> For the complete documentation index, see [llms.txt](https://aruna-1.gitbook.io/aruna-docs/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://aruna-1.gitbook.io/aruna-docs/using-aruna/concepts.md).

# Key Concepts

## The 70/25/5 Model

This is Aruna's core innovation - an immutable yield distribution formula:

| Recipient        | Percentage | Purpose                            |
| ---------------- | ---------- | ---------------------------------- |
| **Investors**    | 70%        | Competitive returns for depositors |
| **Public Goods** | 25%        | Sustainable ecosystem funding      |
| **Protocol**     | 5%         | Maintenance and development        |

**Why These Numbers?**

* **70%** keeps investor returns competitive (5.74% effective vs 8.2% gross)
* **25%** generates meaningful impact at scale ($205K/year at $10M TVL)
* **5%** ensures long-term protocol sustainability

**Immutable:** This split is hardcoded in smart contracts and cannot be changed by anyone, including the protocol team.

***

## ERC-4626 Vault Standard

Aruna's vaults follow the ERC-4626 tokenized vault standard.

**What This Means:**

* Standardized deposit/withdraw interface
* Composable with other DeFi protocols
* Predictable share accounting
* Compatible with vault aggregators

**How It Works:**

1. You deposit 1,000 USDC
2. Vault mints you 1,000 shares
3. As yield accrues, share value increases
4. Redeem shares anytime for USDC + yield

**Benefits:**

* Industry standard interface
* Reduced integration complexity
* Interoperable with DeFi ecosystem
* Well-tested security model

***

## Invoice Commitments as NFTs

When businesses submit invoices, they receive ERC-721 NFTs.

**Why NFTs?**

* Unique identifier for each commitment
* Provable on-chain ownership
* Transferable after settlement
* Composable with other systems

**NFT Properties:**

* Token ID = unique invoice identifier
* Metadata includes customer, amount, due date
* Transfer restricted until settled
* Reputation tied to owner address

**Future Use Cases:**

* Secondary markets for settled invoices
* Collateral for other DeFi protocols
* Proof of creditworthiness
* Business credit scores

***

## Reputation System

Businesses build on-chain reputation through invoice settlements.

**How Reputation Works:**

* Start at 0 reputation
* **+1** for each on-time settlement
* **-1** for each default/liquidation
* Visible to all potential partners

**Reputation Benefits:**

* Higher grant limits over time
* Better terms from partners
* Verifiable credit history
* Portable across platforms

**Impact:**

* Encourages timely payments
* Rewards good behavior
* Builds trust transparently
* Creates accountability

***

## Yield Harvesting

Yield doesn't distribute automatically - it must be "harvested."

**Why Manual Harvesting?**

* Optimizes gas costs
* Batches transactions efficiently
* Allows user control of timing
* Prevents spam transactions

**Harvest Mechanics:**

* Can be triggered by anyone (permissionless)
* Must wait 24 hours between harvests per vault
* Calculates yield since last harvest
* Distributes via 70/25/5 split immediately

**Best Practice:**

* Harvest monthly for smaller deposits
* Harvest more frequently for large deposits
* Gas costs vs. yield earned trade-off

***

## Octant v2 Integration

Aruna routes 25% of yield through Octant v2's public goods distribution system.

**What is Octant?**

* Ethereum Foundation's public goods funding platform
* Epoch-based donation cycles
* Community-curated project selection
* Transparent allocation mechanisms

**How Integration Works:**

1. YieldRouter calculates 25% of harvest
2. Sends to OctantDonationModule
3. Module accumulates donations per epoch
4. Forwards batch to Octant v2 contract
5. Octant distributes to approved projects

**Supported Projects (Examples):**

* Ethereum Foundation core development
* Protocol Guild (core dev funding)
* Gitcoin grants infrastructure
* OpenZeppelin security tools
* Community-selected ecosystem projects

***

## Aave v3 Vault Adapter

One of two yield sources in Aruna.

**How It Works:**

* Deposits USDC to Aave lending pool
* Receives aUSDC (interest-bearing token)
* aUSDC balance grows automatically
* Withdraw anytime with accrued interest

**Characteristics:**

* Target APY: 6.5%
* Risk level: Low (battle-tested protocol)
* Liquidity: High (largest DeFi lending protocol)
* Stability: Very stable rates

**When to Use:**

* Prefer stability over maximum yield
* Want battle-tested protocols
* Need reliable, predictable returns

***

## Morpho Vault Adapter

Second yield source offering higher returns.

**How It Works:**

* Deposits to MetaMorpho vault
* MetaMorpho allocates across Morpho Blue markets
* Curator optimizes yield strategies
* Higher returns from peer-to-peer efficiency

**Characteristics:**

* Target APY: 8.2%
* Risk level: Moderate (newer protocol)
* Liquidity: Good (growing TVL)
* Stability: Optimized for higher yields

**When to Use:**

* Want maximum yields
* Comfortable with newer protocols
* Understand Morpho's architecture

***

## Collateral vs Grant Model

Businesses lock collateral but receive instant grants.

**The Mechanism:**

* Lock 10% of invoice amount as collateral
* Immediately receive 3% as grant
* **Net effect**: 7% locked, 3% earned

**Example:**

* $10,000 invoice submitted
* Lock $1,000 USDC (10%)
* Receive $300 USDC grant (3%)
* Actual cost: $700 locked for 90 days
* Settlement unlocks $700

**Why This Works:**

* Businesses get immediate cash incentive
* Protocol has collateral security
* ROI is instant (30% on locked amount)
* Risk is minimized for both parties

***

## Liquidation & Default

Invoices that aren't settled trigger automatic liquidation.

**Default Conditions:**

* Invoice unpaid 120 days after due date
* No settlement transaction submitted
* Collateral held by contract

**Liquidation Process:**

1. After 120 days overdue, invoice marked defaulted
2. Locked collateral forfeited to protocol
3. Business loses 1 reputation point
4. Invoice NFT remains (as proof of default)

**Investor Protection:**

* Collateral mitigates default risk
* Investor deposits unaffected by defaults
* Yield generation continues normally

***

## TVL (Total Value Locked)

Understanding protocol growth metrics.

**What TVL Measures:**

* Total USDC deposited across all vaults
* Indicates protocol adoption
* Determines public goods funding scale

**Impact on Public Goods:**

* $1M TVL → $20,500/year to public goods
* $10M TVL → $205,000/year to public goods
* $50M TVL → $1,025,000/year to public goods

**Growth Drivers:**

* More investors discovering Aruna
* Higher yields attracting deposits
* Public goods impact awareness
* DeFi ecosystem growth

***

## Gas Optimization

Aruna minimizes transaction costs through smart design.

**Key Optimizations:**

* Batch yield distributions (not per-transaction)
* 24-hour harvest interval prevents spam
* Immutable variables reduce storage costs
* Standard interfaces reduce complexity

**User Costs:**

* Deposit: \~$0.50-1 (one-time)
* Harvest: \~$1-2 (monthly)
* Withdraw: \~$0.50-1 (when needed)
* Claim rewards: \~$0.50 (after harvest)

**On Base Network:**

* Significantly cheaper than Ethereum mainnet
* Fast confirmations (2 seconds)
* Low congestion
* Predictable costs

***

## Next Steps

Now that you understand the concepts:

1. See [How It Works](/aruna-docs/using-aruna/how-it-works.md) for step-by-step flows
2. Read [Use Cases](/aruna-docs/using-aruna/use-cases.md) for real-world examples
3. Check [Smart Contracts](/aruna-docs/the-solution/contracts.md) for deployment details
4. Try the protocol on Base Sepolia testnet