What are protocol fees?
Protocol fees are the portion of transaction charges that a crypto protocol keeps and directs according to its rules.
Version 1
GlossaryA protocol fee is the part of a transaction charge that a crypto protocol keeps. The protocol’s rules decide where that money goes.
Imagine a swap charges one dollar. Some of that dollar may pay the people supplying trading liquidity. Another part may go to the protocol. That retained part is the protocol fee.
A little more technical
Smart contracts can direct protocol fees automatically to a treasury, token buyback, staking reward or operating team. Governance can sometimes change that split. A fee percentage does not by itself show profit because teams may also have expenses and other revenue.
Common misunderstanding
Trading volume is not protocol revenue. A protocol can process a large amount of trading while keeping only a small fee. A promised buyback allocation also does not guarantee when purchases happen or what happens to the purchased tokens.
Source: Orca’s current fee-allocation proposal is one project-specific example.