most vaults are blackboxes, let's understand how and whether your funds are at risk or not
but before that, lets understand in broader state of defi vaults and few must know concepts if you have funds allocated in defi, or if you're planning to deploy
what are vaults?🧵
- vaults are like mutual funds, which invests your deposits into certain equities, or funds. but i true crypto sense, erc4626 or similar vaults are smart-contracts that direct deposits made into these vaults into certain protocols -- such as aave, morpho, uniswap etc
- since most protocols are onchain, as they should be, a vault is able to account for growth in its deposits also onchain
- a simple example is, imagine a vault which takes user deposits invest those deposits into a strategy called aave, which means depositing into aave
- now, the vault can onchain account for at what rate your deposits are growing, dynamically
- imagine when you deposited 1k usdc, the vault gave you 1:1 vaultShares, which is like a deposit receipt -- your deposit receipt grows at the same rate as underlying strategy performance, in this case, the rate at which your usdc are growing in aave
- seems pretty simple, right? there's onchain accounting, vault issues you receipt tokens called vaultshares for your deposits, which are always redeemable for the underlying and you can get your deposits back anytime by clicking "withdraw"
- but, there's a catch
- when you "deposit" into a vault, and vault routes the deposits into an underlying strategy like @aave usdc on @base -- you can only withdraw until your deposits in the underlying strategy are liquid
- that means, if a large borrower came borrowed all available usdc from aave, and at that exact point you click withdraw, withdraw would fail because aave simple doesn't have usdc to give to you
- there are measure against it, like rate spikes in aave but the risk is there
- now, let's understand what are these risk? broadly the risk are
1. smart-contract risk
2. economic risk
3. redemption risk
4. accounting/oracle risk
5. front-running risk
1/ smart contract risk
everyone talks about it. few truly understand it.
this includes:
- reentrancy & logic bugs
- broken upgradeability
- governance backdoors
- flash loan exploits
- unverified dependencies
2/ economic risk
even if the code is sound, the underlying strategy can nuke your funds.
examples:
- your delta-neutral strategy not ADLed on hyperliquid
- impermanent loss in passive lp vaults
- bad risk–reward skew (e.g. 5x leverage for 2% extra yield)
what looks safe can still be a slow bleed.
3/ redemption risk
your assets are there… until they’re not.
key triggers:
- vault is allocated to a strategy that requires offchain redemption (like what happened with celsius)
- exit queues due to illiquidity of underlying strategy
- nav > tvl: vault is undercollateralized
- sometimes only way out is to wait or take a haircut
this is similar to a depeg events, if you remember ezeth, steth depegs
illiquidity in volatile markets = exit trap.
4/ oracle / accounting risk
many vaults are opting out of fully-onchain vault, like @veda_labs and many similar vaults relying on offchain accounting of vaultshares
common issues:
- oracle latency or manipulation (chainlink downtime, curve-style attacks)
- accounting mismatches (price per share vs real asset backing)
- time-weighted price drift
you may think you have $10k. the protocol may disagree.
5/ frontrunning & sandwiching risk
vaults with open functions (like rebalance or harvest) are mev honeypots.
if there’s:
- no slippage protection
- no twap or batching
-no backrun guardrails
then every harvest is alpha… for a bot.
your “apy” might be getting siphoned out.
tldr: risks in defi vaults ≠ just smart contract bugs.
the hidden risks include:
- economic fragility
- redemption delays
- accounting mismatch
- oracle inaccuracy
- mev exploitability
don’t just ask “is this audited?”
ask “is this robust?”
3,4 t.
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