What is a Vault Strategy?
A vault strategy is the specific investment approach used by a DeFi vault to generate returns on deposited assets. Strategies can range from simple (single protocol lending) to complex (multi-step leveraged positions across protocols).
Strategy Components
- Asset Deployment: Where and how funds are used
- Yield Sources: Trading fees, lending interest, rewards
- Risk Parameters: Leverage, collateralization, limits
- Harvest Logic: When and how to claim rewards
- Rebalancing Rules: When to adjust positions
Common Strategy Types
Simple Strategies
- Lending: Deposit to Aave/Compound, earn interest
- Staking: Stake assets, claim rewards
- LP Farming: Provide liquidity, earn fees + rewards
Intermediate Strategies
- Leveraged Lending: Recursive borrowing for amplified yield
- LP Compounding: Auto-compound LP rewards
- Curve Optimization: Maximize CRV + protocol rewards
Advanced Strategies
- Delta Neutral: Long + short positions for stable yield
- Cross-Protocol: Arbitrage between platforms
- Options Selling: Generate premium income
- Active LP Management: Dynamic range adjustment
Strategy Evaluation
- Historical Performance: Backtested and live returns
- Risk Profile: Potential for loss, worst-case scenarios
- Complexity: Number of protocols and interactions
- Smart Contract Risk: Audit status, track record
- Capacity: Maximum TVL before returns diminish
Strategy Development
Yield aggregator strategists:
- Research new opportunities
- Test strategies on testnets
- Deploy to production
- Monitor and adjust
- Earn performance fees
Strategy Risks
- Smart contract bugs in strategy or underlying
- Liquidation in leveraged strategies
- Impermanent loss in LP strategies
- Protocol insolvency affecting deposits