, sits as the junior tranche of the credit market. It is consumed before lender capital on every default. If Tythe underwrites badly, Tythe pays for it first.

This is not a marketing promise. The order is an invariant of the loss waterfall contract, formally verified so that no path can skip a layer, reorder the layers, or reach lenders while the reserve has balance.

### The waterfall

When a Loan defaults, the shortfall is absorbed in this order, in one transaction, on-chain.

<Steps>
  <Step title="**Captured revenue**">
    Any revenue-tagged inflows still arriving in the borrower's account are applied to the schedule first. Capture does not stop because a payment was missed.
  </Step>

  <Step title="**The lien**">
    The fraction of its own balance the borrower pledged at origination is consumed, up to the shortfall and never beyond the lien amount.
  </Step>

  <Step title="**Legal recourse**">
    A claim is recorded against the borrower's verified legal identity under the Master Credit Agreement. Tythe pursues recovery as servicer. Recoveries unwind the loss in reverse: lenders first, then the reserve.
  </Step>

  <Step title="**The first-loss reserve**">
    Tythe's own capital absorbs the remaining shortfall, up to the reserve's balance.
  </Step>

  <Step title="**Lenders**">
    Only what exceeds all four layers reduces lender share value, pro-rata across the market's shares.
  </Step>
</Steps>

Three properties hold on every default and are formally verified: the five steps execute in exactly this order; the amounts absorbed across the steps sum to the shortfall, so no value is created or lost; and the reserve is exhausted before any lender loss is applied.

### The reserve

<AccordionGroup>
  <Accordion title="How it is funded" icon="coins" iconType="solid">
    Seeded with Tythe's own capital at launch, so first-loss protection exists from the first Loan, and funded on an ongoing basis from protocol revenue until it reaches its target. Surplus above the target may be released; the reserve can never be drawn below what the current book requires.
  </Accordion>

  <Accordion title="How it is sized" icon="scale-balanced" iconType="solid">
    The reserve targets a coverage ratio against the outstanding book, with a floor. Both are registered, bounded parameters that can only change under a timelock. Between target and floor, new origination throttles. At the floor, new Loans halt until revenue refills the reserve. Existing Loans, capture, and loss absorption are unaffected.
  </Accordion>

  <Accordion title="What it does during a pause" icon="pause" iconType="solid">
    Tythe's circuit breakers can halt new origination. They never halt loss absorption or reserve funding. An obligation that exists is honoured whether or not new lending is paused.
  </Accordion>

  <Accordion title="What you can verify" icon="magnifying-glass" iconType="solid">
    The reserve's balance, the book it backs, the coverage ratio, and the floor and target are on-chain and reproducible by anyone at any time. See the dashboard.
  </Accordion>
</AccordionGroup>

### The lien

Coverage on Tythe is not locked collateral and not a claim over money Tythe holds. It is a lien the borrower grants over a fraction of its own account balance at origination.

* The fraction is a published function of the borrower's Rating band. A thinner rating pledges more.
* The liened amount cannot be withdrawn or reserved by a mandate while the Loan is open. Everything else in the account stays free and productive.
* Only the waterfall can consume the lien, only on default, only up to the shortfall.
* On full repayment the lien is released.

Every Loan is therefore partially secured by the borrower's own capital and by capture at the source of its revenue, before the reserve is ever reached.

### Bounded agent draws

Loans are drawn by the principal directly or by its agents within their credit share. An agent can never draw beyond its effective share of the principal's available Credit Limit, and the borrower of record is always the principal. Agent misconduct narrows or revokes the agent's authority; it does not change who owes the debt.

### What lenders should understand

* Lender capital sits behind captured revenue, the borrower's lien, legal recourse, and Tythe's reserve, in that order.
* Loss that reaches lenders is pro-rata across market shares.
* Loans are fixed-term. Lender withdrawals are served from a liquidity buffer and otherwise queued until Loans repay. See [Earn: Lend](/principals/account/earn).
* The reserve is finite and disclosed. It is consumed before lenders, not instead of them. Tythe does not guarantee principal.

<Warning>
  Undercollateralised credit carries the risk of loss. The waterfall reduces that risk in a defined order; it does not eliminate it. Read the [Risk disclosure](/get-started/resources/risk-disclosure) before supplying the credit market.
</Warning>

### Verify further

<CardGroup cols={2}>
  <Card title="Audits and security" icon="shield-check" href="/get-started/resources/audits-security">
    The waterfall invariants, the formal-verification record, and the audit reports.
  </Card>

  <Card title="Intelligence dashboard" icon="chart-line" href="/get-started/resources/intelligence-dashboards">
    The reserve, the book, and the coverage ratio, live and reproducible.
  </Card>
</CardGroup>