Now, picking up from where I left off in my previous post.
Liquid farms like Aave and Spark hold capital that needs to stay accessible for short-term withdrawals.
Illiquid farms, Pendle Principal Tokens, Ethena's sUSDe positions, and tokenized private credit instruments like Fasanara's mGLOBAL fund, receive capital matched to the lock durations of the junior tranche.
The fractional reserve element is that the protocol does not keep all liquid capital in liquid farms. Because siUSD holders will not all withdraw at the same moment, a portion of their capital gets redirected into higher-yielding illiquid positions.
This improves returns for siUSD holders above what a purely liquid deployment would achieve. Illiquid depositors also benefit, because the pooled capital base gives the protocol access to position sizes and yield sources that individual depositors could not reach alone.
Both sides earn more than they would outside the system.
The reserve ratio, the fraction of liquid capital redirected to illiquid strategies, is calibrated against observed depositor behavior and is visible on-chain at all times.
Anyone can verify the asset-liability position at any block, not through a disclosure filing but through the live state of the contracts.
That transparency is also what makes the governance layer coherent rather than decorative.
liUSD holders vote on capital allocation across farms. Voting power is weighted by locked amount and unbonding period, so longer commitments carry more governance weight.
But a liUSD-1w holder cannot vote on long-duration farms. You can only direct capital to strategies with durations you have personally committed to.
The people directing capital into any given strategy are the same people who absorb the first loss if that strategy fails, and the slashing mechanics make that concrete.
If an underlying position experiences a confirmed realized impairment, whether from a borrower default, a protocol exploit, or an oracle-driven liquidation shortfall, the loss is calculated in dollar terms and applied pro-rata across all Locked-iUSD positions at that moment, including positions currently in their unwinding period.
The adjustment happens atomically and on-chain. Nobody gets preferential treatment.
The lower redemption rate becomes the permanent new baseline, and if the team recovers any funds through technical or legal means afterward, those recoveries get airdropped back to the slashed holders.
Senior siUSD holders are fully insulated unless the junior tranche is completely wiped out first. The loss waterfall is not a promise stated in documentation, it is hardcoded into the contracts and formally verified by Certora, who found and corrected a subtle redemption-queue ordering bug during the verification process.
The bug would have let new redeemers skip ahead of users already queued during a liquidity crunch.
The fix enforces strict FIFO ordering, proven mathematically to hold under all possible inputs.
The full security stack includes Spearbit, a Cantina crowd audit, Certora formal verification, TestMachine pen-testing, Three Sigma ongoing review, and Hypernative for live on-chain monitoring.
That rigor shows up in the numbers too. By November 2025, infiniFi had $175M in TVL, with $136M of that sitting in the locked junior tranche.
A protocol where most depositors are choosing the higher-risk, longer-commitment position is not running on short-term mercenary capital.
It is a protocol where people have actually internalized the tradeoff and committed to it, and the Morpho integration gives those committed depositors another layer to work with.
PT-iUSD, the principal token representing a locked iUSD position, can be used as collateral to borrow USDC at up to 91.5% LTV.