Vault

A vault is a smart contract that pools users' deposits and automatically deploys them into a yield-generating strategy, handling the work of farming, harvesting, and compounding on depositors' behalf. Instead of manually moving funds between protocols and reinvesting rewards, a user deposits once and receives shares representing their slice of the vault, whose value grows as the strategy earns.

Yearn Finance popularized the model: deposit USDC into a Yearn vault and its strategy might lend the funds on Aave, farm reward tokens, sell those rewards, and reinvest the proceeds — all automatically, with gas costs shared across every depositor. Auto-compounders like Beefy apply the same idea to liquidity pool positions, harvesting farm rewards and rolling them back into the position far more often than an individual could economically do alone.

The ERC-4626 standard now defines a common interface for tokenized vaults on Ethereum, making vault shares composable across DeFi. A common misconception is that vaults reduce risk because they are managed — they actually stack risks: the vault's own code, the strategy logic, and every underlying protocol the strategy touches must all be sound, and vaults charge management or performance fees on top. A vault saves effort and gas, and can execute strategies more efficiently than a small depositor, but it is an automation layer, not a safety layer.