Protocol fees

Diffuse Prime protocol fees consist of spread fee and fees for liquidation and early withdrawal. All fees are specific to a yield strategy and defined by the vault curators. While setting fees per strategy requires more boilerplate work, it gives curators greater flexibility. In future versions, this may be simplified.

Lenders receive fixed returns when a position is created, so borrowers effectively cover all protocol fees.

Spread fee

The spread fee is applied by slightly increasing the borrow interest rate and routing the difference to the protocol.

Liquidation penalty fee

When a position is liquidated, a penalty fee is applied. This helps reward the liquidator and offset potential losses from price fluctuations or gas costs.

In the current early phase, only Diffuse-managed liquidators are active, so this fee is routed back to the protocol.

In volatile conditions, liquidation-related costs (e.g. gas) may exceed the penalty. Vault curators are responsible for tuning this parameter to ensure liquidations remain worthwhile.

Early exit fee

Early withdrawals work against the interests of both lenders and the protocol. To discourage them, a small optional fee may be applied.