💰Understanding Fees

Decoding Fees in Digital Asset Transactions

Understanding the various fees imposed by protocols is essential for anyone involved in trading digital assets. These fees sustain the extensive decentralized finance (DeFi) ecosystem, supporting numerous protocols and projects. Transaction fees are diverse: some apply to active processes such as trading, gas fees, and minting or redeeming assets. Others relate to asset holding, like management and performance fees. This article explores the different fee types that DeFi participants may encounter using the dHedge platform.

Management Fees: These fees represent ongoing holding costs, calculated as a percentage of the asset's total value, covering operational expenses like gas for the protocol. DeFi platforms utilize management fees instead of traditional annual fee collection through intermediaries. These fees accumulate over time and are periodically collected via smart contracts, based on the product's market cap throughout its lifecycle. Management fees are seamlessly deducted from the users’ returns, ensuring a transparent fee mechanism.

Performance Fees: Unlike management fees, performance fees are contingent on achieving positive results. They are automatically awarded as vault tokens to the strategy provider upon asset deposits or withdrawals. Strategy providers also have the option to mint these fees manually. For instance, if a product incurs a 10% performance fee and achieves a 10% yield, the provider earns 1% of the total, leaving 9% for the investor. Should the product fail to generate positive returns, no performance fees are applied. This fee structure motivates developers to create sustainable, high-performing products that benefit from the profits generated.

Protocol Fees:

Protocols like dHEDGE impose protocol fees on strategy providers. Specifically, the dHEDGE DAO charges a fee of 10% on any management and performance fees collected by a strategy provider. It's important to note that these protocol fees are not charged to vault investors directly; instead, they apply solely to the fees accrued by strategy providers.

For example, in a scenario where vaults are managed without any management or performance fees, no protocol fees are assessed. When fees are applicable, the protocol fee is deducted directly from the strategy provider's earnings. To illustrate, consider our previous situation where the strategy provider earns 1%. From this 1%, dHEDGE deducts 10%, which results in the strategy provider retaining 0.9% and dHEDGE receiving 0.1%.

Note

The performance chart for each vault reflects fees deducted, ensuring that what you see represents the actual performance after accounting for both provider management and performance fees. These fees are not charged separately on top of the displayed performance.