Lorenzo Protocol makes much more sense when you stop thinking about it as a complicated crypto product and start thinking about it as a familiar financial idea that has been rebuilt with smart contracts. In traditional finance, people give money to a fund, the fund runs strategies behind the scenes, and investors hold shares that represent their portion of the whole portfolio. Most of the work happens quietly in the background through custodians, administrators, and managers that users never really see. Lorenzo is trying to recreate that same experience on-chain, where the logic is transparent, the ownership is tokenized, and the rules are enforced by code instead of paperwork.
The main problem Lorenzo is trying to solve is not yield itself. Yield already exists everywhere in DeFi. The problem is structure. Most strategies in crypto live in isolated systems. Each one has its own contracts, its own logic, and its own risks that users must understand and manage on their own. Lorenzo’s idea is to standardize how strategies are packaged so that users and partners can interact with them in a predictable way, without rebuilding the entire setup each time. This is why the protocol focuses so heavily on vaults and abstraction instead of flashy promises.
At the heart of Lorenzo is something called the Financial Abstraction Layer. The name sounds heavy, but the idea is actually very practical. It is meant to act like a common language between strategies and products. Instead of every strategy being a one-off design, the abstraction layer makes them fit into a shared structure. This allows strategies to be plugged in, combined, and managed using the same basic rules. In simple terms, it is a framework that turns complex strategies into standardized building blocks.
Vaults are the main containers that hold capital inside this system. A vault is just a smart contract that receives assets and follows specific rules about how those assets are used. The rules define where funds are allocated, how returns are calculated, and how users enter and exit. Lorenzo describes two main types of vaults, and the difference between them is important for understanding the system as a whole.
A simple vault is the most basic unit. It is connected to a single strategy and represents one source of yield. If you imagine a traditional fund world, this is similar to a fund that runs one clear approach, such as a single trading strategy or yield method. Users who deposit into a simple vault are exposed only to that strategy, and their returns depend entirely on how that one approach performs.
A composed vault, sometimes referred to as a fund, is a step up in complexity. Instead of running one strategy, it aggregates several simple vaults into a single portfolio. This mirrors how diversified funds work in traditional finance. Instead of holding exposure to one idea, users gain exposure to a basket of strategies managed together. The composed vault decides how much capital goes into each simple vault, and users interact with it as one product rather than juggling multiple positions themselves.
What makes this design powerful is that management can be delegated. The composed vault can be managed by a third party, which could be a professional team, an institution, or even an automated agent. The user does not need to understand every individual strategy inside. They trust the structure and the manager, just like they would in a traditional fund, but with the transparency and programmability of on-chain systems.
One part of Lorenzo’s design that often raises questions is its connection to centralized trading execution. The protocol does not pretend that all yield comes purely from on-chain actions. Some strategies described in its design rely on trading activity on centralized exchanges. Instead of hiding this reality, Lorenzo tries to organize it carefully.
The operational model is explicit. Assets deposited into a vault can be routed into custody wallets that are mapped one-to-one with sub-accounts on centralized exchanges. Each sub-account corresponds to a specific asset and strategy. Trading teams operate these accounts using controlled APIs with limited permissions. This means they can trade, but they cannot arbitrarily move funds elsewhere. The goal is to keep ownership and accounting anchored on-chain, while execution happens off-chain in a controlled and auditable way.
To make this work, several components must be set up properly. Exchange sub-accounts are created for each underlying asset. Custody wallets are registered and mapped directly to those sub-accounts. When a simple vault is created, it defines where yield comes from, what return targets exist, and how capital should be split across portfolios. It also specifies which custody wallet is tied to each part of the strategy. When users deposit assets, those assets are automatically distributed according to the predefined rules. There is no manual routing after the fact.
Composed vaults add another layer on top of this. When users deposit into a composed vault, the system first decides how the funds are split across the underlying simple vaults. Then each simple vault follows its own rules to dispatch assets into the appropriate custody wallets. This two-step allocation mirrors how large funds operate in the real world, where capital is first assigned at a portfolio level and then deployed into specific strategies.
Withdrawals follow a similarly structured process. They are not instant promises but defined flows. After a withdrawal request and its associated cycle expire, yield is collected and settled. Assets corresponding to the user’s share are separated from custody wallets and moved into a multi-signature payment wallet. From there, they are transferred back into the vault contract so the user can receive their assets on-chain. Throughout this process, accounting is handled through LP tokens.
LP tokens in Lorenzo’s system act like digital receipts. When a user deposits into a vault, LP tokens are minted to represent their share of the vault’s total value. When the user withdraws, those tokens are burned. This is how ownership is tracked cleanly and transparently. Users do not need to trust spreadsheets or reports. The token balance reflects their position directly.
On top of the vault system sits the product layer that makes everything feel more familiar. Lorenzo refers to these products as On-Chain Traded Funds, or OTFs. The idea is very similar to traditional funds or ETFs. An OTF gives exposure to a strategy or portfolio through a single token or interface. Users interact with the OTF rather than the raw vault mechanics underneath. Vaults do the heavy lifting, while OTFs present a clean, understandable product to the outside world.
This separation between infrastructure and product is intentional. It allows builders and integrators to focus on creating user-friendly experiences without reinventing the back-end logic each time. It also allows strategies to evolve inside vaults without breaking the product layer that users rely on.
The BANK token plays a different role in this ecosystem. It is not a yield token and it does not represent a share of vault assets. Instead, it functions as a governance and coordination tool. Holders of BANK can participate in decisions about how the protocol evolves. This includes incentive programs, parameter changes, and other system-level choices.
Lorenzo uses a vote-escrow model called veBANK to structure governance. In simple terms, users lock BANK tokens for a period of time and receive veBANK in return. The longer the lock, the more governance power they receive. This system rewards long-term alignment instead of short-term speculation. Those who are willing to commit to the protocol over time gain more influence over its direction.
It is important to understand what this means for beginners. BANK is not something that directly generates yield from strategies. It is a tool for steering the protocol. Its value comes from participation, incentives, and governance, not from vault performance itself. Confusing these roles is one of the most common mistakes people make when evaluating systems like this.
No explanation of Lorenzo would be complete without talking about risk. Tokenizing fund logic does not remove market risk. Strategies can fail. Returns can be lower than expected. Volatility can impact outcomes in ways that models did not predict. Smart contracts can have bugs. Systems that involve custody wallets and centralized exchanges introduce operational and counterparty risks alongside on-chain risks.
Even when processes are clearly defined, extreme market conditions can stress assumptions. Liquidity may dry up. Settlement times can stretch. Off-chain execution can face disruptions. These are not unique to Lorenzo. They are realities of any hybrid system that tries to bridge traditional execution with on-chain ownership. Understanding this is part of engaging responsibly with the protocol.
What Lorenzo is really offering is not a guarantee of returns. It is a framework. A way to package strategies into fund-like products with clear rules, standardized flows, and transparent accounting. For users who are tired of managing dozens of separate positions and contracts, this structure can feel familiar and calming. For builders and institutions, it offers a way to deploy strategies without rebuilding the same infrastructure again and again.
When you step back, Lorenzo looks less like a typical DeFi experiment and more like an attempt to modernize asset management logic for a programmable world. Vaults replace custodians. LP tokens replace fund shares. Smart contracts replace manual settlement processes. Governance tokens replace boardroom votes. The pieces are different, but the intent is recognizable.
In the end, Lorenzo Protocol is best understood as an on-chain asset management system that borrows the discipline of traditional funds while embracing the transparency of blockchain technology. The Financial Abstraction Layer organizes capital through simple and composed vaults. OTFs present strategies as clean products. BANK and veBANK coordinate governance and incentives. The system does not remove risk, but it tries to make complexity easier to live with.
That clarity, more than anything else, is what makes the design worth understanding.
