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:

ParameterDescriptionExample
Interest RateThe fixed annual rate lenders will earn8%
Maturity DateWhen the loan term ends and lenders can withdrawJan 1, 2027
Loan SizeThe 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 OwedVault BalanceSettlement FactorMeaning
1,083 USDC1,083 USDC100%Full repayment
1,083 USDC812 USDC75%Partial default
1,083 USDC0 USDC0%2Full 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#

Next Steps#


Footnotes

  1. Interest compounds daily and is recalculated lazily on each transaction. See Interest Accrual for the full mechanism.

  2. 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.