Credit and Guarantees

Credit applications lend capital to external entities, ranging from corporations to individuals. These applications assess borrower risk and coordinate the collection of interest payments and other loan obligations.

To reduce lender risk, these loans can be backed by collateral. This is where Symbiotic V2 comes in: it provides fully built and audited infrastructure for collateralized guarantees, allowing credit applications to seamlessly integrate collateral-backed lending and risk management into their systems.

How it Works

Capital allocators deposit funds into Symbiotic vaults, providing the collateral that backs the guarantees issued by the application. Rather than being pooled across all borrowers, these collateral commitments can be isolated per borrower or credit facility, allowing each guarantee to be independently managed and risk-assessed.

When a borrower requests financing from an external source of capital, such as a reserve, treasury, or lending pool, the Symbiotic vault acts as a collateral layer that guarantees part or all of the borrower's obligations. This additional security enables capital providers to extend credit with greater confidence while maintaining a clear separation between the lending capital and the collateral securing it.

If the borrower fulfills their obligations, the collateral remains untouched and capital allocators continue earning yield. If the borrower defaults, the collateral in the corresponding Symbiotic vault can be used to cover the agreed losses, reducing the lender's exposure. In return for assuming this risk, capital allocators receive compensation through the fees or yield generated by the application managing the credit system.

Case Study

Cap

Cap is a covered credit platform that connects depositors, borrowers, and underwriters through a programmable financial guarantee system. By separating liquidity provision from credit risk, Cap enables borrowers to access unsecured or undercollateralized financing backed by onchain guarantees, while underwriters earn yield for assuming the underlying credit risk.

1. Capital allocators provide guarantees

Capital allocators deposit assets into dedicated Symbiotic vaults, providing the collateral that secures loans originated through Cap. This capital is not lent directly to borrowers; instead, it remains locked as a guarantee, while borrowers access liquidity from external capital pools, such as reserves or lending facilities. Collateral commitments can be isolated per borrower or credit facility, allowing each guarantee to be independently managed and risk-assessed.

2. Borrowers obtain financing

When a borrower requests financing, Cap performs the underwriting process and determines the amount of collateral required to guarantee the loan. Once sufficient collateral has been committed through the corresponding Symbiotic vault, the borrower can access the requested capital. Throughout the loan lifecycle, the lending capital and the guarantee capital remain entirely separate.

3. The guarantee remains active

As long as the loan remains outstanding, the collateral stays locked in the Symbiotic vault while lenders earn interest from the borrower. In parallel, capital allocators receive fees generated by Cap in exchange for providing the guarantee and assuming the underlying credit risk.

4. Loan repayment

If the borrower repays the loan according to the agreed terms, the guarantee expires and the collateral is released back to the Symbiotic vault, where it can be reused to underwrite future borrowers.

5. Default

If the borrower defaults or another predefined loss event occurs, the corresponding collateral can be slashed and used to compensate the lender for the agreed losses. In this model, the credit risk is transferred to the capital allocators providing the guarantees, while Symbiotic supplies the infrastructure for managing collateral, guarantees, and slashing, and the credit application remains responsible for underwriting borrowers and determining when a loss event has occurred.