How It Works#
Overview#
Coalesce Finance is a fixed-rate, fixed-term lending protocol:
- Borrowers create loan markets with specific terms
- Lenders deposit USDC to earn interest
- Borrowers access deposited funds
- At maturity, lenders withdraw with interest
The Lending Cycle#
Phase 1: Market Creation#
Who: Whitelisted borrower
The borrower creates a market on-chain by setting three parameters:
| Parameter | Description | Example |
|---|---|---|
| Interest Rate | The fixed annual rate lenders will earn | 8% |
| Maturity Date | When the loan term ends and lenders can withdraw | Jan 1, 2027 |
| Loan Size | The maximum amount of USDC the loan market can accept | $1,000,000 |
A vault (escrow) account is created alongside the loan market to hold deposited funds.
Phase 2: Deposits#
Lenders deposit USDC into the vault and receive shares (a scaled balance). The share count stays constant while the scale factor grows over time to reflect accrued interest.
Day 1 deposit of 10,000 USDC:
scale_factor = 1.0
shares = 10,000
Interest accrues over time...
Deposits are accepted from market creation until maturity.
Phase 3: Borrowing#
The borrower draws funds from the vault. Constraints:
- Cannot exceed available vault liquidity (full vault balance)
- Cannot exceed whitelist capacity
- Cannot borrow after maturity
Phase 4: Active Loan Period#
During the loan:
- Interest compounds daily based on elapsed time1
- The borrower can repay partially or fully at any time
- Lenders can deposit more (until maturity)
Phase 5: Repayment#
The borrower sends USDC back to the vault. They should repay principal plus interest by maturity to ensure lenders receive full value.
Phase 6: Maturity#
When the market reaches its maturity timestamp:
- No additional deposits are allowed
- No additional borrowing is allowed
- A 5-minute grace period begins (allows last-minute repayments, prevents front-running)
- After grace period concludes, withdrawals open and borrower force-close becomes available for abandoned positions
Phase 7: Settlement#
The first grace-eligible withdrawal or borrower force-close triggers settlement. The protocol computes a settlement factor — the ratio of available vault funds to total owed — and locks it for all lenders.
| Total Owed | Vault Balance | Settlement Factor | Meaning |
|---|---|---|---|
| 1,083 USDC | 1,083 USDC | 100% | Full repayment |
| 1,083 USDC | 812 USDC | 75% | Partial default |
| 1,083 USDC | 0 USDC | 0%2 | Full default |
See Settlement for the full calculation and re-settlement details.
Phase 8: Withdrawal#
Lenders withdraw their share:
payout = shares × scale_factor × settlement_factor / WAD²
Late repayments after settlement can improve the factor via re-settlement. Partial defaults are shared pro-rata among all lenders.
Risks#
Every investment carries risk. Here's what you need to know.
Credit Risk#
Borrowers may not repay, leading to a loss of deposited funds. As a lender, you take on the credit risk of the borrower. Research the borrower fully and don't deposit more than you are comfortable losing.
Smart Contract Risk#
Bugs in protocol code could lead to loss of funds. Coalesce mitigates this through security audits, formal verification, a bug bounty program, and conservative code.
Liquidity Risk#
Funds are locked until maturity. You cannot access your deposit early, even in an emergency. Only deposit funds you won't need before the maturity date.
Interest Rate Risk#
Rates are fixed at deposit time. If market rates rise, you may miss better opportunities elsewhere. If rates fall, you benefit.
Protocol Risk#
The protocol could be paused, upgraded, or discontinued, temporarily preventing interaction. A pause blocks market creation, deposits, borrows, principal repayments, interest repayments, withdrawals, fee collection, re-settlement, close position, force-close, withdraw excess, claim haircut, and force claim haircut until unpaused.
Default Scenarios#
At maturity, the settlement factor determines what lenders receive. If the borrower fully repays, lenders get 100% of principal plus interest. If the borrower only repays part, lenders share the loss pro-rata. If the borrower repays nothing, lenders receive effectively nothing. Late repayments after settlement can improve the factor via re-settlement. See Settlement for details.
Details#
- Interest Accrual — How interest grows
- Settlement — What happens at maturity
- Whitelisting — Borrower approval
- Fees — Protocol fees
- FAQ — Common questions
Next Steps#
- For Lenders — Start earning
- For Borrowers — Access capital
Footnotes
-
Interest compounds daily and is recalculated lazily on each transaction. See Interest Accrual for the full mechanism. ↩
-
The on-chain settlement factor has a floor of 1 (out of
10^18), so it is never exactly zero. For practical purposes, lenders receive negligible recovery. ↩