Many crypto users want diversified, rules-based exposure without spending every day trading or monitoring markets, yet they often face three persistent problems: opaque strategies, fragmented liquidity across chains and venues, and unclear, delayed reporting on what their money is doing. In traditional markets, these gaps are handled by fund structures, administrators, custodians, and a standardized process for calculating and publishing net asset value. In crypto, the same goals matter, but the tools are different. When portfolio logic, trade execution, and performance accounting are scattered across wallets, bridges, and independent applications, it becomes hard for a normal user to know what is being held, how risk is controlled, and how value is calculated at any given time.
Traditional finance approaches this with regulated funds that follow a mandate, hold assets with a custodian, execute through authorized brokers, and publish a prospectus and reports. Capital flows into and out of the fund through a transfer agent, the portfolio manager rebalances based on rules, and administrators compute daily or periodic NAV so all investors transact against the same reference value. These layers were built to reduce operational risk and create a single source of truth for positions, cash, and fees. The trade-off is complexity, limited access, and slow settlement.
Lorenzo Protocol applies the same organizing logic on-chain using transparent, rules-based smart contracts. Its On-Chain Traded Funds, or OTFs, mirror the structure of a fund share while remaining native to blockchain infrastructure. Each OTF represents a strategy mandate implemented by contracts instead of paper processes. Vaults act like on-chain portfolio accounts. Simple vaults implement a single strategy such as quantitative spot trend, managed futures exposure via perpetuals, volatility carry, or structured payoff construction. Composed vaults route capital across simple vaults according to a defined allocation policy, similar to a fund-of-funds model. This hierarchy gives the protocol clear lines for what assets can be held, how and when rebalancing occurs, and how performance is tracked.
A user interaction is straightforward. A wallet connects to the application, reviews disclosures for a specific OTF, and deposits an accepted asset such as a stablecoin or base token. The deposit mints OTF tokens that represent a pro-rata claim on the vault’s net assets. Redemptions burn OTF tokens and return the user’s share of underlying assets or their settlement asset, depending on the strategy design. Fees, such as management or performance fees if they apply, are encoded in the contracts so that accrual and deduction follow observable rules rather than back-office spreadsheets. Every mint, burn, and fee event creates an on-chain record, which means balances, ownership, and transaction history are independently verifiable.
Capital flows follow clear steps. When users deposit, funds move into the selected vault. If it is a simple vault, the strategy contract deploys capital into the instruments it is permitted to use, for example spot assets on decentralized exchanges, collateral in derivative protocols, or structured positions created by combining options-like payoffs. If the vault is composed, a router allocates deposits across underlying simple vaults based on target weights and rebalancing thresholds. Execution relies on integrated venues with predefined slippage limits and allowed counterparties where relevant. Settlement occurs on-chain when trades close or funding and PnL accrue, and all cash movements stay within the vault’s accounting perimeter so the strategy’s assets and liabilities remain segregated from other activities.
Value is calculated, tracked, and settled in a way that aligns with fund accounting. Each vault maintains an on-chain ledger of positions, cash, and claims. Asset valuations are derived from transparent price sources and oracle feeds appropriate to the instrument. The protocol can checkpoint the portfolio at defined intervals to compute net asset value per token, incorporating realized and unrealized PnL, fees, and any distribution logic specified by the mandate. Mints and burns reference the current NAV so that incoming and outgoing investors transact at the same basis, reducing confusion about who owns which share of performance. Because the accounting state is stored on-chain, independent parties can reconstruct the vault balance sheet from transaction logs and state proofs.
Risk management principles are built into the structure rather than implied after the fact. Market risk is addressed by explicit strategy mandates, position limits, and exposure caps that the contract enforces. Liquidity risk is mitigated by using venues with sufficient depth and by setting per-transaction slippage bounds; if conditions deteriorate, the contract can refuse to execute until parameters are within limits. Leverage and collateral risk in derivatives are handled through hard limits on margin usage and eligible collateral types. Oracle risk is reduced by using robust feeds and fallback logic, with the understanding that any price-based system depends on data quality. Smart contract risk is managed through audits, standardized libraries, permission scopes, and timelocks for changes. None of these controls eliminate risk, but they make the sources of risk observable and the responses rule-driven, which is an important step for a market that needs consistency over headlines.
Because the protocol operates in today’s crypto market structure, it must handle the realities of chains, bridges, and execution venues. Gas costs and finality determine rebalancing cadence. Composability allows strategies to integrate with liquidity and derivatives protocols while keeping a clean accounting boundary. If a strategy spans multiple chains, the vault design can restrict how and when assets move across bridges, or choose to remain single-chain to avoid additional operational risk. All of this is disclosed at the strategy level so users understand the operational surface area before they deposit.
Transparency and on-chain verification reduce confusion in several practical ways. Users can see current holdings and exposures at the vault level, not just a static pie chart. They can match reported NAV to position and price data at checkpoint times. They can observe when fees were accrued and paid. They can verify that redemptions were processed according to the same rules as mints. Auditors and risk reviewers can reproduce the accounting from state, which raises the standard for public funds data in crypto and shortens the feedback loop when the market changes.
Governance focuses on long-term alignment rather than short-term promotion. The BANK token is the protocol’s governance asset, and a vote-escrow system (veBANK) allows participants who lock their tokens for longer to have more influence on parameter choices such as strategy listings, risk limits, fee schedules, or incentive allocations. This creates a clear mechanism for aligning decisions with time horizons. The design does not promise outcomes or prices; it provides a public process for changing rules with appropriate notice through timelocks and verifiable votes so that end users and integrators can plan around predictable governance events.
For users, the operating experience stays simple while the infrastructure stays rigorous. Interactions are limited to deposit, hold, and redeem; everything else is driven by mandates and recorded by contracts. For integrators, OTF tokens and vault interfaces are standard building blocks that can be composed into portfolios, lending markets, or structured notes, with the accounting and risk logic traveling alongside the asset. For the broader ecosystem, the important contribution is a shared language for strategy mandates, NAV, fees, and settlement that works natively with blockchains and explorers rather than PDFs and emails.
A balanced view recognizes both the potential and the responsibilities. Tokenized fund structures can lower operational friction, improve auditability, and make diversified strategies more accessible, but they introduce new dependencies on smart contracts, price feeds, and venue liquidity. Clear disclosures, narrow and well-tested mandates, conservative parameter defaults, and independent verification are the path to maturity. If the industry keeps improving data, security, and governance, structured on-chain products like Lorenzo’s OTFs can help standardize how value is created, measured, and shared across networks. The goal is not to promise outcomes, but to make the process understandable and repeatable so that users, developers, and institutions can build with confidence over the long term.
