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Vaults range in complexity and risk, with some of them using single asset deposits instead of liquidity pool tokens. Alternatively, Vaults can even utilize more complex strategies that involve multiple protocols and transaction types.

What are Vaults?

What is a Vault in the Decentralised Finance space?

In the DeFi space, most of the projects are based on issuing rewards to users for interacting with their contracts on their platform, one example is staking tokens in a smart contract (farm) which in turn can increase the total locked value for the project. Usually, Liquidity Pool (LP) tokens are used to this end as many projects give rewards in return for users providing the liquidity needed to make the platform run.

This is commonly called yield farming.

Yield farming with limited funds can be quite expensive due to high transaction costs for claiming rewards. To solve this dilemma, Yield Aggregators are sets of contracts that pool these funds together and allow investors to optimise their yields by facilitating the use of Vaults to automatically harvest and reinvest the farming rewards the liquidity pools, resulting in most often than not , highly compounded gains. These auto-compounding vaults can provide yield farming advantages to users with smaller portfolios. These vaults allow investors to not have to worry about high gas fees which maximize the rewards they can earn on various yield farms.

Different types of DeFi Vaults

Vaults can come in a few different varieties

  • Lower risk: Simple strategy – single asset staking vaults
  • Middle risk: Simple strategy – LP token with auto compounding of the farming rewards
  • High risk: Advanced strategy – Multi-layered strategies that use multiple farms and protocols.


It is always wise to research the exact process of a vault before investing any funds into one.  Vaults range in complexity and risk, with some of them using single asset deposits instead of liquidity pool tokens. Alternatively, Vaults can even utilize more complex strategies that involve multiple protocols and transaction types.

Written By

Petrache Ionut

May 28, 2022