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Vault

A contract that takes deposits and runs a yield strategy on the depositors' behalf, issuing a share token that appreciates as the strategy earns.

Vaults exist because running a farm by hand is expensive and fiddly. The contract claims rewards, sells them, rebalances and redeposits, socialising the gas across everyone and applying auto-compounding far more often than an individual would bother to.

In exchange you accept two things: a fee, typically a slice of performance plus a management charge, and the strategist's discretion. Many vaults can be upgraded or repointed by a multisig, so you are trusting a team's judgment and keys as well as their code. That is admin-key-risk by another name.

Vault share tokens are also a favourite target. Pricing a share against pool reserves has been exploited repeatedly, and a first depositor can sometimes manipulate the share ratio of a brand-new vault. Prefer vaults with a long live history, sizeable tvl, and audits covering the exact deployed version.

Related: auto-compounding, yield-farming, admin-key-risk, smart-contract-audit

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Compounding against a flat returnTwo account balances over fifteen years at the same yearly rate: one curve bends upwards as gains are left in, the other rises in a straight line.ACCOUNT VALUE$10k$20k$30k$40k051015YEARSCOMPOUNDED 10% a yearSIMPLE: 10% of the original sumboth start at $10,000 and run 15 years$41,772DIFFERENCE$16,772$25,000
Compounding against a flat return. Two accounts start at $10,000 and earn 10% a year for fifteen years. Leaving the gains in means each year earns on a larger balance, so the curve bends away from the straight line and ends $16,772 higher.

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