DeFi Vault FAQ: Frequently Asked Questions
What is a DeFi vault?
A smart contract that accepts deposits, issues shares (usually ERC-4626), and runs a yield strategy on your behalf. You deposit USDC or ETH, the vault lends it across protocols, compounds the interest, and your shares appreciate relative to the underlying asset. When you withdraw, you get back more than you put in, minus fees.
Are DeFi vaults safe?
No. Smart contract bugs, oracle manipulation, bad debt from under-collateralized borrowers, and curator errors are all real risks. Safety varies by protocol: Morpho Blue is 650 lines of immutable code with multiple audits. A yield aggregator routing through four protocols has four times the smart contract surface area. Check audit history, TVL track record, and governance controls (timelocks, multisigs) before depositing.
What is the difference between a vault and staking?
Staking locks tokens to validate a proof-of-stake network. The reward rate is set by the protocol. Vaults pool capital and deploy it across lending markets, DEX liquidity positions, or funding rate trades. Vaults can change strategy, shift between protocols, and compound returns. Staking gives you one fixed yield source. A vault can give you several, with correspondingly more risk.
What is ERC-4626?
A standard interface for tokenized vaults on Ethereum. It defines how deposits, withdrawals, and share accounting work, so any protocol can integrate any ERC-4626 vault without custom code. Before ERC-4626, Yearn had yTokens, Compound had cTokens, and Aave had aTokens, all with different interfaces. ERC-4626 replaced that fragmentation. Morpho, Yearn v3, Euler v2, and most new vault protocols use it.
What are curated vaults?
Vaults where an independent risk manager (the curator) controls allocation parameters instead of hardcoded strategy logic. The curator whitelists collateral, sets LTV limits, and moves capital between lending markets. Morpho popularized this with MetaMorpho vaults. The curator has no custody over funds and changes are subject to timelocks (typically 1 to 7 days), during which depositors can withdraw if they disagree.
How do I choose a DeFi vault?
Check the curator's track record during stress events, not just their APY. Look at on-chain parameters: which markets are whitelisted, what are the supply caps, how long is the timelock. Verify the smart contracts have been audited. Compare current APY against 30-day and 90-day historical performance, since point-in-time rates can be misleading. If you cannot find clear documentation about how the vault works, do not deposit.
What is a vault curator?
An independent risk management firm that manages a vault's parameters. Gauntlet, Steakhouse Financial, Block Analitica, and RE7 Labs are examples. They are not part of the underlying protocol. Gauntlet does not work for Morpho. They set risk limits, choose which lending markets receive capital, and rebalance allocations. Most charge a 5 to 15% performance fee on generated yield.
How do DeFi vaults generate yield?
Lending interest is the most common source: the vault supplies assets to borrowers who pay interest. Other sources include DEX trading fees (LP vaults), staking rewards (liquid staking vaults), protocol incentive tokens (yield farming), and funding rate differentials (basis trading vaults that are long spot and short perps). Most vaults auto-compound, meaning returns are reinvested rather than distributed.