Core Architecture

Pencil Finance's core architecture governs the entire lifecycle of capital and repayment—starting from loan bundle creation by verified lenders, to investor participation, to real-time on-chain repayments. The protocol uses a dual-tranche model to structure capital into distinct risk-return profiles, ensuring capital efficiency, risk management, and transparency.

Step-by-Step Capital Flow

1. Loan Bundle Creation by Whitelisted Lending Partners: Whitelisted student loan companies initiate the process by creating loan bundles on the Pencil Finance platform. Each bundle represents a portfolio of underlying student loans. During creation, the lending partner configures:

   • Total loan amount

   • Maturity period

   • A fixed interest rate for the Senior Tranche ($GROW Token)

   • The expected APR for the overall bundle

   Based on this, the protocol estimates the variable yield for the Junior Tranche (EDUFI NFT). The tranche ratio is fixed at 80% Senior / 20% Junior.

2. Investor Participation in Tranches: Investors choose which tranche to participate in:

   • Senior Tranche ($GROW Token): Receives a fixed interest rate, lower risk, and repayment priority.

   • Junior Tranche (EDUFI NFT): Accepts higher risk, absorbs first losses, and earns variable interest based on actual bundle performance.

   Upon investment:

   • Senior investors receive ERC-20 $GROW Tokens proportional to their deposit.

   • Junior investors receive a unique ERC-721 NFT with metadata such as amount, interest rate, and payout frequency.

3. Capital Deployment to Lending Partners: Once a bundle is funded, the lending partner is allowed to withdraw up to 90% of the capital, proportional to the tranche ratio. The remaining 10% stays in the protocol as a reserve buffer to support liquidity for early withdrawals from the Senior Tranche.

   Lending companies use this capital to issue or refinance student loans, as per the structure defined in the bundle.

4. On-Chain Repayment by Lending Partners: As students begin repaying their loans, the lending company deposits funds directly back into the Pencil protocol. Repayments are handled entirely on-chain and follow a structured waterfall distribution:

   1. Senior Principal – Repaid first to preserve capital for low-risk investors.

   2. Senior Interest – Paid after principal and reflected through an increase in the NAV of Grow Tokens.

   3. Junior Principal – Repaid only after all Senior obligations (principal and interest) are fully covered. This ensures that the Junior tranche only receives capital back if the loan bundle performs well.

   4. Junior Interest – Any remaining repayment amount is distributed as interest to Junior tranche NFT holders on a monthly or quarterly basis, as per bundle configuration.

5. Redemption and Yield Realization:

   • Grow Token (Senior):

     • Auto-redeemed at loan maturity

     • Investors receive USDC proportional to the final NAV

     • Early withdrawals are allowed with a 1% penalty fee and subject to available liquidity and a FIFO queue

   • EDUFI NFT (Junior):

     • Interest is paid out periodically per the configured schedule (monthly/quarterly)

     • Principal is locked until the loan bundle matures

     • No early redemption or resale is available currently

This architecture ensures full transparency, predictable cash flow logic, and real-time capital movement—all governed by smart contracts.

Overview