Vault Strategy

Deposits assets into an Automated Market Maker (AMM) pool (e.g., Uniswap, Curve) to earn trading fees and liquidity mining rewards. Strategies manage impermanent loss risk and optimize for fee-heavy pools.

• Examples: Stablecoin pools (e.g., USDC/DAI), volatile asset pairs (e.g., ETH/USDC).
• Mechanics: Supplies both tokens of a trading pair, receives LP tokens representing the share of the pool.

Supplies assets to a lending protocol (e.g., Aave, Compound) to earn interest from borrowers. Advanced strategies may involve leveraged looping (borrowing against supplied collateral to supply more) to amplify yield.

• Yield Source: Borrower interest payments and protocol token incentives.
• Risk Focus: Manages collateral health factors and liquidation risks.

Stakes Proof-of-Stake (PoS) native tokens (e.g., ETH, SOL) to secure the network and earn staking rewards, while issuing a liquid staking token (LST) like stETH or mSOL that can be used elsewhere in DeFi.

• Key Benefit: Unlocks liquidity of staked assets.
• Strategy Role: Manages validator selection, slashing risk, and reward distribution.

A meta-strategy that takes the yield-bearing token from a base strategy (e.g., a lending cToken or LP token) and re-deposits it into another protocol to farm additional rewards, often in governance tokens.

• Process: 1) Earn base yield (interest/fees). 2) Stake receipt token in a farm. 3) Harvest and compound rewards.
• Goal: Maximize total APY through reward token accumulation.

Aims to generate yield while hedging against the price movement of the underlying asset. Often involves taking offsetting positions in perpetual futures or options contracts.

• Common Setup: Provide liquidity in a spot market while taking a short position in perps to hedge price exposure.
• Result: Aims for pure yield from fees/funding rates, isolated from market volatility.

Seeks higher yields by leveraging opportunities across multiple blockchain networks. Uses bridges and interoperability protocols to move assets to chains with more favorable lending rates, farming rewards, or lower gas costs.

• Components: Asset bridging, yield source identification on destination chain, and periodic rebalancing.
• Complexity: Introduces bridge security and cross-chain messaging risks.

Strategies execute complex DeFi operations automatically, such as liquidity provision, lending, or staking, to continuously seek the highest risk-adjusted returns. This removes the need for manual monitoring and transaction execution.

• Example: A strategy might automatically compound rewards from a liquidity pool back into the principal to maximize APY.

Strategies can be engineered with built-in risk parameters like slippage tolerance, debt ceilings, and oracle price feeds. They can also diversify assets across multiple protocols to mitigate smart contract risk and impermanent loss.

• Example: A stablecoin yield strategy might split funds between Aave, Compound, and a Curve pool to spread exposure.

By pooling user funds, vaults achieve economies of scale, reducing gas fees per user and enabling access to strategies with high capital minimums. They can also utilize leverage or flash loans to amplify returns in a way impractical for individual users.

• Example: A leveraged farming strategy might use a flash loan to temporarily boost liquidity position size.

Vaults abstract away technical complexity, allowing users to gain exposure to advanced DeFi tactics with a single deposit. The vault token itself (ERC-4626 standard) becomes a composable yield-bearing asset that can be used as collateral elsewhere in DeFi.

• Example: A user deposits ETH and receives a vault token representing a staked ETH position, which they can then use as collateral to borrow on MakerDAO.

The core value proposition is that all strategy logic is on-chain and open-source. Users and auditors can verify the code, the asset custody (non-custodial), and the execution path, creating a trust-minimized system. Performance metrics like APY and TVL are publicly visible.

Common strategy archetypes demonstrate their value:

• Delta-Neutral Farming: Earn yield while hedging against asset price volatility.
• Liquid Staking Derivatives (LSD): Stake tokens and use the derivative for additional yield.
• Stablecoin Yield Aggregation: Rotate between lending protocols to capture the highest stablecoin rates.
• Cross-Chain Strategies: Deploy capital to the highest-yielding opportunities across multiple blockchains.

The primary risk is a vulnerability in the vault's own code or in the external protocols it integrates with (e.g., lending pools, DEXs, oracles). Exploits can lead to a total loss of deposited funds. Mitigation involves code audits, bug bounties, and using time-locked, multi-signature governance for upgrades.

Strategies are exposed to the underlying DeFi primitives they use. Key risks include:

• Impermanent Loss: For liquidity provider (LP) strategies in Automated Market Makers (AMMs).
• Liquidation Risk: For leveraged positions in lending protocols if collateral value falls.
• Slippage & MEV: During large strategy rebalances or exits.

Many strategies rely on price oracles (e.g., Chainlink) to determine asset values for functions like calculating collateral ratios or harvesting rewards. A stale or manipulated price feed can cause incorrect strategy execution, leading to unfair liquidations or failed arbitrage.

The entity controlling the vault's strategy parameters holds significant power. Risks include:

• Rug Pulls: Malicious admins draining funds.
• Upgrade Risks: A governance vote pushing a buggy or malicious strategy update.
• Fee Manipulation: Excessively high performance or management fees set by controllers.

A strategy overly concentrated in a single asset, protocol, or blockchain faces heightened systemic risk. If that single point fails, the entire vault is impacted. Diversification across assets and base-layer protocols is a key mitigant.

Users may not be able to withdraw funds immediately if the strategy's assets are illiquid or locked. This can occur during:

• Bank Runs: Mass exits causing a vault to sell assets at a loss.
• Protocol Pauses: Underlying integrations freezing withdrawals.
• Lock-up Periods: Assets staked in vesting or bonding contracts.

The foundational activity that vaults automate. It involves providing liquidity to DeFi protocols (like AMMs or lending markets) in exchange for rewards, typically in the form of trading fees or governance tokens. Vault strategies programmatically manage the complex steps of this process, such as compounding rewards to maximize returns.

A core DeFi primitive where vaults often deploy capital. An AMM is a decentralized exchange that uses liquidity pools instead of order books. Vaults act as liquidity providers (LPs), depositing token pairs (e.g., ETH/USDC) into these pools. In return, they earn a share of the transaction fees generated from trades that occur in that pool.

The primary metric for gauging the scale and adoption of a vault or DeFi protocol. TVL represents the aggregate amount of user deposits (in USD) managed by the strategy. It is a key indicator of capital efficiency and trust, though it does not directly measure profitability or risk. High TVL often correlates with deeper liquidity and lower slippage.

The immutable, self-executing code that defines the vault strategy's logic. It autonomously handles deposits, withdrawals, fee calculations, and the execution of the yield-generating strategy. Security audits of this contract are critical, as vulnerabilities can lead to the loss of all locked funds. The strategy's rules and parameters are encoded here.

A key risk for vaults providing liquidity to AMMs. IL occurs when the price ratio of the deposited tokens changes compared to when they were deposited. The vault's value in the pool becomes less than if the tokens were simply held (HODL). Strategies may employ hedging or focus on stablecoin pairs to mitigate this risk, but it is an inherent trade-off for earning fees.

Measures of return critical for evaluating vault performance. APR (Annual Percentage Rate) is the simple interest rate earned, ignoring compounding. APY (Annual Percentage Yield) includes the effect of compounding interest or rewards over the year. Vaults that frequently harvest and reinvest rewards will advertise an APY, which is typically higher than the APR for the same base rate.