If you spend enough time in the decentralized finance (DeFi) sector, it’s highly likely that you’ll encounter the concept of Vaults and wonder what they are. Vaults go by many names; yield aggregators, yield optimizers, auto-compounders, or yield maximizers. In this article, you’ll learn exactly what Vaults are and how you can use them to grow your capital with stellar interest rates, 24 hours a day!
Note: The information in this article should not in any sense be interpreted as financial advice. You are responsible for your own investment decisions in DeFi.
What is a Vault?
Like a bank account, a Vault is an instrument for you to deposit your capital to perpetually grow it by accumulating interest. When interest is earned your deposit grows, and the next time interest is earned again, your deposit grows even more! This effect is known as compound interest, and it arises because each proceeding interest is calculated on your new balance which includes all the previous earnings.
The biggest difference between a Vault in DeFi and your bank account? Vaults are way more lucrative! Below is an example of one of the best conservative Vault options currently (2021/12/06) available on Crystl.Finance on the Cronos network.
As you can see, this Vault advertises an astronomical 46.82% annual ROI on what is essentially a “risk-free” stablecoin liquidity pairing (USDC-USDT). By DeFi standards is actually considered a conservative investment option. Another example follows!
In this case providing Bitcoin (wBTC) paired in liquidity with Crypto.com Coin (wCRO) into this particular Vault offers a mind boggling 1170% annual ROI! It almost seems too good to be true, but you’ll be thrilled to know that it’s real! Thousands of users are already taking advantage of financial opportunities such as this, and arguably these very opportunities are a huge part of the reason why the DeFi sector has seen such an explosion of growth in 2021.
How do Vaults Work?
An initial reaction of misbelief upon seeing the high interest rates offered by Vaults is completely normal! Especially if you are new to DeFi! But, be rest assured that the interest rate is simply the mathematical result of compound interest.
What will help is to understand exactly how Vaults are capable of achieving such a high interest rate. Let’s consider this Vault on Crystl.Finance as an example.
Notice that underneath the WBTC-WCRO there are two keywords “VVS”, and “VVS LP”. VVS indicates that the strategy the Vault uses to grow your deposit is located on VVS Finance. VVS LP indicates that this Vault only accepts LP tokens from VVS Finance (in this case, WBTC-WCRO VVS LP).
On the Vault interface, clicking the little information icon (i) and then clicking the View Farm Site link will take you to the underlying site with farming strategy used by the Vault.
Looking around on the farm site, you would be able to find the following farming option where a user may stake CRO-WBTC LP to earn VVS tokens with an APR of 250.15%! Or 0.685% daily (divide by 365).
In other words by providing liquidity on the VVS Finance decentralized exchange (DEX), the VVS Finance protocol rewards liquidity providers by paying them with VVS tokens. VVS tokens of course have value (decided by the demand of the market), and can be sold or bought on the market through the VVS Finance DEX. So, how does the Vault on Crystl Finance use these facts to achieve a stellar 1.17k% ROI if the APR is only 250.15%? It’s simple!
The Vault will automatically harvest the VVS farming rewards worth 0.685% the deposited capital, and sell them for more CRO and BTC tokens every day! Each time this is done, the Vault will reinvest the CRO and BTC tokens into CRO-WBTC LP and deposit the LP back on the farm on behalf of the user. This means that each day, the user’s deposit will earn more VVS than the last. If this sounds familiar, that’s because it is! This is again the concept of compound interest at work.
By automatically selling reward tokens earned on arbitrary farms, and reinvesting capital into more LP tokens deposited back into the farm to perpetually earn more and more rewards, Vaults are capable of achieving astronomical compound interest rates. For a crystal clear understanding, see the graphic below!
In short, Vaults are incredibly powerful investment instruments that allow users to deposit capital and let it grow automatically and completely hands-free at very lucrative interest rates!
Why Use Vaults Instead of Farms?
Let’s say you are an investor looking to provide liquidity on the VVS Finance exchange. To reiterate the previous example, suppose you are interested in providing and staking BTC-CRO LP. You then have two choices:
- Deposit BTC-CRO LP on VVS Finance and earn VVS tokens.
- Deposit BTC-CRO LP on Crystl Finance and earn more BTC-CRO LP.
Choosing option #1 would be beneficial if you were looking to accumulate VVS tokens as a long term investment, or if you wished to sell VVS for something other than BTC and CRO.
On the other hand, choosing option #2 would be beneficial if you were looking to maximize your BTC-CRO LP deposit and enjoy hands-free automated compound interest. Of course, there is always the option of performing the same strategy as implemented by the Vault manually – but there is a catch!
Oh, No! Gas Fees!
Every blockchain requires users to pay gas fees to perform transactions. On Cronos, users must pay gas fees in CRO tokens. If you were to manually perform the exact same strategy as done by a Vault and reinvest your VVS farming rewards into LP to stake that new LP every single day for 365 days a year then you would spend a large amount of capital paying for gas fees!
On the other hand, using a Vault means you don’t have to worry about paying all those gas fees at all! Isn’t that convenient?
Impermanent Loss
Impermanent loss is another strong reason users might want to choose to deposit into a Vault instead of in a farm. In fact, reward tokens such as VVS arguably exist to minimize the risks associated with impermanent loss.
When a user provides assets to a liquidity Pool, there is almost always a risk for some impermanent loss. By using a Vault, users can guarantee that their VVS token rewards are invested into other tangible assets in the LP, effectively hedging their LP investment against the risk of impermanent loss!
Short Term vs. Long Term
Vaults offer a powerful alternative to farms because they are capable of automating the investment process that users typically would need to employ manually to achieve compound interest.
Albert Einstein once said the following; “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
While many users continue to chase other opportunities in DeFi, providing liquidity into a Vault on Crystl Finance offers a means to investing that is not only hands-free but is also free from gas fees as well as the typical stress involved from chasing buy & sell (i.e. day-trading) investment opportunities. Users who take a long term approach to investing may see Vaults as a reliable means to financial freedom and automated capital growth. The effects of compound interest become very prominent especially for those users committed to staking in Vaults for longer periods. The chart below outlines a comparison between earning rewards on a farm and an investment automated by a Vault. As you can see, exponential interest really ramps up over the long run and this effect is only amplified further with a larger initial capital.
Which Vault Should You Use?
Visit Crystl Finance on Cronos to explore the variety of available Vault options to put your capital to work 24-hours a day! From conservative stablecoin-stablecoin LP pairings like USDC-USDT, to bluechip pairs like BTC-CRO, or token pairs for promising projects like CRX-CRO and VVS-CRO, you are sure to find an option that is appropriate for you.
Every investor should consider their own investment appetite as well as risk tolerance. Please consider providing liquidity only for tokens that you strongly believe in. For more information, check out the Crystl Finance Gitbook for more information on Vaults as well as how to get started.
Article written by Crypto Light from Crystl.Finance.
Telegram: @xCryptoLight
Twitter: @0xCryptoLight
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