Waterfall Payment Structure

A waterfall payment structure is a mechanism used in financial engineering and smart contracts to define the sequential order in which incoming cash flows or liquidated collateral are distributed to various stakeholders. Revenue or assets flow from the top of the waterfall to the bottom, filling each tier completely before any funds move to the next level.

Senior creditors or high-priority token holders sit at the top, while equity holders or subordinated participants sit at the bottom. This structure ensures that senior obligations are satisfied first, providing them with greater security, while junior participants accept higher risk in exchange for potential higher returns.

In decentralized finance, this is automated via code to remove the need for intermediaries. If cash flows are insufficient, lower tiers receive nothing.