# Lend ERC20 Tokens - FIL as Collateral

## FIL backed ERC20 Loan

![](https://2244172924-files.gitbook.io/~/files/v0/b/gitbook-legacy-files/o/assets%2F-MWQ5XrYoQYzJ0D9WZIj%2F-MbSeQSobDcmW9-7OVuM%2F-MbSfwSowdm_rxbzS8nI%2FLend%20ERC20%20-%20FIL%20Collateral%20_%20Filecoin%20Loans.png?alt=media\&token=1d8812e4-eaf7-4e93-b709-b8613b338b7d)

## Normal Flow

### Step 1: Create Loan Offer

* **Actor:** Lender
* **Blockchain:** Ethereum (or EVM compatible blockchain)
* **Action:** Create Loan Offer
* **Description:** The Lender creates a loan offer and funds the loan offer with the principal (ERC20 tokens).

### Step 2: Create Payment Channel

* **Actor:** Borrower
* **Blockchain:** Filecoin
* **Action:** Create a Payment Channel to the Lender's FIL address.
* **Description:** The Borrower creates a Payment Channel to the Lender's FIL address to lock the required collateral.

### Step 3: Create (Seize Collateral) Voucher

* **Actor:** Borrower
* **Blockchain:** Filecoin
* **Action:** Create Voucher
* **Description:** The Borrower created a Voucher to allow the Lender to seize the collateral in case of default. The Voucher can only be redeemed by the Lender by using the `secretA1`. The `secretA1` is revealed when the Borrower withdraws the loan's principal.

### Step 5: Approve Request & Sign (Unlock Collateral) Voucher 

* **Actor:** Lender
* **Blockchain:** Ethereum (or EVM compatible blockchain)
* **Action:** Approve Request & Sign Voucher
* **Description:** The Lender assigns the Loan to the borrower by entering the Borrower's ETH based address and hashed preimage (`secretHashA1`). Afterwards, the Lender signs a voucher with nonce `n+1` and `amount = 0` to allow the Borrower to unlock the collateral once the payback is accepted.

### Step 6: Withdraw Principal

* **Actor:** Borrower
* **Blockchain:** Ethereum (or EVM compatible blockchain)
* **Action:** Withdraw Principal
* **Description:** The Borrower withdraws the Loan's principal from the smart contract by revealing the `secretA1`. This secret allows the Lender to seize the collateral if the Borrower fails to pay back the loan on time.

### Step 7: Repay Loan

* **Actor:** Borrower
* **Blockchain:** Ethereum (or EVM compatible blockchain)
* **Action:** Payback
* **Description:** The Borrower pays back the loan's principal plus interests before the loan expiration date by sending the ERC20 token amount to the smart contract.

### Step 7: Accept Payback

* **Actor:** Lender
* **Blockchain:** Ethereum (or EVM compatible blockchain)
* **Action:** Accept Payback
* **Description:** To accept the Payback, the Lender reveals `secretB1` which allows the Borrower to redeem the (unlock collateral) voucher and settle the payment channel.

### Step 8: Unlock Collateral

* **Actor:** Borrower
* **Blockchain:** Filecoin
* **Action:** Unlock Collateral
* **Description:** The Borrower uses `secretB1` to redeem the (Unlock Collateral) voucher and close the payment channel.


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