Crypto Gloss

Vault Strategy

A vault strategy is a modular smart contract that encodes the specific logic for how a yield aggregator vault deploys capital — defining exactly which DeFi protocols to interact with, how to sequence interactions (deposit, stake, borrow, farm), how to harvest accumulated rewards, and how to reinvest them back into the base asset to achieve auto-compounding. The vault itself (the user-facing deposit contract) is a “dumb” wrapper that holds assets and issues shares; the strategy contract is where the actual yield-generation logic lives. This separation allows the vault to swap strategies without migrating user funds — a new strategy can be proposed, audited, and set as the active strategy while users remain deposited.

Architecture: Vault vs. Strategy

“`

User deposits USDC

│

▼

┌─────────────────────┐

│ Vault Contract │ ← Holds funds, issues yvUSDC shares, tracks share price

│ (e.g., yvUSDC) │

└─────────┬───────────┘

│ calls strategy.deposit() / strategy.harvest()

▼

┌─────────────────────┐

│ Strategy Contract │ ← Deploys USDC into Aave, Curve, Convex, etc.

│ (e.g., StrategyX) │ ← Harvests COMP/CRV rewards

└─────────┬───────────┘ ← Swaps to USDC, returns to vault

│

▼

Aave / Curve / Convex / etc.

“`

Key separation of concerns:

  • Vault: User-facing; handles deposits, withdrawals, share accounting
  • Strategy: Protocol-facing; handles the actual yield generation

Strategy Lifecycle

1. Development

  • Which protocol to deposit into (e.g., Convex stETH/ETH Curve pool)
  • How rewards are harvested (call getReward() on Convex, collect CVX + CRV)
  • How rewards are converted (swap CVX → ETH → stETH via 1inch)
  • How to reinvest (deposit stETH back into the Curve pool)

2. Testing & Audit

  • Tested against mainnet state via forks (Foundry, Hardhat)
  • Audited by external firms (Yearn requires audits for any strategy managing >$10M)
  • Staged in limited-TVL “experimental” vaults

3. Deployment

4. Active Management

  • Keeps funds deployed 24/7
  • harvest() called by keepers on a schedule (daily, hourly for large vaults)
  • Keeper receives a small reward from the harvest for covering gas
  • Strategist earns a cut of the performance fee (e.g., 10% of the vault’s 20% take)

5. Migration or Deprecation

  • Governance proposes setStrategy(newStrategy)
  • Old strategy withdraws all funds from underlying protocols
  • Funds transferred to vault, then re-deployed via new strategy
  • Ideally: atomic migration (no funds idle during transition)

Strategy Examples (Yearn V3 / Beefy)

Curve/Convex LP Strategy

  1. Stake LP tokens in Convex Finance → earn CRV + CVX rewards
  2. On harvest: claim CRV + CVX
  3. Swap CRV → USDC via 1inch; swap CVX → USDC via 1inch
  4. Deposit USDC back into Curve pool → receive more LP tokens
  5. Stake new LP tokens in Convex
  6. Report profit to vault → share price increases

Aave Lending Strategy

  1. Deposit USDC into Aave V3 → earn supply interest (aUSDC accrues passively)
  2. On harvest: collect any AAVE token incentives
  3. Swap AAVE → USDC
  4. Deposit USDC into Aave → share price increases

Delta-Neutral Strategy (Advanced)

  1. Supply USDC to Aave as collateral
  2. Borrow ETH against it (~50% LTV)
  3. Short ETH via perpetuals (dYdX, GMX) — hedge the borrowed ETH exposure
  4. Earn: Aave supply yield + funding rate on short position
  5. Net exposure: zero ETH delta; pure yield from rate differential

Multi-Strategy Vaults

In Yearn V3, vaults support multiple strategies simultaneously with allocation percentages:

“`

yvUSDC Vault ($100M TVL)

├── 40% → Aave Strategy ($40M at 4.2% APY)

├── 35% → Curve Strategy ($35M at 6.8% APY)

├── 15% → Morpho Strategy ($15M at 5.1% APY)

└── 10% → idle (liquidity buffer for withdrawals)

“`

Governance votes adjust allocations based on current yields, risk appetite, and withdrawal demand patterns.

The vault’s reported APY is the weighted average across active strategies.

Strategist Incentives

Yearn introduced the strategist model — a key innovation:

  • External developers can submit strategies to Yearn
  • If accepted, the strategy earns the strategist 10% of the performance fee (while vault takes 20%)
  • A $100M vault earning 6% APY at 20% performance fee generates $1.2M/year in fees; 10% to strategist = $120K/year passive income for the strategy author
  • Creates an ecosystem of independent developers competing to write the best strategies

This is why Yearn has dozens of strategies covering nearly every productive asset in DeFi.

Strategy Risk Classification

Yield aggregators classify strategies by risk level to help users choose:

Risk Level Characteristics Example
Conservative Single protocol, well-audited; no leverage Aave lending only
Moderate 2–3 protocol interactions; LP exposure Curve pool + Convex staking
Aggressive Leverage, exotic protocols, or new incentives Leveraged yield via recursive borrowing
Experimental New protocols; limited audit; TVL capped New L2 farm with unaudited contract

Most aggregators offer separate vaults per risk tier rather than mixing risk levels in a single vault.

See Also