> For the complete documentation index, see [llms.txt](https://docs.nara.io/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.nara.io/nara-protocol/risks/capital-protection.md).

# Capital Protection

**Losses are absorbed in a fixed order: the Insurance Fund first, NaraUSD+ second, NaraUSD last.** The order is a risk-allocation design, not a guarantee. It makes clear who bears a loss and in what sequence; it does not make losses impossible.

#### The three tiers

| Tier              | Capital                                                                                                                  | Who funds it                                 | What it absorbs                                                                          |
| ----------------- | ------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------- | ---------------------------------------------------------------------------------------- |
| 1. Insurance Fund | $250,000 team seed plus a 10% share of gross strategy yield (about 1% of assets a year at the target rate), continuously | The Nara team, then the protocol's own yield | Realized credit losses and impairments, first, up to its balance                         |
| 2. NaraUSD+       | The staked share of supply (the current staked ratio is on the [dashboard](https://app.nara.io/transparency))            | Holders who chose to stake for yield         | Losses beyond the Insurance Fund, as a reduction in the NaraUSD+ / NaraUSD exchange rate |
| 3. NaraUSD        | The unstaked supply                                                                                                      | Holders of the base dollar                   | Only losses that exceed the Insurance Fund and the entire value of NaraUSD+              |

NaraUSD+ holders take the second tier in exchange for receiving all of the portfolio yield. NaraUSD holders earn nothing and sit behind two buffers. Both tokens remain exposed to liquidity, custody, smart-contract, legal and operational risk, which the waterfall does not address; see Risks.

#### Worked examples

Illustrative only, on a hypothetical book: $10 million of supply, of which $5 million is credit exposure and $5 million liquid reserve; 30% of supply staked ($3 million of NaraUSD+); an Insurance Fund of $250,000. Real outcomes depend on the live book, recoveries and timing; the live figures are on the [dashboard](https://app.nara.io/transparency).

| Loss on the credit book               | Loss amount | Absorbed by Insurance Fund | Absorbed by NaraUSD+ | Mark on NaraUSD+ exchange rate | Reaches NaraUSD?                                         |
| ------------------------------------- | ----------- | -------------------------- | -------------------- | ------------------------------ | -------------------------------------------------------- |
| 5% impairment                         | $250,000    | $250,000                   | $0                   | 0.0%                           | No                                                       |
| 10% impairment                        | $500,000    | $250,000                   | $250,000             | about 8.3%                     | No                                                       |
| 20% impairment                        | $1,000,000  | $250,000                   | $750,000             | 25.0%                          | No                                                       |
| Loss exceeding fund plus all NaraUSD+ | $3,500,000  | $250,000                   | $3,000,000           | 100%                           | Yes, $250,000 against $7 million of NaraUSD (about 3.6%) |

The three impairment sizes match the stress scenarios on the Risks page.

#### What sits in front of the waterfall

The waterfall is the last set of controls, not the first. Before a loss reaches it: underwriting and knock-out gates decline positions that fail them; concentration limits cap what any single borrower, corridor or stablecoin can be; position-level structure (borrowing bases, draw caps against reported volume, cure periods, originator first-loss contributions where negotiated) reduces the loss given a default; and the liquid reserve keeps redemptions running while a position is worked out. See Underwriting and Investment policy and limits.

#### Future changes

Any change to the waterfall, including participation by a governance token, will be published here before it takes effect and will be consistent with the token's final product documentation. No such change is in force.


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