Redemption Fee
A fee charged when a depositor withdraws from a fund, vault, or pool, often used to discourage short-term capital and compensate remaining depositors for withdrawal-related costs.
A redemption fee is a charge applied when a depositor withdraws funds from a vault (see Kaavon's "Vault (DeFi)" glossary definition), yield farming (see Kaavon's "Yield Farming" glossary definition) pool, or similar pooled investment product, typically calculated as a percentage of the withdrawn amount. The fee is often structured to decline or disappear entirely after a depositor has held their position for a minimum period, specifically targeting short-term, opportunistic capital rather than genuine long-term depositors.
Redemption fees serve two related purposes: discouraging "hot money" from quickly entering a pool to capture a short-term yield spike and then immediately exiting, which can destabilize a pool's liquidity for other depositors, and compensating remaining depositors for the transaction costs a large withdrawal can trigger, such as the pool needing to unwind underlying positions to fund the redemption. Collected redemption fees are typically redistributed back to the pool's remaining depositors rather than being kept by the protocol itself.
Examples
- A yield vault charging a redemption fee for withdrawals made within the first week of depositing discourages short-term capital from quickly entering and exiting to capture a temporary yield spike.
- Redemption fees collected from early withdrawals are typically redistributed back to the pool's remaining depositors, rather than being retained by the protocol itself.