> 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/yield-distribution.md).

# Yield distribution

Income distribution occurs only when aggregate income is positive.

Total income is defined as the combined income generated by the **Master Vaults** and the **Reservoir**, with NAV reported by the **NAV Oracle**.

Yield is calculated at the end of each epoch and distributed linearly over the following epoch.

All distributions are calculated on a **net yield basis**, after the deduction of all applicable fees, including the curators' commission.

#### Net Yield Distribution

Net yield (after fees) is allocated across three components that collectively sum to 100%: a **Base Reward**, a **Mezzanine Risk Premium**, and a **Junior Risk Premium**.

The Base Reward compensates all staked tranche depositors for providing liquidity, while the Risk Premiums compensate Mezzanine and Junior tranche holders specifically for their position in the loss waterfall. These are two independent mechanisms.

Current distribution parameters are displayed within each tranche on the **Earn** page in the app.

The **Base Reward** is distributed proportionally across all tranches based on TVL, resulting in a uniform base APR for each tranche.

The **Mezzanine** and **Junior Risk Premiums** are defined as fixed percentages of total net yield and are allocated exclusively to their respective tranches, independent of tranche TVL. Smaller tranches receive a higher premium APR, creating a self-balancing incentive to attract additional liquidity.

{% hint style="info" %}
If a premium-bearing tranche has zero TVL at the time of distribution, its corresponding risk premium is not paid out and is instead reallocated to the next tranche up in the risk stack.
{% endhint %}

#### Base Reward

1. **Distributed across all staked tranches.**
2. Scales directly with the TVL in each tranche.
3. Allocated across Senior, Mezzanine, and Junior tranches in proportion to their respective TVL.
4. Within each tranche, rewards are distributed to users pro rata based on their share of staked mzUSD.

#### Risk Premium

1. Distributed **exclusively to the Mezzanine and Junior Tranches**.
2. Defined as **fixed percentages of total net income**, independent of tranche TVL.
3. Incentivizes the targeted filling of risk-bearing tranches and promotes balanced capital allocation across the protocol.
4. Mechanism.
   1. Each tranche’s fixed Risk Premium is divided by the amount of capital staked in that tranche at the time of distribution.
   2. When a tranche has relatively low TVL, the premium is concentrated across less capital, resulting in a higher realized APR.
   3. As additional capital enters the tranche, the same fixed premium is distributed across a larger capital base, reducing the APR.
   4. **Unstaked mzUSD earns no yield and does not participate in Risk Premium distributions.**

<figure><img src="/files/pHGvOfCCZDgyhkudyl8k" alt=""><figcaption></figcaption></figure>

| Tranche   | Risk Premium |
| --------- | ------------ |
| Senior    | None         |
| Mezzanine | Moderate     |
| Junior    | Substantial  |


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