TORQ
TORQ explains governed credit operations for digital and tokenized assets.
- 02 OCT 2026
- 7 min read
How vault-funded lending works
TORQ ties each loan to the vault that funds it. See how capital is allocated, how borrowers draw and repay, and where a loss lands when recovery falls short.
Vault-funded lending means a borrower draws against capital assigned to a specific vault and credit line. The loan, its repayments and any resulting loss stay attributed to that funding vault.
In TORQ, vaults can use the same market rules without combining their capital into one supplier pool.
That distinction matters to capital providers. Bob can choose a Senior position, Alice can choose a Junior position with different return and loss priority, and Carol can fund a separate vault.
Each can identify the capital structure and credit line behind their exposure.
How capital moves from a vault into a loan.
A vault holds capital under its configured terms. A credit line connects that vault to a market, where the borrower draws subject to the market and facility rules.
TORQ records the resulting debt against the vault that supplied the funds.
1. Allocate capital.
Bob allocates to Vault A's Senior tranche. Alice allocates to its Junior tranche. Carol allocates to Vault B's Single Share.
2. Set the credit lines.
Vault A and Vault B each have their own credit line. They may use the same market rules, including the market's interest-rate, collateral and liquidation inputs.
3. Draw a loan.
A borrower draws through Credit Line A. TORQ records that debt under Vault A. Vault B does not become a co-funder of this draw.
4. Repay or resolve.
Principal and interest paid on the Vault A loan return through Vault A's path. If the loan is impaired, its shortfall and subsequent recovery are accounted for there.
Why Senior and Junior have different yield and risk.
Senior and Junior are claims on the same vault, with different economic priority. Bob's Senior tranche has a target yield under the configured terms and stands ahead of Junior when losses are allocated.
Alice's Junior tranche receives the residual yield after Senior's target and any unpaid Senior amount are accounted for. That can give Alice a higher projected yield, alongside greater first-loss exposure.
A target or projected yield is not a promised return. Utilization, borrower payments, fees, impairments and recoveries affect what investors actually receive.
Senior can also lose principal if a shortfall exceeds the capital and protection ahead of it.
Where repayments go.
When a borrower repays a Vault A loan, TORQ attributes the principal and interest to Vault A. The principal reduces that loan's outstanding debt.
Lender interest is accounted for under Vault A's capital structure. Applicable protocol fees follow their separate cash path. A repayment on Credit Line A is not a repayment to Vault B.
Repayment also does not mean every investor can withdraw immediately. Redemption rights, available cash, queues and the vault's configured terms still matter.
What happens if the borrower cannot repay.
Collateral realization and recovery determine how much of the obligation remains unpaid. Recovery proceeds are uncertain.
If a market is explicitly insured and eligible reserve cash is available, that protection applies before investor capital takes a recognized loss. TORQ markets start uninsured. Do not assume insurance is available.
For a vault with Senior and Junior tranches, a remaining realized loss reaches Junior first. Alice takes the first investor loss after any applicable insurance. Bob's Senior position can be impaired after Junior is exhausted.
A later recovery first addresses outstanding loss and Senior shortfalls before Junior upside. A Single Share vault has no Senior/Junior split. Its own investors bear losses under its terms.
A loss on a loan funded by Vault A is not charged to Carol's Vault B position. Separate vaults can still face similar market conditions and independent borrower risks.
An illustrative USD 600,000 loan.
Assume Bob supplies USD 800,000 to Vault A's Senior tranche and Alice supplies USD 200,000 to its Junior tranche. Carol supplies USD 500,000 to Vault B's Single Share.
Vault A funds a USD 600,000 loan through Credit Line A. For this simplified example, assume there are no other positions, fees, accruals or value changes.
If the borrower repays in full, the loan's principal and interest are attributed to Vault A.
Now suppose a USD 250,000 loss remains after recovery and any applicable insurance. Alice's USD 200,000 Junior capital is exhausted first. Bob's Senior capital absorbs the remaining USD 50,000.
Carol's Vault B capital is not allocated this Vault A loss. Actual outcomes depend on the live terms, claims and accounting state.
What to check before allocating capital.
Vault attribution makes the path of a loan clearer. It does not remove credit, collateral, liquidity or execution risk. Review the actual configuration before making a decision.
- Which vault and credit line will fund the borrower, and what market rules apply?
- Is the position Senior, Junior or Single Share? What sets its target or projected yield?
- Is insurance enabled for this market, and what eligible reserve cash is actually available?
- What are the borrowing limits, collateral inputs, fees and recovery procedures?
- When can capital be redeemed, and what happens during a stress or withdrawal queue?
