How It Works

Overview

Coalesce Finance is a fixed-rate, fixed-term lending protocol:

1. Borrowers create loan markets with specific terms
2. Lenders deposit USDC to earn interest
3. Borrowers access deposited funds
4. 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:

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 (vault balance minus reserved protocol fees)
• 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

Phase 7: Settlement

The first withdrawal after the grace period triggers settlement. The protocol computes a settlement factor — the ratio of available vault funds to total owed — and locks it for all lenders.

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, and withdraw excess 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