Lagoon's fee structure: the four fee types, explained

Introduction

Fee design is where three interests meet: how much a curator earns, how much an investor trusts the vault, and how the protocol itself sustains. Get any one wrong and the other two suffer. In traditional funds, these tradeoffs sit in a limited partnership agreement and take weeks of negotiation to change. In an onchain vault they are code, specific parameters written into the smart contract at deployment and visible to every investor before they deposit.

Across more than 120 vaults deployed on Lagoon spanning 18+ EVM chains, fee configuration is one of the few knobs every curator tunes deliberately. Four fee types sit in a Lagoon vault's smart contract, each with its own accrual method and its own protocol-enforced cap.

The four fee types at a glance

Every Lagoon ERC-7540 vault supports four fee categories. All of them are charged on the vault state at a single moment in time, the settlement, which is when the curator accepts a new valuation and processes pending deposit and redemption requests.

Figure 1: The four fee types, their accrual method, and their hard caps.

The first three fees are configured by the vault admin at deployment. The protocol fee is set at the protocol level and currently stands at 10%. The onchain limit is 30%, which gives room for future governance decisions without requiring any contract migration.

All four are denominated in basis points (bps), where 10,000 bps equals 100%. So a 2% annual management fee is expressed as 200 bps in the contract, a 20% performance fee is 2,000 bps, and so on.

Management and performance: the manager's economics

Management and performance fees are the two levers that determine curator compensation. They are computed differently (linear time-based accrual vs. gain-gated accrual) and serve different purposes (covering operating costs vs. rewarding alpha), but they use the same basis-point system and accrue at the same moment.

Management fee

Management fees are the simpler of the two. They accumulate linearly between settlements, proportional to the vault's current size and the elapsed time:

managementFee = (assets × rate / 10,000) × (timeElapsed / 1 year)

A $100M vault with a 150 bps (1.5%) management rate accrues $1.5M of management fees over a full year. If settlement happens every three months, each settlement crystallizes roughly a quarter of that amount. The longer the gap between settlements, the larger the single accrual event, but the total over any given year is unchanged.

Two operational points follow from this design. First, the cap is 10% per year, which is enforced at the contract level and cannot be exceeded regardless of vault admin intent. Second, management fees are charged even when the strategy loses money; they compensate the curator for operating infrastructure, not for producing returns.

Performance fee and the high-water mark

Performance fees behave differently. They only apply when the current price per share exceeds the high-water mark, which is the highest price per share the vault has ever reached. This design is deliberate: managers should earn on genuine new gains, never on recovering losses they previously exposed investors to.

The formula runs only when the high-water mark is breached:

If pricePerShare > highWaterMark:
  profit = (pricePerShare - highWaterMark) × totalSupply
  performanceFee = (profit × rate) / 10,000

Figure 2: The high-water mark steps up only when the price per share sets a new peak. Performance fees accrue on fee-gated cycles; recovery cycles produce no fee.

The high-water mark is tracked onchain at every settlement. When the vault sets a new peak, the HWM is raised. When the vault dips, the HWM stays put. This is the mechanism that prevents what TradFi investors call the "fee reset" problem: in a poorly designed structure, a manager who loses 20% and then gains 20% back would charge performance fees on the recovery, effectively double-charging investors. With onchain HWM tracking, the reconciliation disputes that often stretch across quarters in a traditional fund are replaced with a deterministic smart contract read.

The protocol caps performance fees at 50% of gains above the high-water mark. In practice, the market usually lands in the 10% to 25% range, but the ceiling exists to protect investors from fee structures that would capture most of their upside.

Entry, exit, and protocol fees

Beyond the two core levers, a Lagoon vault supports two additional fee types: optional entry/exit fees on deposits and redemptions, and a protocol-level fee that accrues to Lagoon itself.

Entry and exit fees

Entry and exit fees are charged on the size of incoming deposits and outgoing redemption requests, collected at the same settlement that processes them. They are set to zero in most vaults but can be useful when the curator wants to discourage short-term flows, for example a strategy that relies on a minimum holding period to generate yield. Because settlement batches all pending requests together, the entry fee is applied once per settlement per investor, not per transaction.

Protocol fee

The protocol fee is different from the other three in one important way: it is not set by the vault admin. Lagoon takes a percentage of fees that the vault itself collects, at the same settlement. The rule is simple and proportional: if a vault computes 200 shares worth of management and performance fees, and the protocol fee rate is 10%, Lagoon receives 20 of those shares. The remaining 180 go to the curator's feeReceiver address.

This is a fee on fees, not a fee on deposits or AUM directly. A vault with zero curator fees generates zero protocol revenue; the protocol only earns when the vault earns. Starting November 2025, Lagoon charges 10% of curator fees at each settlement for non-zero-fee vaults. The onchain cap is 30%, which gives Lagoon governance room to adjust the rate upward or downward without a migration.

Settlement: how fees become shares

All four fee types resolve to a single mechanism at settlement: new shares are minted to the feeReceiver address. Nothing is sold. No assets move out of the vault. The curator's share of the fees, and Lagoon's share, both arrive as freshly minted claims on the vault's future performance.

Figure 3: At settlement, fees are computed from vault state, minted as new shares, and split between the curator and the protocol.

The mechanics: at the moment of settlement, the contract reads four inputs (total assets, total supply, time elapsed since last settlement, current price per share) and uses them to compute the management fee, the performance fee, and any applicable entry/exit fees. It converts the total fee amount into a share quantity, using the current price per share as the denominator. Those shares are then minted and distributed: Lagoon's protocol cut goes to a protocol-controlled address, the remainder goes to the vault's configured feeReceiver.

Three consequences of this design are worth noting for curators and their counterparties.

1. Strategy capital is preserved. Because fee shares are minted rather than extracted, the vault's working capital never dips at settlement. A trading strategy that relies on being fully invested does not see a drawdown on fee days.
2. Fee recipients are aligned with performance. A feeReceiver that holds minted shares continues to participate in future vault upside, not just the current period. Curators who receive their fees as shares are exposed to the same net asset value (NAV) movement as their investors.
3. Audit trails are continuous. Every mint event is visible on the vault's ERC-20 ledger. Investors can reconcile fees against the contract state without waiting for a quarterly report. For institutional allocators conducting periodic verification, this replaces spreadsheet-based reconciliation with a direct query against onchain data.

The vault governance roles model reinforces this: the vault administrator sets rates at deployment; the curator executes strategy and triggers settlement; the valuation provider submits NAV; the whitelist manager gates access. No single role can unilaterally redirect fees or change caps without a governance path that is itself encoded onchain.

Going further

• Vault Governance Roles: Who Does What in an Onchain Fund: the four-role model that gates who can configure what, including fee rates.
• How Onchain Vaults Cut Fund Operations from Weeks to Hours: the broader operational case for encoding fund administration in smart contracts.
• ERC-7540 Explained: Async Vaults for Real-World Assets: the settlement mechanism that all fee accrual hooks into.