This article goes into more detail about the DeFi vault concept and also discusses common vault types and DeCommas automation strategies you can use to optimize your DeFi yields.
TL;DR
- The DeFi vault is a collection of user funds that are automatically invested based on a specific strategy.
- DeFi vaults automatically optimize the return on the funds you deploy. They come in handy if you are a retail investor as you can save significantly on transaction fees.
- Not all DeFi vaults are equally secure. Higher rewards usually mean higher risks.
- DeCommas offers DeFi vaults that you can follow with one click.
Introduction to DeFi vaults
Decentralized Finance [DeFi] is a complex system composed of several pillars – the main ones are lending, borrowing and decentralized exchanges [DEX]. Liquidity is a link between the three, a valuable resource that DeFi protocols are winning.
More liquidity = more functionality and connectivity for the protocol.
Since liquidity is quite limited, DeFi protocols capture and distribute liquidity to gain an advantage. Protocols can use various DeFi tools like yield farming to access and manage more liquidity.
Yield farming is loans/stakes against interest. In other words, you tokenize the protocol while the protocol uses additional liquidity to generate value and reward you in return. Imagine a bank deposit, but more transparent and flexible.
Logs pool retail users into what are known as vaults to make yield farming more efficient. DeFi Vault is a collective, auto-assembled strategy, similar to asset management companies or mutual funds. Rather than grappling with all the milestones of yield farming, you can pool your funds once and enjoy total profits automatically reinvested.
Let’s talk about DeFI vaults in detail.
What is a DeFi vault?
DeFi Vault is a service that manages your tokens – it automatically optimizes the return on the funds you provide. Stores users’ total funds in pools, reducing overall transaction costs and optimizing returns for each pool participant.
Imagine you have secured tokens and want to claim your yield farming rewards. You may also want to reinvest for more profits when the pool is profitable. Now imagine 99 other users doing the same thing – that’s a lot of transactions, each with additional fees attached. DeFi vaults reduce the number of transactions and costs by pooling funds, making your yield farming more efficient. Vaults also collect your rewards and automatically reinvest them for even more profit.
DeFi vaults are not necessarily yield farming strategies. The underlying strategy may vary, but the principle remains the same. Automated vault strategies maximize the efficiency of your investment while keeping it simple for you. Safes are particularly useful for small investors, as they can save investors on gas fees. It is also an excellent way to get started with DeFi.
DeFi vaults: risks explained
Not all DeFi vaults are created equal. Some of them offer higher rewards but also risks. Let’s classify DeFi vaults based on risk tolerance.
- DeFi vaults with low risks. When staking individual assets, they are usually stablecoin vaults or large tokens. You deposit an asset and earn more from the same asset. Lower rewards.
- DeFi vaults with moderate risks. More complicated strategies involve lesser-known tokens and automatic reward composition. The underlying token is more likely to fluctuate in price. Moderate rewards.
- High risk DeFi vaults. Advanced strategies with multiple assets, income pools and even logs. Auto-compounding makes such strategies even more risky. High rewards.
- DeFi vaults with extremely high risks. Complex tools with multiple protocols, assets and leverage.
There are many more classifications for DeFi vaults, but the basic principle never changes. Rewards rarely decouple from risks as they tend to go hand in hand.
DeFi vaults: types
Here is the list of some popular DeFi vault types that you can come across.
- Leveraging DeFi vaults. Yield farming + borrowing from other pools.
- Options DeFi vaults. Complex option strategies to hedge the risks.
- Fixed-yield DeFi vaults. Single asset safes with low risks.
- Basis for farming DeFi vaults. Profits from the difference in financing rates.
Each type has its own pros and cons, as well as its own risk/reward ratio. You may also come across more vaults, which are shown schematically as follows.
Original image according to STFX protocol.
Learn about the product classification of DeFi vaults, structured products and decentralized wealth management from different angles.
DeComma’s DeFi Strategies
DeCommas is an automation layer that provides one-click access to DeFi vaults and various strategies. For clarity, let’s break down DeCommas’ top DeFi vault strategies.
DeFI Strategy #1: Ethereum Perpetual [Optimism]
An automated basic trading strategy to profit from positive ETH funding rates. The strategy uses the same principle as Mango Markets PERP-ETH, but you can deposit at Optimism.
How does the PERP-ETH DeFi strategy work?
The PERP-ETH DeFi vault is a basic trading strategy. You can take advantage of the price difference between ETH perpetual futures and ETH on the spot. This particular strategy generates returns from opening opposite positions in perpetual futures and spot-to-collect funding rates when they are in positive territory.
Learn more about base trading and the benefits of funding rates to understand the PERP ETH strategy in detail.
DeFi strategy #2 [Coming Soon]: 10% stable currency rate at GMX
This delta-neutral farming strategy leverages the GMX ecosystem – a permanent Avalanche and Arbitrum trading platform. Although previous backtesting reports say the following 10% APR on average only when using stablecoins, The DeCommas team is still here Run more simulations [adjusting market parameters] to get a more accurate estimate of the forthcoming APR.
💡Delta neutral strategies balance the reaction to market movements and leave the net change in your position neutral [no price exposure].
To understand the 10% stablecoin DeFi vault, let’s introduce the main principles of the platform.
- The GMX platform is supported by the GLP token.
- GLP comprises a basket of crypto assets. The basket supporting GLP includes both volatile assets and stablecoins. This changes the GLP value compared to the basket value.
- Similar to funding rates, GLP pools counterparties’ deals to maintain balance.
- The GMX platform rewards GLP liquidity providers with a share of all activity within the ecosystem. Fees, Swaps, Trades, Liquidations and more.
Therefore, the GMX DeFi vault benefits from the revenue that GMX pays to GLP stakers.
How does the GMX stablecoin strategy work?
The strategy aims to profit from the rewards paid to liquidity providers while hedging the risks. We use the Aave DeFi protocol to borrow the GLP equivalent of crypto assets and sell them against stablecoins, reducing the risks associated with volatility. That’s how it works.
Learn more about GMX DeFI Vault x DeCommas.
closing thoughts
While DeFi is an excellent alternative to traditional finance, it still lacks the simplicity that has evolved over the years. DeCommas is building the DeFi automation layer to enable next-gen DeFi strategies and is currently demonstrating the power of its automation layer with several “vault-like” one-click strategies.
You can access our DeFI strategies with a few clicks and mind your own business while the protocol works to your advantage.
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