Vaults

Vaults in DeFi are smart contracts that run automated strategies to generate returns on your assets.

What is a vault?

Instead of you manually executing complex strategies, you deposit your tokens in a vault that:

1. Executes the strategy automatically
2. Reinvests gains (compounding)
3. Charges a fee for the service

You deposit tokens

The strategy runs on its own, 24/7

Returns get reinvested automatically

You just deposit and withdraw. The contract does the rest — which is exactly what you need to understand before trusting it with money.

Types of vault strategies

1. Yield farming

The vault deposits your tokens into protocols that pay rewards, and reinvests them automatically.

Example: You deposit USDC, the vault lends it out on Aave and reinvests the interest.

2. Liquidity provision

The vault provides liquidity on DEXs and earns the fees from people making swaps.

Example: You deposit ETH, the vault uses it in an ETH/USDC pool on Uniswap.

Impermanent loss: the risk nobody explains to you

It's the central risk of providing liquidity, and the one that leaves a lot of people with less money than if they'd done nothing.

When you put two tokens into a pool, the pool rebalances itself as people trade. If one of the two rises a lot in price, the pool leaves you with less and less of that one and more of the other.

   You deposit:   1 ETH  +  2,000 USDC     (ETH is at $2,000)

   ETH rises to $4,000. People buy ETH from the pool.

   You withdraw:  ~0.7 ETH  +  2,830 USDC   ≈ $5,660

   If you had done nothing:
                  1 ETH  +  2,000 USDC     = $6,000

   Difference:   −$340   ← that's impermanent loss

It's called "impermanent" because if the price goes back to where it was, the loss disappears. But if it doesn't, it's very permanent.

The fees you earn have to make up for that loss. Sometimes they do; sometimes they don't. That's why providing liquidity in volatile pairs is much riskier than a big APY makes it look.

With two stablecoins (USDC/USDT) the effect is nearly zero, because the prices don't drift apart.

3. Delta-neutral strategies

Combine long and short positions to generate returns without directional exposure to price.

4. Arbitrage

Exploit price differences between markets.

5. Hyperliquid vaults

Hyperliquid has specific vaults where you can copy traders' strategies:

HYPERLIQUID VAULT

Depositors put in USDC. A trader trades with that money. Gains and losses are split among everyone.

• If the trader wins, you win — minus their fee
• If the trader loses, you lose

You're trusting your money to one person's skill. It's the closest thing to a fund, with none of a fund's regulation.

Important concepts

APY vs APR

Term	Meaning
APR	Annual Percentage Rate - Simple return
APY	Annual Percentage Yield - Includes compounding

A 10% APR with daily compounding = ~10.5% APY

TVL (Total Value Locked)

The total amount of value deposited in the vault. Higher TVL generally signals more trust, but doesn't guarantee safety.

Performance fee

The fee the vault charges on gains (typically 10-20%).

Management fee

An annual fee on the deposited capital (typically 0-2%).

Risks of vaults

1. Smart contract risk

The vault is code. If it has bugs, they can be exploited to steal funds.

Mitigation:

• Use audited vaults
• Check the protocol's track record
• Don't put everything into one vault

2. Strategy risk

The strategy can lose money because of:

• Adverse market conditions
• Impermanent loss (in liquidity pools)
• Liquidations (in leveraged strategies)

3. Underlying protocol risk

If the vault deposits into another protocol (Aave, Compound, etc.), you inherit that protocol's risks.

4. Operator risk

In vaults managed by humans (like Hyperliquid's), you're trusting the operator to make good decisions.

5. Liquidity

Some vaults have lock periods or penalties for early withdrawal.

Popular vaults

Platform	Blockchain	Type
Yearn	Ethereum	Yield optimization
Beefy	Multi-chain	Auto-compounding
Hyperliquid Vaults	Hyperliquid	Copy-trading
Kamino	Solana	Liquidity provision

How to evaluate a vault

Before depositing, check:

□ Is the contract audited?
□ How long has it been running?
□ What's the track record of returns?
□ What are the strategy's risks?
□ Is there a lock period?
□ What are the fees?
□ How big is the TVL?
□ Who operates/manages the vault?

Example: Using a Hyperliquid vault

1. Go to app.hyperliquid.xyz
2. Connect your wallet
3. Go to the "Vaults" section
4. Review the available vaults:
   • Historical performance
   • Maximum drawdown
   • Strategy
5. Deposit USDC into the vault you chose
6. Your funds follow the vault's strategy
7. You can withdraw whenever you want (check the conditions)

Realistic returns

Watch out for very high APYs

• APY of 5-15% on stablecoins: Reasonable
• APY of 20-50%: High risk, dig deeper
• APY of 100%+: Probably unsustainable or a scam

"If it sounds too good to be true..."

Diversification

Don't put everything in a single vault:

Portion	Where	Risk
40%	Stablecoin vault	low
30%	ETH vault with a proven strategy	medium
20%	More aggressive vault	high
10%	Experimentation	assume you lose it

Summary

• Vaults automate yield strategies
• They offer convenience but introduce risk
• There's always smart contract risk
• Evaluate audits, track record, and strategy before depositing
• Very high returns = very high risk
• Diversify across different vaults and protocols

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