Asset Vault

Users retain full ownership of their assets via private keys; the vault's smart contract holds assets but cannot move them without the user's signed transaction. This eliminates counterparty risk from centralized intermediaries and ensures users maintain self-sovereignty over their funds at all times.

The vault's core is its automated strategy contract, which encodes rules for asset deployment. This can include:

• Yield Farming: Automatically supplying liquidity to DeFi protocols like Aave or Compound.
• Delta-Neutral Strategies: Using derivatives to hedge against price volatility.
• Rebalancing: Automatically adjusting portfolio weights based on market conditions.

When a user deposits assets, they receive a proportional amount of vault shares (e.g., ERC-20 tokens). These shares are fungible and represent a claim on the vault's underlying assets and accrued yield. They can be traded, used as collateral, or transferred, providing liquidity for the locked position.

Vaults typically charge fees to compensate strategy developers and maintainers. These are automatically deducted from generated yield and can include:

• Performance Fees: A percentage (e.g., 10-20%) of profits.
• Management Fees: A small annual percentage of total assets.
• Withdrawal Fees: A fee on exiting the vault, often to protect against rapid capital movement.

To protect assets, vaults implement configurable safety limits, such as:

• Debt Ratios: Maximum borrowing limits against collateral.
• Health Factor Thresholds: Minimum collateralization ratios for loans.
• Whitelisted Protocols: Restricting interactions to audited, trusted smart contracts.
• Emergency Shutdown: A function to pause all strategy activity and enable direct withdrawals.

As a foundational DeFi primitive, asset vaults are highly composable. They can be integrated into other protocols as yield-bearing collateral, used within meta-vaults that allocate across multiple strategies, or form the basis for structured products and index tokens, creating layered financial ecosystems.

The core risk is a vulnerability in the vault's smart contract code. Exploits can lead to a total loss of funds. Key considerations include:

• Code Audits: The necessity of multiple, reputable security audits.
• Upgradability: The risks and governance of proxy patterns or immutable contracts.
• Economic Logic Flaws: Bugs in the vault's financial mechanics, distinct from simple code bugs.

Vaults rely on cryptographic keys for privileged functions. Compromise leads to theft. Critical controls are:

• Multi-signature Wallets: Requiring multiple signatures for administrative actions.
• Timelocks: Delaying execution of sensitive transactions to allow community review.
• Role-Based Permissions: Granular separation of duties (e.g., strategist vs. governor).

Vaults often depend on price oracles (e.g., Chainlink) for valuations and liquidations. Risks include:

• Oracle Failure: If the oracle goes offline or provides stale data.
• Price Manipulation: An attacker artificially moving an asset's price on a DEX to trigger incorrect vault actions, known as an oracle manipulation attack.

Vaults interact with external protocols (e.g., lending markets, DEXs, bridges). Risks emerge from:

• Protocol Insolvency: The integrated protocol (like a lending pool) becomes undercollateralized.
• Integration Bugs: Errors in how the vault's logic interacts with an external contract's API.
• Bridge Hacks: Loss of assets if a cross-chain vault depends on a compromised bridge.

Even with perfect code, financial design introduces risks:

• Impermanent Loss: For vaults providing liquidity in Automated Market Makers (AMMs).
• Liquidation Cascades: In leveraged vaults, a market downturn can trigger mass liquidations, worsening the sell-off.
• Yield Source Failure: The underlying strategy (e.g., staking, farming) ceases to generate returns or loses principal.

A fundamental security distinction:

• Non-Custodial Vaults: Users retain control of their assets via their private keys; the vault only has approved spending allowances. Risk is limited to the approved amount.
• Custodial Vaults: Users deposit assets into a contract controlled by a third party's keys. This introduces custodial risk, similar to a centralized exchange, where the operator could abscond with funds.

The core mechanism where assets are locked in a vault as security for a loan or to back a synthetic asset. The Loan-to-Value (LTV) ratio is a critical metric determining how much can be borrowed against the collateral. Automated liquidation occurs if the collateral's value falls below a maintenance threshold.

Vaults often employ automated strategies to generate yield on idle assets. Common methods include:

• Liquidity Provision: Supplying assets to AMMs like Uniswap.
• Lending: Depositing into protocols like Aave or Compound.
• Staking: Participating in Proof-of-Stake consensus.
• Strategy Aggregation: Using routers like Yearn Finance to find optimal yields.

Infrastructure that enables asset vaults to hold and manage collateral across multiple blockchains. Bridges like Wormhole or LayerZero lock assets on a source chain and mint representative tokens (wrapped assets) on a destination chain, expanding a vault's composability and asset selection.

A DeFi primitive that allows uncollateralized borrowing within a single transaction. Sophisticated vault strategies can use flash loans for arbitrage, collateral swapping, or self-liquidation to optimize positions. The entire loan must be repaid by the transaction's end.