What is a Performance Fee?
A performance fee is a charge taken as a percentage of profits earned by a DeFi strategy or vault. Unlike management fees charged on total assets, performance fees only apply to gains, aligning protocol incentives with user returns.
How Performance Fees Work
Fee Calculation:Performance Fee = Profit × Fee Percentage
Example: $1,000 profit with 20% performance fee = $200 to protocol, $800 to user
Typical Performance Fees
- Yield Aggregators: 10-20% of profits
- Active Strategies: 15-25% of profits
- Hedge Fund Style: 20% (the "2 and 20" model)
- Automated Vaults: 5-15% of profits
Fee Collection Timing
Per-Harvest
- Fee taken at each harvest
- Most common in DeFi
- Simple to implement
On Withdrawal
- Fee calculated on position gains
- Deducted when user exits
- More complex accounting
Periodic (Traditional)
- Calculated quarterly/annually
- Less common in DeFi
- High-water mark considerations
High-Water Mark
Some protocols only charge performance fees on new highs:
- Prevents charging fees on recovery from losses
- Fairer to users
- More complex to implement
- Yearn v2 uses this model
Impact on Returns
Gross APY → Net APY Example:- Gross yield: 25%
- Performance fee: 20%
- Net yield: 25% × 80% = 20%
Comparing Fees Across Protocols
Consider:
- Gross vs net APY displays
- Fee percentage
- High-water mark presence
- Hidden fees in strategy
- Gas costs passed through
Fee Recipients
- Protocol treasury
- Governance stakers
- Strategy developers
- DAO operations