Lorenzo Protocol now manages $549 million in assets, which is considered above average in DeFi. However, there is a strange data point: in the past 30 days, Lorenzo's protocol fee revenue has been $0, not a penny charged. This is simply unimaginable in traditional finance, as asset management is a service industry and services should be charged for.
BlackRock, a giant in asset management, manages $10 trillion in assets and charges a 0.5% management fee, which amounts to $50 billion in revenue per year. Lorenzo manages $549 million and if they charge the same rate, they should have $2.7 million in revenue per year, but they choose not to charge. What is the business logic behind this?
First, let's talk about where Lorenzo can theoretically charge fees. The first is the minting and redemption fees. Users can mint enzoBTC by depositing BTC or exchange enzoBTC back to BTC. This process could charge 0.1% to 0.3%. Many wrapped BTC projects operate this way, such as WBTC charging a 0.25% minting fee.
The second is management fees for structured products like USD1+ OTF, which have an investment committee that actively manages them, meeting every two weeks to review strategies. This type of professional service can easily charge an annual management fee of 0.5% to 1%. Traditional hedge funds have management fees above 2%.
The third is performance commissions. If the yield rate of USD1+ exceeds a certain benchmark, such as 10%, the excess portion could yield a commission of 20% to 30%. Such incentive fees are common in the asset management industry, where managers can only earn commissions when clients make money, creating a win-win mechanism.
However, Lorenzo currently charges nothing. DeFiLlama's data clearly shows that the protocol fees over the past 30 days are 0. This is quite unusual. A normally operating asset management protocol cannot charge nothing at all unless they have another profit model or are still in a phase of subsidizing users.
If it is the latter, then Lorenzo's strategy is a typical internet approach: first attract users with zero fees, expand the scale, and once market share is established and user stickiness is formed, gradually introduce charging mechanisms. Didi and Uber both played this way in their early days, aggressively subsidizing to capture users.
However, DeFi is different from the internet because user loyalty in DeFi is very low. Users will go wherever the profits are higher. If Lorenzo starts charging fees, users may immediately switch to other protocols unless Lorenzo can provide value that others cannot offer. Otherwise, it will be difficult to retain users.
Lorenzo currently has a total financing of only $200,000, which is not enough to sustain operations. Team salaries, auditing fees, custody fees, and marketing expenses are all real monetary expenditures. After a month, it could amount to hundreds of thousands of dollars. If there is no income, where does the money come from?
The most likely source comes from token appreciation. The Lorenzo team and early investors definitely have a lot of BANK tokens. If the token price rises, they can sell a portion to maintain operations, but this method is not sustainable because token prices are volatile, and frequent selling could be interpreted by the market as cashing out, which is not favorable for the token price.
Another possibility is that Lorenzo's charging method is relatively obscure, not directly charging users but taking a cut from the underlying profits. For example, USD1+ claims an annualized return of 40%, but in reality, Lorenzo may have already taken 10% to 15% from it, leaving users with a net return of 25% to 30%.
This indirect charging method is common in traditional funds. Fund companies might say that their product has an annualized return of 10%, but in reality, they may have made 12%, with the 2% in between accounting for management and custody fees. This fee is just not listed separately but has already been deducted.
If Lorenzo uses this method, then transparency becomes an issue because the core value of DeFi is transparency. All fees should be traceable on-chain, and users have the right to know how much fees are deducted from their funds and where those fees go.
However, according to Lorenzo's official information, they have not clearly disclosed the specific fee structure. They only mentioned in the white paper that there will be certain management fees and performance commissions, but the specifics of how much, when, and how to charge have not been detailed. This information gap is indeed puzzling.
Another possibility is that Lorenzo is engaging in MEV arbitrage. They manage $549 million in assets and allocate between various DeFi protocols, capturing some MEV opportunities, such as front-running sandwich attack arbitrage. Although these earnings are not direct charges, they are also a source of profit for the protocol.
MEV is very common on Ethereum. Miners and validators can gain additional profits by adjusting the order of transactions. Lorenzo, as a major capital player, can fully leverage their informational advantage to participate in MEV when making strategic adjustments. This portion of income may not be reflected in the on-chain protocol fees.
However, MEV is also controversial because it essentially profits from information asymmetry. Sometimes it even harms the interests of ordinary users. If Lorenzo is engaging in MEV, they should publicly disclose it, allowing users to understand the source of the protocol's profits rather than secretly making money.
Another possible source of income for Lorenzo is liquidity mining rewards. They deploy users' funds into various protocols to receive token rewards from these protocols. For example, by depositing money in Aave, users can earn AAVE, and by providing liquidity in Curve, they can earn CRV. These rewards may not be fully distributed to users.
If Lorenzo takes a cut from these mining rewards, for example, if a user is supposed to receive 100 tokens, Lorenzo only distributes 90 tokens and keeps 10 for themselves. This is also a form of hidden charging, but such practices are quite common in DeFi. Many yield aggregators operate this way.
But the key question is how much Lorenzo actually takes and whether this proportion is reasonable and transparent. If Lorenzo takes too much, the actual earnings for users will be significantly discounted. If it is completely opaque, users will have no idea how much they have been charged.
From the perspective of competitors, WBTC charges a 0.25% minting fee. Babylon, while not charging directly, takes a cut from staking returns. Solv Protocol also has management fees. If Lorenzo really has zero fees, then they are indeed competitive in terms of pricing, but it also raises concerns about sustainability.
I personally believe that Lorenzo is currently in the market education phase. They know that most BTC holders are still unfamiliar with DeFi. If they start charging fees right away, users may be reluctant to try. So they first attract users for free, and once users are accustomed to Lorenzo's products, they gradually introduce fees.
This strategy makes sense commercially, but the risk is that if the free period is too long, users will form an expectation of zero fees. When it comes time to charge, it may provoke a backlash. Lorenzo also needs to consider their own cash flow. If they burn cash for too long without support, the project may fail.
Lorenzo needs to quickly establish a sustainable profit model and cannot rely solely on selling tokens to maintain operations. The ideal situation is to gradually introduce a transparent fee mechanism, such as first charging a 0.1% management fee and then adjusting based on market response, while also publicly disclosing where the fees go, so users know how their money is being spent.
Additionally, Lorenzo can explore other profit-making methods, such as launching premium membership services. veBANK holders can enjoy zero fees or fee discounts, while regular users have to pay the normal fees. This tiered service is used by many platforms, retaining core users while generating income from regular users. Lorenzo manages $549 million but charges zero fees. This may be a strategic choice in the short term, but in the long run, they must address profitability issues; otherwise, this business will not last. $549 million TVL is just a number. Whether it can be converted into real monetary income is key to whether the project can survive in the long term.
