Very clear and structured explanation — the step-by-step breakdown makes complex DeFi mechanics easy to understand.

How Lorenzo Protocol Works
1. Deposits and Capital Allocation
Lorenzo organizes user funds through vaults, which are smart contracts designed to:
Hold supported assets
Issue LP tokens that represent your share of the vault
Route capital into underlying financial strategies
When you deposit assets, the vault mints LP tokens proportional to your ownership.
Capital allocation is handled by the Financial Abstraction Layer (FAL), which manages:
Custody setup
Strategy selection
Capital distribution
Risk-bounded allocation targets
Depending on the vault, your funds may be directed into:
A single strategy, or
A diversified portfolio split across multiple strategies
This allows you to gain exposure to complex financial products through a simple on-chain deposit.
2. Strategy Execution & Performance Tracking
Once capital is allocated, the strategies are executed off-chain by approved managers or automated trading systems. These strategies may include:
Arbitrage
Market making
Hedging
Volatility harvesting
Quantitative algorithmic trading
These processes are performed in controlled custody environments such as:
Exchange sub-accounts
Institutional wallets
Permissioned trading environments
As the strategies generate returns, results are periodically reported on-chain, where:
The vault’s Net Asset Value (NAV) is updated
Portfolio composition adjusts
Individual user returns are recalculated
This ensures transparent, verifiable, and trust-minimized performance reporting.
3. Yield Distribution and Withdrawals
Lorenzo returns yield to users based on the vault or product structure they choose. This may occur through:
NAV growth (similar to ETFs)
Claimable yield rewards
Fixed-duration payouts
Integration with On-Chain Traded Funds (OTFs)
OTFs function like fully on-chain equivalents of traditional ETFs, offering exposure to diversified portfolios while remaining composable within Web3.
When you request a withdrawal:
1. Your LP tokens are burned.
2. The vault settles the underlying assets.
3. For off-chain strategies, funds are returned to the custody layer and then to the vault.
4. You receive your principal plus any accumulated yield.
This process ensures seamless redemption while maintaining transparency and security.@Lorenzo Protocol #lorenzoprotocol $BANK