> For the complete documentation index, see [llms.txt](https://docs.mezz.finance/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.mezz.finance/how-it-works/loss-mechanics.md).
# Loss Mechanics
When strategies underperform, a NAV drop is reported. Losses are applied to tranche vaults via a fixed waterfall.
**Junior (JLT) → Mezzanine (MLT) → Senior (smzUSD)**
Losses are applied by burning mzUSD claims from tranche vaults in this order. Each tranche absorbs losses in full before they pass up the stack. As mzUSD claims are burned, the affected vault's total assets decrease, the price per share for remaining holders falls, and the total supply of mzUSD is reduced by the loss amount.
* Losses reduce **Price Per Share**, not share count.
* The waterfall order is fixed and cannot be modified during a loss event.
* Loss mechanics are independent of yield configuration.
* POL in any tranche has identical loss exposure to user positions in that tranche.
A protocol-level loss has a greater proportional impact on smaller tranches. A tranche holding 10% of TVL that absorbs a 1% protocol-level loss takes a 10% hit to its value.
#### **mzUSD seniority**
**mzUSD** is super-senior **in the loss waterfall sense: mzUSD is the base claim token**. It is not a tranche position and does not absorb waterfall losses while buffers remain in the tranche stack.
Waterfall losses are applied to tranche vaults in order: JLT → MLT → smzUSD. That means smzUSD only takes losses once JLT and MLT buffers are exhausted.
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