Intro: Vaults

Yield farming can be a pretty ⏳ time-consuming and 💸 expensive activity. By relying on vaults, you don't need to spend hours searching for the best yield farming opportunity and hundreds of dollars in gas fees to move funds around and keep monitoring your collateralization ratio.

What are Vaults?

Vaults are pools of capital that automatically generate yield based on lending rates available in DeFi.

Vault strategies are more active than just lending out coins like in the standard Yearn protocol.

In fact, most vault strategies can do multiple things to maximise the returns, including:

• Supplying collateral and borrowing other assets such as stable coins

• Providing liquidity

• Collecting trading fees

• Farming other tokens and selling them for profit.

One of the most important benefits of using Vaults is automating your 👨‍🌾 yield farming.

source: finematics.com

Why are Vaults needed?

Vaults were created as a direct response to yield farming and liquidity mining that made searching for the highest yield much more complex than just switching between different lending protocols.

Similarly to the standard Yearn protocol, when tokens are deposited to a vault the user receives their corresponding yTokens that can be redeemed for the underlying tokens.

You always withdraw the same asset that was initially deposited. So farmed tokens and accrued fees are sold for the main asset in the vault. The amount that is withdrawn is the initial amount + pool yield - fees.

When a user withdraws from a vault, the funds first come from the idle portion of the vault and there is no withdrawal fee charged. If there are not enough funds in the idle portion of the vault to cover the withdrawal, the funds have to be withdrawn from the strategy which results in a 0.5% fee.

source: finematics.com

Fees that don’t go to the strategy creator end up in a dedicated treasury contract. If the money in the treasury contract exceeds the $500k threshold, everything over that amount is redirected to the governance staking contract.

What is an example of a vault?

source: finematics.com

In the current strategy for the yETH vault that may and will most likely change over time:

• An user deposits ETH into the Vault.

• ETH is put into a MakerDAO lending platform as collateral.

  • The ETH strategy can borrow DAI at 200% collateralization ratio, creating a collateralised debt position (CDP). This means that if 100 ETH was put into the MakerDAO with $500 per ETH, the strategy could borrow up to $25,000 DAI.

• Borrowed DAI is then put into the Yearn DAI Vault that uses a strategy that deposits DAI to Curve’s Y pool that is a pool with stable coins consisting of DAI, USDC, USDT and TUSD.

  • Due to the current liquidity mining program of the Curve’s CRV token, providing liquidity to the Curve’s pools and locking LP tokens in the Curve Gauge result in getting rewarded with extra CRV tokens, on top of standard trading fees generated by just supplying liquidity to a pool.

The ETH strategy then periodically sells CRV tokens for ETH and uses the accrued trading fees from the Y liquidity pool to accrue even more interest.