> For the complete documentation index, see [llms.txt](https://docs.creditcoop.xyz/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.creditcoop.xyz/start-here/how-it-works.md).

# How It Works

The full lifecycle of a dollar through Credit Coop — from depositor to vault to credit line to borrower, and back again through the Spigot.

This page walks the complete lifecycle end-to-end. Every step names the actual onchain action, so you can follow along in the contracts.

## 1. Depositors fund the vault

Capital enters through a **Lending Vault**, an ERC-4626 vault with asynchronous (ERC-7540) deposits and redemptions:

1. A depositor calls `requestDeposit()` with the vault asset. If the vault is whitelist-gated, their address must be approved first.
2. The Vault Curator processes the request (`processDepositRequest()`), locking in the share price within slippage bounds.
3. The depositor claims their shares with `deposit()` — they now hold vault tokens whose value tracks the vault's `sharePrice()`.

Redemptions mirror this: `requestRedeem()` → Curator processing → `redeem()` to claim assets. The two-step design lets the vault manage liquidity responsibly — capital may be deployed in credit lines and needs to be recalled in an orderly way.

While capital waits to be deployed into credit, the **Liquid Strategy** can park it in an approved external yield source (any ERC-4626 vault with the same base asset), so idle funds still earn.

## 2. The vault extends credit

The **Credit Strategy** acts on behalf of depositors. With capital from the vault, it proposes and funds positions on a borrower's **Secured Line of Credit**:

1. Terms — amount, rate, deadline — are agreed by **mutual consent**: both the lender side and the borrower must sign the same proposal (`addCredit()`).
2. Once accepted, the position is minted as an ERC-721 **Credit Position Token** held by the Credit Strategy. Positions are transferable (where permitted), which enables secondary liquidity for lenders.
3. The borrower draws funds with `borrow()` — up to the committed amount, repay and redraw as needed. It's a revolver, not a term loan.

## 3. The Spigot secures repayment

Before (or as a condition of) funding, the borrower's revenue-generating contracts are transferred to the **Spigot**'s ownership:

* Each revenue contract is registered with `addSpigot()`, defining how tokens are claimed and how ownership transfers back.
* Incoming revenue is escrowed and split automatically: the **owner share** accumulates toward debt service; the **operator share** is claimable by the borrower (`claimOperatorTokens()`) to run their business.
* The borrower keeps operating their product through `operate()` — but only via functions explicitly whitelisted, so they can never redirect the cash flow or reclaim ownership while debt is outstanding.
* Revenue arriving in other tokens can be converted before repayment — via market trade (`tradeAndDistribute()`) or a bounded OTC swap — so debt is always serviced in the credit token.

The Spigot supports multiple **beneficiaries** with defined allocations, so one secured cash flow can service more than one obligation with a transparent, programmatic waterfall.

## 4. Repayment flows back to depositors

Escrowed owner tokens are used to pay down interest and principal (`claimAndRepay()` and related flows). Interest accrues continuously per the agreed rate. Repayments flow to the Credit Strategy, increasing vault assets — which is what drives the vault share price, and thus depositor yield. Vault-level management and performance fees are taken per the disclosed fee schedule.

## 5. The line closes — or doesn't

A line's status is a state machine: `ACTIVE` while healthy, `REPAID` when fully closed out, `LIQUIDATABLE` if covenants are breached (missed deadline, collateral shortfall), and `INSOLVENT` or `ABORTED` in failure scenarios.

* **Happy path:** the borrower repays in full (`depositAndClose()`), positions close, and the Spigot releases ownership of the revenue contracts back to the borrower automatically. The lien exists only as long as the debt does.
* **Distress path:** if the line becomes liquidatable, the protocol's recovery tools activate — escrowed collateral can be liquidated, Spigot flows stepped up to full escrow for debt service, and positions impaired transparently if recovery falls short.

```mermaid
sequenceDiagram
    participant D as Depositor
    participant V as Lending Vault
    participant CS as Credit Strategy
    participant L as Secured Line of Credit
    participant B as Borrower
    participant S as Spigot

    D->>V: requestDeposit(assets)
    V-->>D: vault shares (after processing)
    V->>CS: deploy capital
    CS->>L: addCredit (mutual consent)
    B->>L: borrow()
    L->>B: funds
    Note over B,S: Borrower's revenue contracts owned by Spigot
    S->>S: escrow & split incoming revenue
    S->>L: owner share → repay interest + principal
    S->>B: operator share → business operations
    L->>CS: repayments
    CS->>V: assets grow → sharePrice ↑
    D->>V: requestRedeem() → redeem assets + yield
```

## Go deeper

* Facility mechanics: [Secured Line of Credit](/core-concepts/secured-line-of-credit.md)
* Cash-flow security: [The Spigot](/core-concepts/the-spigot.md)
* Pooled lending: [Vaults](/core-concepts/vaults.md)
* Your role-specific guide: [Who It's For](/start-here/who-its-for.md)


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