Harvest-on-Deposit vs Harvest-on-Withdrawal Mechanisms

Harvest-on-Deposit excels at maximizing capital efficiency by compounding yield instantly upon user interaction. When a user deposits into a vault like Yearn's yVaults or Aave's aTokens, the protocol immediately harvests pending rewards and converts them into more of the underlying asset, ensuring every unit of capital is immediately productive. This results in a smoother, auto-compounding APY curve for the end-user, as seen in protocols with high TVL where small, frequent harvests are gas-prohibitive.

Harvest-on-Withdrawal takes a different approach by deferring the harvest transaction until a user exits their position. This strategy, used by many standalone staking contracts and simpler vaults, minimizes protocol-level gas expenditure and simplifies contract logic. The trade-off is that unharvested rewards sit idle, creating an opportunity cost known as "yield drag." This can be significant in high-yield environments like liquid staking derivatives on Lido or Pendle's yield tokens, where yields accrue in real-time.

The key trade-off: If your priority is maximizing absolute returns for long-term holders and you can amortize gas costs over a large TVL, choose Harvest-on-Deposit. If you prioritize minimizing protocol overhead and gas fees for frequent depositors/withdrawers, or are building a simpler initial MVP, choose Harvest-on-Withdrawal. The decision fundamentally hinges on your target user's holding period and your vault's expected transaction volume.

Harvest-on-Deposit excels at delivering a seamless, predictable user experience because rewards are auto-compounded at the moment of staking. For example, protocols like Lido and Rocket Pool use this model for their liquid staking tokens (stETH, rETH), providing users with a rebasing or price-appreciating asset without requiring manual claims. This model simplifies accounting for users and dApps, as the value of the staked position is always up-to-date and composable within the broader DeFi ecosystem on Ethereum and Layer 2s.

Harvest-on-Withdrawal takes a different approach by separating the principal and reward accrual. This results in a trade-off of increased user action for potentially greater gas efficiency and flexibility. Protocols like Aave for lending or Uniswap V3 for liquidity provision use this model, where yield accrues internally and is claimed upon exit. This can reduce on-chain write operations and gas costs for passive holders, but it shifts the burden of timing and paying for harvest transactions to the user, which can lead to reward stagnation.

The key trade-off: If your priority is maximizing user convenience, composability, and predictable APY display for a mainstream product, choose Harvest-on-Deposit. This is ideal for foundational DeFi primitives like liquid staking. If you prioritize protocol-level gas optimization, flexible reward distribution (e.g., vesting schedules), or complex multi-asset reward calculations, choose Harvest-on-Withdrawal. This is often better suited for sophisticated yield aggregators or protocols where user interaction is already expected.