Protocol Fees

Pencil Finance incorporates a transparent, sustainable fee model designed to support protocol development, maintain long-term liquidity, and align incentives between investors, lending partners, and the protocol itself.

💸 How Pencil Finance Makes Money

The protocol generates revenue from the following sources:

1. Lending Partner Withdrawal Fee

• 0.5% fee charged when lending partners withdraw capital from their bundle.

• Applied per withdrawal, encouraging efficient fund management.

• Sent directly to the protocol treasury.

2. Early Investor Withdrawal Fee

• 1% fee paid by investors who redeem Grow Tokens before loan maturity.

• Early redemptions are fulfilled via a FIFO queue and must be backed by available liquidity.

• This fee helps stabilize the pool and discourages speculative short-term exits.

3. Interest Share Fee

• The protocol takes a 5% cut of the total interest repaid by borrowers.

• This is deducted before distributing returns to tranche holders.

• Ensures the protocol earns sustainably as repayment volume increases.

4. Stablecoin Liquidity Yield

• Unutilized USDC (or USDT) in the reserve pool may be deployed into low-risk yield strategies.

• All generated yield flows directly to the protocol.

• Future DAO governance may decide how to reinvest or distribute this income.

📊 Fee Usage and Treasury

All collected fees go into the Pencil Protocol Treasury, which will be governed by the community via the Pencil DAO (starting in V3). Treasury funds may be allocated for:

• Covering smart contract operations and audits

• Liquidity incentives and staking rewards

• Future product development

• Emergency liquidity support or insurance buffers