Protocol Fees

Overview

Coalesce Finance charges fees on interest accrued, not on principal. Fees are an additional charge to the borrower and do not reduce the interest lenders earn.

Fee Structure

Fees accrue from each interest step (not as a single end-of-loan calculation):

interest_delta_wad = new_scale_factor × WAD / scale_factor - WAD
fee_delta_wad = interest_delta_wad × fee_rate_bps / BPS
fee_normalized = scaled_total_supply × new_scale_factor / WAD × fee_delta_wad / WAD

interest_delta_wad is derived from the ratio of the post-accrual scale factor to the pre-accrual scale factor. This captures the full interest growth for the accrual period, including compound effects from daily compounding.

Because fee accrual uses new_scale_factor (post-interest), the effective fee is slightly above the nominal fee rate per accrual step.

Example

Lender deposits: 10,000 USDC
Interest rate: 8% APR
Term: 1 year
Protocol fee: 10% of interest

Lender interest (daily compounding): 10,000 × (1.08328 - 1) ≈ 832.78 USDC
Protocol fee (approximate): 832.78 × 10% ≈ 83.28 USDC
Total borrower obligation: 10,000 + 832.78 + 83.28 ≈ 10,916.05 USDC

Lender receives the full ≈832.78 USDC interest (8% APR, daily compounding).
The protocol fee is a separate charge to the borrower.

The current fee rate is set in the protocol configuration and visible on-chain.

How Fees Work

Fees accrue alongside interest on each transaction. They are tracked internally but not transferred until explicitly collected by the protocol's fee authority.

Protocol fees are senior to lender claims. At settlement and withdrawal, fees are reserved from the vault first (fees_reserved = min(vault_balance, accrued_protocol_fees)), and lenders receive their share of what remains. This applies in all scenarios, including borrower default.

Impact on Returns

Fees are charged to the borrower in addition to lender interest. When the borrower fully repays, lenders receive the full market APR. Fees do not reduce lender returns.

In default scenarios, protocol fees are senior to lender claims. Fees are reserved from the vault before lender recovery is calculated. See Settlement for details.

There are no deposit, withdrawal, borrowing, or repayment fees — only the protocol fee on interest.